Most of us have heard the saying that real estate is all about location, location, location. While it’s true that investment opportunities can differ from neighborhood to neighborhood, some investors are surprised to learn that sometimes the best deals can be found in smaller, secondary real estate markets.
Key Takeaways
- Real estate markets are typically classified as primary, secondary, and tertiary, although there is no standard consensus on how a market is defined.
- Secondary real estate markets generally have populations of between 1 – 5 million residents.
- In addition to population size, other factors affecting how a real estate market is classified include population growth, cost of living, housing prices, and tax rates.
- Examples of secondary markets include Austin, Charleston, Nashville, and Orlando.
Three Types of Real Estate Markets
Real estate markets are classified as:
- Primary markets
- Secondary markets
- Tertiary markets
Unfortunately, there’s no standard consensus in the real estate industry on how the three types of real estate markets are defined. Oftentimes, experts classify a market by population size. The larger the market is, the more likely it is to be primary, and vice versa.
However, classifying a market solely based on how many people live there is a fairly limited view. Instead of relying on a single data point like population size, many real estate investors use a variety of information to classify a real estate market as primary, secondary, or tertiary:
- Gateway city (a city that serves as a point of entry to a region, such as New York City or Los Angeles)
- Location to trade routes (such as interstate highways, ports of entry, international airports)
- Population
- Population migration (inbound or outbound)
- Median age of residents
- Job growth
- STEM jobs (science, technology, engineering, mathematics)
- Unemployment rate
- Economic drivers
- Cost of living
- State income tax rate
- Property tax rate
- Median property value
- Median household income
- Major league sports team
- Direct flights to and from gateway cities
- Climate
- Change in home values
- Cap rate analysis
- Gross rent yield
- Rent growth
- Occupancy rates
- Percent of renter-occupied households
What is a Secondary Market in Real Estate?
A secondary real estate market typically has a population size of between one and five million residents and is located near a primary major metropolitan area.
A good example of a secondary real estate market is Austin. The city has a population of just over 2.2 million and is located about 2 ½ hours by car from Houston and 3 ½ hours from Dallas-Fort Worth.
Secondary real estate markets also have population and job growth that are above average. Inbound migration is driven by new residents and businesses seeking a smaller city that offers a lower cost of living, a better quality of life, and a business-friendly government. Most secondary cities have similar amenities found in a larger primary city, but at more affordable prices.
Many secondary markets are also home to well-paying STEM jobs. Regulatory-friendly cities are attracting the attention of more entrepreneurs, which can in turn attract higher-paying jobs and millennials. As NBC News recently reported, Silicon Valley is experiencing a tech flight as companies move to Miami and Austin for cheaper expenses and to avoid costly local laws.
While housing prices and rents show strong growth in secondary real estate markets, prices are still relatively affordable. As new properties become available, they are quickly absorbed by real estate investors and tenants, with rising demand for rental property helping to keep occupancy rates high.
10 Secondary Real Estate Markets
Here’s a list of 10 secondary markets for real estate investors to consider, listed in alphabetical order. Data included for each city was drawn from publicly available sources including Data USA, Federal Reserve Bank of St. Louis, Tax Foundation, U.S. Bureau of Labor Statistics, and Zillow.
Rental property investors should always select a real estate market that best fits their investment strategy. Selecting a market mainly because it’s a “hot” or a high-interest market may not be the best option for every investor.
Austin
- Population metro area 2.23 million
- Population growth 2.71%
- GDP $159 billion
- Job growth 5.02%
- Unemployment 4.8%
- Per capita income $41,957
- Median household income $80,954
- Median home value $562,723
- Median home value 1-year change 35.7%
- Average rent $1,571
- Rent growth year-over-year 6%
- Renter occupied households 42%
- Median age of residents 35.2 years
- Education bachelor's degree or higher 46.2%
- Cost of living 3% below the national average
- Average state property tax rate 1.690%
- State income tax 0%
Charleston, SC
- Population metro area 802,122
- Population growth 1.84%
- GDP $45.6 billion
- Job growth 1.98%
- Unemployment 4.0%
- Per capita income $38,050
- Median household income $70,505
- Median home value $396,818
- Median home value 1-year change 14.2%
- Average rent $1,583
- Rent growth year-over-year 6.2%
- Renter occupied households 33%
- Median age of residents 37.7 years
- Education bachelor's degree or higher 37.5%
- Cost of living 4% above the national average
- Average state property tax rate 0.550%
- State income tax 0% - 7%
Charlotte, NC
- Population metro area 2.64 million
- Population growth 2.63%
- GDP $178.4 billion
- Job growth 3.77%
- Unemployment 4.7%
- Per capita income $36,374
- Median household income $66,399
- Median home value $310,399
- Median home value 1-year change 18.6%
- Average rent $1,608
- Rent growth year-over-year 7.9%
- Renter occupied households 35%
- Median age of residents 37.7 years
- Education bachelor's degree or higher 36.2%
- Cost of living 5% below the national average
- Average state property tax rate 0.770%
