Many real estate investors read about rising home prices and assume that good opportunities to invest in rental property are long gone.
While it’s true that the demand for housing is strong across the country, there are still many areas where home prices are relatively affordable and the demand for rental property is strong.
In this article, we’ll take an in-depth look at tertiary markets in real estate, including 10 small cities that may be worth taking a look at.
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.
- Tertiary real estate markets generally have populations of less than 1 million residents.
- Smaller markets may offer robust returns to rental property owners due to strong inbound migration and job growth.
- Examples of tertiary markets include Colorado Springs, Boise, Las Vegas, and Sacramento.
Real Estate Market Classifications
Although there’s no industry standard, most experts agree on three real estate market classifications:
- Primary markets
- Secondary markets
- Tertiary markets
As a rule of thumb, tertiary real estate markets generally have a population of 1 million people or less, secondary markets are home to between 1 and 5 million people, and primary real estate markets have more than 5 million residents.
However, there are other factors to consider when classifying a market other than how many people live there.
It’s generally easy to separate a primary market from a secondary market. For example, secondary markets are usually close to primary gateway cities (like Los Angeles, San Francisco, or New York City) and have amenities similar to larger urban areas.
Population and job growth is strong, and housing prices are still relatively affordable, although some secondary markets, such as Austin, are seeing increases in home values of more than 30%.
While tertiary markets also have these characteristics, they generally aren’t as well known and are frequently overlooked by even the most experienced real estate investors.
What is a Tertiary Market in Real Estate?
A tertiary real estate market – sometimes known as an emerging real estate market - generally has a population of less than one million people.
Living costs are typically less expensive than in primary and secondary markets. While they may not have the same amenities, tertiary markets often see a slow but steady stream of inbound migration and steady employment growth as new residents and businesses seeking a better quality of life.
Last year, The Business Journals described how many smaller cities saw population growth during the pandemic. Three tertiary markets topped the list for unprecedented resident gains: Greenville (North Carolina), Las Vegas, and Tallahassee.
One of the reasons that tertiary markets are seeing solid population growth may be because housing prices and rents are still generally affordable in these markets. Although rent prices may not be as high as in other, larger markets, annualized returns and gross yields can be more robust due to a powerful demand for homes that are increasingly in short supply.
A good way to think about a tertiary market is like a target. Primary markets are the bull’s eye, with secondary markets the ring outside the bull’s eye, and tertiary markets another ring outside of secondary markets and furthest away from primary markets.
An example of a tertiary real estate market is Colorado Springs. The city has a population of about 750,000 residents and is about an hour drive from Denver (a secondary market). In turn, Denver has convenient access to primary markets such as Dallas and Phoenix.
10 Tertiary Real Estate Markets
Here’s a list of 10 tertiary markets for real estate investors to consider, listed in alphabetical order. Data included for each city comes from online sources including Data USA, Federal Reserve Bank of St. Louis, Tax Foundation, U.S. Bureau of Labor Statistics, and Zillow.
When choosing a market to buy rental property in, investors focus on real estate markets that offer the most potential based on the investment strategy. While tertiary markets can offer plenty of potential, they aren’t necessarily the right choice for every real estate investing strategy.
