As 2021 came to a close, The New York Times published a piece entitled “The Pricey California Market? In 2021, It Got Pricier.”
It details how California’s home prices greatly outpaced national rates and not just in the usual suspect markets.
Because of the pandemic and already sky-high prices, the greatest gains were seen in suburbs and in smaller metro areas surrounding massive primary markets.
It isn’t just California, either. Despite worries of a market crash, even the mild slowdowns in the real estate market have not eased the frustration of sky-high real estate prices. And while this might seem beneficial for investors on the surface, the relative and increasing unaffordability found in primary markets poses significant problems and challenges moving forward, namely:
- Widening debt-to-income ratios for new investors.
- Slowing an investor’s ability to scale.
- Unsustainable costs for rental residents.
- Higher barrier to entry for investors.
- Increased investment risk due to the rising costs of acquisition and maintenance.
If the COVID-19 market has demonstrated anything, it’s the value in secondary and tertiary markets for real estate investors.
Refresher: What’s a Secondary Real Estate Market?
The exact definition and differences between primary, secondary, and tertiary markets are somewhat arbitrary. Real estate markets may be categorized differently based on these definitions. In essence, it comes down to size.
Primary markets are the largest markets in the United States (think New York City, Los Angeles, etc.), where secondary markets are more mid-sized and tertiary markets are even smaller.
You will find that investment firms tend to target primary markets. They’re often seen as the crème de la crème of real estate – but the reality, particularly for individual real estate investors – is quite different. Primary markets are not practical or particularly accessible for individual investors.
The COVID-19 pandemic has fueled a price explosion that has moved these markets even further out of reach while making them arguably more volatile as prices become unsustainable and over-inflated.
4 Reasons Secondary & Tertiary Markets Work Better
For real estate investors, the ability to scale one’s portfolio is paramount for building real long-term wealth. If the markets you buy in are expensive (relative to your income and assets), then it will be more difficult to gain the capital necessary to grow. It is prudent, then, for real estate investors to target markets that are more affordable than the one in which they live and earn. Because the cost of living varies – and is often much lower in small and mid-sized cities, particularly in the southern U.S. – targeting these markets means buying higher-quality properties for less.
That means increased rental income, as a larger family home in one market may cost less than a tiny one-bedroom home in another.
While the cost of primary markets is a significant barrier to entry, so is overall competition. Markets of every price point have struggled with inventory throughout the pandemic (and, truthfully, since the Great Recession). Primary markets may have more properties, but they also have more people and more investor activity. That means competition. Additionally, most primary markets are densely populated. Even if there is room available for new construction, land is more costly and local laws may prevent residential development.
On the other hand, secondary and tertiary markets are often more spread out and less dense. While the inventory may be smaller, the competition won’t be as fierce, either.
Every real estate investment comes with risk. It’s unavoidable. However, investors can mitigate their risk with every decision they make. Oftentimes, that first decision is where to invest. Listen: you want investing in real estate to be boring. Boring is good. Predictability is super. Hot, large real estate markets have excitement, but that excitement often comes from their volatility. Secondary and tertiary markets are more predictable and stable in their fluctuations, which means that investors rarely have to worry about market conditions threatening their investments.
Finally, secondary and tertiary markets are just more stable. Now, a market’s stability often depends on factors like the health of the local economy, job market, and population growth, among other factors. Regardless, these markets are far less likely to encounter extreme changes one way or the other. Growth is slow and steady, volatility is low, and investors can generally craft a solid foundation by investing in these markets.
From that stable, reliable base, you can then branch out into riskier ventures knowing that your portfolio, at its core, is secure.
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