The question every real estate investor asks and asks often: Where should I invest?

Now, an investor can answer this question in a lot of different ways. One of the common considerations is the market size and popularity. After all, it’s hard not to be dazzled by the thought of owning NYC townhouses or West Coast condos. There’s something glamorous about primary real estate markets. But are big cities really the best place to build wealth?

What Are Primary Real Estate Markets?

• Primary real estate markets are large metropolitan areas with high population density, bustling economic activity, and a strong demand for real estate. Examples in the U.S. include New York City, Los Angeles, San Francisco, and Chicago. These markets typically have:

  • High Competition – Intense investor activity drives up property prices.
  • Low Cap Rates – The high cost of properties results in relatively low rental yields (cap rates), making cash flow challenging for investors.
  • Strong Appreciation Potential – These markets often experience significant long-term property value growth, appealing to speculative investors.

  Let’s look at some quick data courtesy of the National Association of Realtors:

Median Sales Price of Existing Single-Family Homes by Region

We recommend checking out the full data table, as it shows a sampling of median prices from various metro areas in the U.S. The disclaimer here is that individual markets can vary wildly from the median. For example, though the highest Q3 2024 median was $634,700 in the West, one of their markets – San Jose-Sunnyvale-Santa Clara, CA – saw a Q3 price tag triple the regional median at $1,900,000.

The point is that regional data gives us a snapshot overall, but we should expect individual markets to vary…sometimes significantly.

But based on this table, we can see clearly that the South and Midwest are the more affordable parts of the country – and not home to as many primary markets, either. Now, investing in real estate isn’t all about the price tag. Savvy investors consider a multitude of factors.

So, let’s clarify: there are plenty of reasons to turn your attention to smaller secondary and tertiary real estate markets.

Why Should SFR Investors Focus on Smaller Housing Markets?

Smaller markets (secondary or tertiary markets) offer significant advantages for single-family residence (SFR) investors, especially those looking for consistent cash flow rather than speculative gains. Here’s why:

Better Affordability

Smaller markets typically have lower home prices, making it easier to enter the market and scale a portfolio. The barrier to entry is lower for first-time investors. Not only is less leverage required, but renovation and maintenance costs are often lower, too.

Higher Rental Yields

Smaller markets often have higher cap rates, as rents relative to home prices are more favorable. Affordable (not cheap) properties are better for cash flow purposes, as ongoing expenses are more manageable, too.

The key here is consistency. Secondary and tertiary markets are about stability, not speculation. That allows for reliable appreciation and rental rates rather than one or the other.

Less Competition

Smaller markets attract fewer large players, giving individual investors better opportunities. Individual investors – especially those just starting out – don’t stand much chance in a primary market without some serious advantages from the outset. The stakes and the competition are just at a different level.

Economic Growth in Secondary Markets

Secondary and tertiary markets aren’t unpopular with Joe Q. Public. Many people and businesses are moving to smaller cities due to lower costs, better quality of life, remote work opportunities, or a better business climate. Not to mention more bang (square footage) for their buck!

You’re not limited by where you live. Invest where it makes sense, regardless of proximity.

Further Reading: Why Remote Real Estate Frees Investors to Dream Big

Risk Mitigation

Smaller markets are less volatile and more insulated from economic downturns than primary markets. Now, this does depend on the strength of that market’s economy. But generally speaking, markets that aren’t caught up in overpriced speculation don’t have as far to fall when things take a turn.

Potential for Portfolio Diversification

Lower prices allow investors to purchase multiple properties across different regions, diversifying risk. Think back to Santa Clara. You could buy one median almost $2 million property there or five to six properties in the $300,000-350,000 range across the South and Midwest. Guess which one mitigates risk!

It’s just easier to scale in a smaller, more affordable market.

By focusing on smaller markets, SFR investors can maximize cash flow, reduce risk, and build a stable, income-generating portfolio without relying heavily on speculative appreciation.

Start investing with REI Nation, where you invest and we handle the rest!