- State income tax 5.25%
Denver
- Population metro area 2.97 million
- Population growth 1.19%
- GDP $227.4 billion
- Job growth 1.00%
- Unemployment 6.3%
- Per capita income $44,806
- Median household income $85,641
- Median home value $543,544
- Median home value 1-year change 13.3%
- Average rent $1,763
- Rent growth year-over-year 4.3%
- Renter occupied households 36%
- Median age of residents 36.7 years
- Education bachelor's degree or higher 45.8%
- Cost of living 12% above the national average
- Average state property tax rate 0.490%
- State income tax 4.55%
Kansas City, MO
- Population metro area 2.16 million
- Population growth 0.59%
- GDP $139 billion
- Job growth 1.73%
- Unemployment 5.4%
- Per capita income $36,358
- Median household income $70,215
- Median home value $198,267
- Median home value 1-year change 18.8%
- Average rent $1,246
- Rent growth year-over-year 6.0%
- Renter occupied households 35%
- Median age of residents 37.7 years
- Education bachelor's degree or higher 37.7%
- Cost of living same as the national average
- Average state property tax rate 0.930%
- State income tax 1.50% - 5.4%
Miami
- Population metro area 6.17 million
- Population growth -0.52%
- GDP $377.5 billion
- Job growth 1.39%
- Unemployment 7.1%
- Per capita income $33,917
- Median household income $60,141
- Median home value $407,242
- Median home value 1-year change 10.8%
- Average rent $2,239
- Rent growth year-over-year 8.5%
- Renter occupied households 41%
- Median age of residents 41.6 years
- Education bachelor's degree or higher 33.1%
- Cost of living 14% above the national average
- Average state property tax rate 0.830%
- State income tax 0%
Nashville
- Population metro area 1.93 million
- Population growth 0.09%
- GDP $138.6 billion
- Job growth 2.02%
- Unemployment 4.6%
- Per capita income $37,696
- Median household income $70,262
- Median home value $347,047
- Median home value 1-year change 14.2%
- Average rent $1,622
- Rent growth year-over-year 5.4%
- Renter occupied households 34%
- Median age of residents 36.7 years
- Education bachelor's degree or higher 38.5%
- Cost of living 3% below the national average
- Average state property tax rate 0.640%
- State income tax 0%
Orlando
- Population metro area 2.61 million
- Population growth 1.37%
- GDP $147.2 billion
- Job growth 3.55%
- Unemployment 6.0%
- Per capita income $31,186
- Median household income $61,876
- Median home value $300,275
- Median home value 1-year change 11.7%
- Average rent $1,680
- Rent growth year-over-year 6.7%
- Renter occupied households 38%
- Median age of residents 37.7 years
- Education bachelor's degree or higher 33.3%
- Cost of living 5% below the national average
- Average state property tax rate 0.830%
- State income tax 0%
Portland, OR
- Population metro area 2.5 million
- Population growth 0.57%
- GDP $175 billion
- Job growth -0.09%
- Unemployment 5.1%
- Per capita income $40,526
- Median household income $78,439
- Median home value $544,136
- Median home value 1-year change 15.6%
- Average rent $1,621
- Rent growth year-over-year 4.4%
- Renter occupied households 38%
- Median age of residents 38.4 years
- Education bachelor's degree or higher 40.3%
- Cost of living 29% above than the national average
- Average state property tax rate 0.900%
- State income tax 4.75% - 9.90%
St. Louis
- Population metro area 2.8 million
- Population growth -0.12%
- GDP $173.5 billion
- Job growth 0.02%
- Unemployment 5.3%
- Per capita income $37,365
- Median household income $66,417
- Median home value $158,572
- Median home value 1-year change 14.4%
- Average rent $1,218
- Rent growth year-over-year 5.4%
- Renter occupied households 31%
- Median age of residents 39.7 years
- Education bachelor's degree or higher 35.8%
- Cost of living 6% below the national average
- Average state property tax rate 0.930%
- State income tax 1.50% - 5.40%
How to Invest in a Secondary Real Estate Market
There are several factors investors consider when analyzing a secondary real estate market to invest in:
- Individual market characteristics compared to state and national averages.
- Data points on a local, granular level such as neighborhood rating.
- Analyze historical trends including rent growth, change in renter-occupied households, and home values.
- Potential investment returns using a variety of financial metrics including annualized return, cap rate, gross yield, cash flow, appreciation, net operating income (NOI), and cash on cash return.
Pros and Cons of Secondary Real Estate Market Investing
Here are some of the reasons investors consider secondary real estate markets for investing, as well as some potential drawbacks as well:
Pros
- Property prices may be more affordable than in higher-cost primary markets.
- Strong population and job growth increases the demand for rental property.
- Potential for stronger return on investment with higher cap rates and bigger cash flows.
Cons
- Risk of significant slow-down in the local economy when populations are smaller.
- Local job markets centered around one or two major industries may be more susceptible to rapidly rising unemployment.
Final Thoughts on Secondary Real Estate Markets
Many secondary markets may have more affordable home prices with a lower cost of living and doing business when compared to larger, primary markets.
As the pandemic continues to run its course, more companies mayare allowing employees to work from home on a permanent basis. People who can work remotely often choose to relocate to the suburbs and secondary markets for a home with more space.
When analyzing real estate markets to buy rental property in, investors judge each secondary market based on its potential opportunities. Every real estate market, regardless of how big or small it is, has different levels of risks and rewards.
