Throughout 2020, we often discussed the growth in secondary and tertiary real estate markets while primary markets saw a decline. The designations of primary, secondary, and tertiary markets are valuable for real estate investors to understand not only in terms of size but in terms of investment strategy.
In real estate, location is heralded as the most important factor in any property purchase.
Location, location, location!
But what are the real difference between different real estate markets...and why do they matter? Keep reading to find out!
Three Types of Real Estate Markets
The first thing we must note is that there are no definitive characteristics for each of these types of markets. There’s no one definition of criteria a market must meet to fit into a certain category. With that said, all of them are related, in part, to the size and density of the market. However, some experts may approach these categories with a stricter definition than others — blurring the lines as to where some markets fit into the equation.
Job market health, population growth, and city amenities play a role in these definitions more than population alone.
Primary
Defining Features
Primary markets at the largest of real estate markets. They’re also called “gateway” markets. Cities like New York City, San Francisco, Washington, D.C., Boston, and Los Angeles fall into this category. They tend to be (but aren’t always) coastal cities that have long-established roles in commerce and trade. They tend to have a high concentration of investment, namely from REITs, foreign investors, and private equity funds.
Pros
- Highly desirable
- Pillars of the economy
- High value
- Reliable population
Cons
- Expensive
- Highly competitive
- High density
- More volatile in recession
- Inaccessible to many investors
Secondary
Defining Features
Secondary markets are those with which we are most familiar — Dallas, Houston, San Antonio, Memphis, and many of our other investment markets fall into this category. These markets aren’t the largest, but they’re defined by above-average growth in population and job opportunities. Common definitions limit these markets to a population of 500,000 while others set the bar at 1 million. Others still say that a population of under 5 million qualifies.
This is why other factors matter — namely, investor activity and economic health. These are the markets that many would consider “hot” or on-the-rise — but not to the point where their values are unsustainable or inaccessible. Secondary markets, in most cases, are much more affordable than primary markets.
Pros
- Appreciating property values
- Lower vacancy rates
- A stable and growing economy
- Population growth
- Lower volatility
- Accessibility
- Higher returns
Cons
- Less supply
- Potential for unsustainable growth
Tertiary
Defining Features
Tertiary markets may be similar in size to secondary markets, but they tend to be smaller while also experiencing more tempered growth. They tend to be more “stable” and reliable than hot. These markets may seem slow compared to secondary markets, but that, too, can be a strength. In many cases, these markets alternate between secondary and tertiary classifications, depending on who you ask!
These are markets like Huntsville and Birmingham, AL, Tulsa and Oklahoma City. For the long-term real estate investor, the stability and consistency of tertiary and secondary markets are attractive — as is their potential for high future returns.
Pros
- Affordability
- Low Cost of Living
- Long-term stability
- Lower volatility
- Accessibility
- Higher returns
Cons
- Not suited for short-term investing
- Less Supply
All in all, secondary and tertiary markets are very similar. For most, the only real distinction is in their size. Both can vary in terms of job and population growth, though secondary markets tend to be the “hotter” of the two.
Where Should I Invest?
With all of this in mind, where should you choose to invest in real estate? There are a few things to remember. First and foremost, even while the distinctions of primary, secondary, and tertiary can help categorize markets, they don’t tell the full story. An investor should not choose a market solely for this distinction, but for its merits and how it fits within your portfolio and investment strategy.
The question of where to invest often comes down to what you want out of your investing experience. When you know what you’re after, you can analyze markets through the lens of your needs and expectations.
Each market is different. Each market must be analyzed for its own merits and downfalls. For the real estate investor, a common thread of stability and growth is desired for the foundation of a real estate portfolio.
Who am I as an investor?
Ultimately, where you invest comes down to your ability and your vision. What type of investor are you? What kind of access to capital do you have? Do these markets make sense for you?
We see many investors interested in REI Nation markets, which fall into the secondary and tertiary categories. This is because many of our investors are out-of-state: our markets provide access to growing but affordable markets relative to their own.
Your circumstances play into what is and is not an advantageous investment. We won’t pretend that navigating the nuance of the market — or even your own investment goals — is easy.
Thankfully, REI Nation is here to help. Not only do we provide access to the best markets for turnkey real estate investment, but we have nearly twenty years of experience informing our counsel, management, and systems. If you don’t know where to start in real estate investment, start with the ones who do!
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