When looking for good real estate deals, the most important factor investors need to consider is location. For savvyinvestors, not all real estate markets are created equal. When it comes to where to invest in real estate, one of the most intriguing debates today among real estate investors is whether to go for a primary vs secondary market.
So, which of these two markets should you invest in?
Before we answer that question, let’s begin by talking about how real estate markets are classified.
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Classification of Real Estate Markets
There are generally 3 types of real estate markets – primary markets, secondary markets, and tertiary markets. However, we must note that there’s no precise definition for these markets. There are no definitive criteria that a housing market must meet to fit into a particular real estate market category.
Real estate experts define markets in different ways depending on investment strategies, market fundamentals, and other characteristics. This can be confusing for investors, especially beginners. However, while some experts may have stricter definitions than others, an overly simplified classification of real estate markets would be a mistake. For instance, market classification that focuses on population alone would hold back investors.
Thus, housing markets are best categorized by taking into consideration a variety of factors such as population, job growth, demographics, and city amenities. While there are no specific criteria for categorizing real estate markets, here’s a general outline of what makes for a primary market and what makes for a secondary market.
1. Primary Markets
Primary markets in real estate, also referred to as gateway markets, are the largest of the housing markets. They are densely populated (typically over 5 million people) and have long-established commerce and trade sectors. They are usually the focus of intense investment by large private equity funds, real estate investment trusts (REITs), and foreign investors. Major US cities such as Boston, New York, Atlanta, Los Angeles, San Francisco, Chicago, and Phoenix fall into this category.
2. Secondary Markets
Secondary markets in real estate are less populous (typically 1-5 million people) and less dense but are experiencing an above-average population and economic growth. They have most of the amenities that you would find in primary markets without the dense population. Cities such as Houston, Orlando, Charlotte, Raleigh, Portland, Seattle, and Miami belong to this category.
Raleigh Is a Secondary Market in Real Estate
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3. Tertiary Markets
Meanwhile, tertiary markets have smaller populations (typically less under 1 million people) that are more spread out. Some examples include Las Vegas, Nashville, and Richmond.
However, our focus in the rest of this blog will be on primary vs secondary market .
Primary Vs Secondary Market: Where Should You Invest?
There are clear reasons why real estate investors may decide to invest in primary real estate markets. For instance, these markets have more steady rental demand due to the high population as well as high liquidity. However, if you are a beginner investor looking for the best places to invest in real estate, they may not be ideal. They are not only prohibitively expensive but also highly competitive and more volatile in recession.
So, what makes secondary markets a better place to invest? Here are reasons why you might want to consider investing in secondary real estate markets when it comes to traditional, long-term rental properties:
Related: Buying a Rental Property in the City vs. Suburbs
1. Affordability
Secondary markets are often more affordable than primary markets. Therefore, beginner investors looking to minimize the initial investment capital may be best served searching in these markets.
2. Less Competition
Since primary real estate markets are often seen as a safe bet, a majority of deep-pocketed individuals and institutions look for investment properties in these areas. This makes secondary markets a more viable option for the average investor who does not have experiencing in facing major competitors.
3. Potentially Higher Return on Investment
Investment properties in secondary markets typically generate stronger cash flow and higher cap rates when rented out traditionally compared to those in primary markets. This is because investment properties in secondary markets are not overvalued which helps yield high returns.
Despite the ability of investment properties in primary markets to command higher rents, the intense competition from high net worth investors pushes up property prices significantly as well which leads to high price to rent ratios and to lower ROI.
You can take a look at the city-average traditional cap rates in some of the top-performing US markets of each type (February 2021 data) based on Mashvisor’s nationwide market analysis and machine-learning algorithms:
Primary Markets
- Boston: 1.5%
- New York: 1.1%
- Atlanta: 2.8%
- Los Angeles: 1.9%
- San Francisco: 1.4%
- Chicago: 1.6%
- Phoenix: 2.3%
Secondary Markets
- Houston: 2.7%
- Orlando: 3.1%
- Charlotte: 2.3%
- Raleigh: 2.4%
- Portland: 1.6%
- Seattle: 2.1%
- Miami: 2.3%
Tertiary Markets
- Las Vegas: 2.5%
- Nashville: 2.7%
- Richmond: 2.7%
Furthermore, on average rental rates tend to increase faster in secondary markets due to the still untapped potential and the influx of new residents. This means that an investment property in such a location will continue bringing a good cash on cash return and a good cap rate.
However, you should keep in mind that while suburban, smaller markets tend to offer a higher return on investment on average, different neighborhoods within the same market as well as different investment properties for sale bring widely different rates of return. Thus, conducting neighborhood analysis and investment property analysis is a must, rather than blindly jumping into the first secondary market that crosses your path.
4. High Population Growth Rate
Secondary markets tend to have high job growth and lower costs of living than primary markets. This leads to a high population growth rate. As a result, property prices tend to be on an upward trend.
5. Less Volatile in Downturns
Generally, secondary markets are less volatile in times of recession. This makes secondary markets attractive to long-term investors. Throughout 2020, primary markets saw a quick decline due to the Coronavirus pandemic. Meanwhile, secondary markets mostly experienced growth.
As COVID-19 spread, many companies allowed their employees to work from home. For example, some large companies like Facebook and Square have allowed most of their staff to work remotely indefinitely. So, It’s likely that remote working would continue even in the post-COVID-19 environment. This may fuel the growth of secondary markets even further.
Owing to the COVID-19 pandemic, residents and companies are now seeking more space that is more affordable in secondary markets. Major cities are more prone to the spread of the virus due to dense population and frequent use of public transportation. Remote working, the closure of many urban amenities, the need for social distancing, and people seeking less expensive housing have all contributed to the appeal of primary markets’ significant decline.
Moreover, secondary markets are witnessed a faster recovery from the initial shock of the pandemic than primary markets. According to CBRE, secondary markets are expected to have a solid performance in 2021.
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How Do You Find the Best Places to Invest In Real Estate?
While it is important to consider whether to inveset in primary and secondary markets, you should not choose a location to invest in based solely on this categorization. You should dig into the individual characteristics of each market and decide whether it fits your investment goals.
Just like primary real estate markets differ from secondary real estate markets, secondary markets also differ from each other. Each real estate market is different and with different risk levels. Therefore, it’s important for every investor to conduct a thorough market analysis before investing in a particular market. Your should be carefully based on your preferred rental strategy: traditional rentals or Airbnb rentals.
If you are looking to invest in the US housing market 2021, Mashvisor makes things easier for you. You can find city data on Mashvisor’s real estate blog. Once you’ve selected a few markets which match your criteria, be sure to also use Mashvisor’s Real Estate Heatmap for your neighborhood analysis. With this tool, you will be able to easily locate the most affordable areas as well as the best performing neighborhoods in your city of choice.
To get access to our real estate investment tools, click here to sign up for Mashvisor today and enjoy 15% off.
Related: Heatmap Analysis: The Secret to Successful Real Estate Investing
The Bottom Line
Choosing a real estate market to invest in can be intimidating due to the complexities of each market, especially if you are still new to the game. That’s why real estate investors need to understand primary vs secondary market pros and cons before investing in either of them. While investing in secondary markets has many upsides, investors should consider potential risk and conduct proper market analysis.