Investing in secondary and tertiary real estate markets can offer several advantages over primary markets, which are typically larger metropolitan areas with high levels of competition and property prices.
But before we dive in, what does a primary-secondary-tertiary market really mean?
Primary market is defined as large metropolitan areas with 5MM or more in population and densely populated. Think Los Angeles, New York, Chicago, Dallas.
Secondary markets have population between 1MM and 5MM, are more affordable and less densely populated. Examples of such include Orlando, Nashville, and Phoenix.
Tertiary markets have population under 1MM and could be as small as under 100K in population. They are typically more remotely located and less densely populated.
Some of the advantages of investing in secondary and tertiary markets include:
- Lower Entry Costs: The initial investment required to enter secondary and tertiary markets is usually lower due to more affordable property prices. This lower barrier to entry makes real estate investment more accessible to a broader range of investors.
- Less Competition: These markets are typically less saturated with investors, which can mean more opportunities for those willing to explore them. Less competition can also lead to better deals and negotiating leverage for investors. Buying at a good basis is key in achieving strong investment returns.
- Diversification: Investing in secondary and tertiary markets allows investors to diversify their real estate portfolios geographically and by market dynamics, reducing overall investment risk by not being overly exposed to the economic conditions of a single market.
- Growth Potential: Many secondary and tertiary markets are on the growth trajectory with improving infrastructure, population growth, and economic development. Investments in these areas can benefit from appreciation as the market matures.
- Community Impact: Investments in these markets can have a significant positive impact on local communities by improving property standards, increasing local tax revenues, and contributing to economic growth.
Some of the key risks associated with investing in these markets include:
- Economic Sensitivity: Secondary and tertiary markets may be more sensitive to economic downturns. These markets often have less economic diversity, making them more vulnerable to layoffs or industry downturns, which can impact rental demand and property values.
- Slower Growth: Although these markets can offer growth potential, the pace of growth and appreciation may be slower compared to primary markets. Investors might have to wait longer to see significant returns on their investments through property appreciation.
- Liquidity Risks: Properties in secondary and tertiary markets can be harder to sell quickly and at a desirable price, due to fewer buyers and lower demand compared to primary markets. This can pose a significant liquidity risk for investors needing to exit their investment swiftly.
- Limited Tenant Pool/Infrastructure/Professional Services: The pool of potential tenants in these markets may be smaller, leading to longer vacancy periods or the need to accept lower rental rates to attract tenants. This can affect the property’s cash flow and overall return on investment. In addition, these markets may lack the infrastructure, amenities, and services found in larger metropolitan areas, which can be a drawback for attracting tenants or achieving higher rents. Lastly, finding experienced property managers, contractors, and other real estate professionals may be more challenging in smaller markets, potentially affecting the quality and cost of property management and maintenance.
- Less Data Availability: There may be less market data available for secondary and tertiary markets, making it harder for investors to conduct thorough market analysis and make informed decisions. This lack of data can increase the risk of overpaying for properties or misjudging the market’s potential.
Despite these risks, investing in secondary and tertiary markets can still be lucrative with the right approach. To mitigate such risks, our firm conducts comprehensive market research, deploys prudent financial analysis, and consults with local experts and residents to obtain additional third party perspective.
Investing in secondary and tertiary markets requires thorough market research, understanding local economic drivers, and careful property selection. However, for investors willing to explore beyond primary markets, these areas can provide significant opportunities for growth and diversification in their real estate portfolios. We have real life examples within our investment portfolios of such!
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.