Boise, ID
- Population metro area 749,057
- Population growth 2.29%
- GDP $37.6 billion
- Job growth 5%
- Unemployment 3.2%
- Per capita income $32,955
- Median household income $66,466
- Median home value $495,485
- Median home value 1-year change 41.1%
- Average rent $1,644
- Rent growth year-over-year 18.2%
- Renter occupied households 28%
- Median age of residents 37 years
- Education bachelor's degree or higher 33.3%
- Cost of living 8% below the national average
- Average state property tax rate 0.630%
- State income tax 1.125% - 6.925%
Colorado Springs, CO
- Population metro area 745,791
- Population growth 0.93%
- GDP $39 billion
- Job growth 1.19%
- Unemployment 6.5%
- Per capita income $35,683
- Median household income $72,633
- Median home value $409,770
- Median home value 1-year change 25.1%
- Average rent $1,662
- Rent growth year-over-year 9.8%
- Renter occupied households 35%
- Median age of residents 35 years
- Education bachelor's degree or higher 39.2%
- Cost of living 6% below the national average
- Average state property tax rate 0.490%
- State income tax 4.55%
Greenville, NC
- Population metro area 180,742
- Population growth 0.78%
- GDP $10 billion
- Job growth 1.23%
- Unemployment 5.1%
- Per capita income $28,878
- Median household income $53,401
- Median home value $165,923
- Median home value 1-year change 12.5%
- Average rent $1,350
- Rent growth year-over-year 4%
- Renter occupied households 50%
- Median age of residents 33.4 years
- Education bachelor's degree or higher 32.1%
- Cost of living 5% below the national average
- Average state property tax rate 0.770%
- State income tax 5.25%
Las Vegas
- Population metro area 2.27 million
- Population growth 1.57%
- GDP $128 billion
- Job growth 2.86%
- Unemployment 9.6%
- Per capita income $32,511
- Median household income $62,107
- Median home value $343,836
- Median home value 1-year change 17.5%
- Average rent $1,572
- Rent growth year-over-year 13.1%
- Renter occupied households 46%
- Median age of residents 37.7 years
- Education bachelor's degree or higher 25.6%
- Cost of living 3% above the national average
- Average state property tax rate 0.530%
- State income tax 0%
Little Rock, AR
- Population metro area 744,483
- Population growth 0.42%
- GDP $38.1 billion
- Job growth 0.98%
- Unemployment 5.1%
- Per capita income $30,899
- Median household income $56,849
- Median home value $167,060
- Median home value 1-year change 3.9%
- Average rent $975
- Rent growth year-over-year 7.6%
- Renter occupied households 36%
- Median age of residents 37.6 years
- Education bachelor's degree or higher 30.3%
- Cost of living 4% below the national average
- Average state property tax rate 0.610%
- State income tax 2.00% - 5.90%
Richmond, VA
- Population metro area 1.29 million
- Population growth -0.98%
- GDP $91.4 billion
- Job growth 0.76%
- Unemployment 4.9%
- Per capita income $37,590
- Median household income $68,324
- Median home value $285,906
- Median home value 1-year change 15.0%
- Average rent $1,354
- Rent growth year-over-year 6.5%
- Renter occupied households 34%
- Median age of residents 39.1 years
- Education bachelor's degree or higher 37.6%
- Cost of living 4% below the national average
- Average state property tax rate 0.800%
- State income tax 2.00% - 5.75%
Sacramento, CA
- Population metro area 2.36 million
- Population growth 0.79%
- GDP $153.3 billion
- Job growth 3.19%
- Unemployment 6.8%
- Per capita income $37,974
- Median household income $76,706
- Median home value $442,500
- Median home value 1-year change 22.1%
- Average rent $2,004
- Rent growth year-over-year 9.5%
- Renter occupied households 40%
- Median age of residents 37.8 years
- Education bachelor's degree or higher 34.2%
- Cost of living 17% above the national average
- Average state property tax rate 0.730%
- State income tax 1.00% - 13.30%
Spartanburg, SC
- Population metro area 319,785
- Population growth -6.3%
- GDP $16.9 billion
- Job growth -6.1%
- Unemployment 4.7%
- Per capita income $27,969
- Median household income $55,339
- Median home value $162,649
- Median home value 1-year change 14.4%
- Average rent $1,295
- Rent growth year-over-year 6%
- Renter occupied households 27%
- Median age of residents 38.5 years
- Education bachelor's degree or higher 26.3%
- Cost of living 10% below the national average
- Average state property tax rate 0.550%
- State income tax 0.00% - 7.00%
Tallahassee, FL
- Population metro area 386,454
- Population growth -0.26%
- GDP $19.2 billion
- Job growth 0.75%
- Unemployment 5.4%
- Per capita income $29,728
- Median household income $52,729
- Median home value $222,737
- Median home value 1-year change 13.9%
- Average rent $1,250
- Rent growth year-over-year 4%
- Renter occupied households 42%
- Median age of residents 34.3 years
- Education bachelor's degree or higher 38.7%
- Cost of living 4% below the national average
- Average state property tax rate 0.830%
- State income tax 0%
Tucson, AZ
- Population metro area 1.05 million
- Population growth 0.79%
- GDP $42.1 billion
- Job growth 2.28%
- Unemployment 7.4%
- Per capita income $31,004
- Median household income $56,169
- Median home value $269,431
- Median home value 1-year change 23.8%
- Average rent $1,337
- Rent growth year-over-year 9.5%
- Renter occupied households 37%
- Median age of residents 38.9 years
- Education bachelor's degree or higher 32.6%
- Cost of living 6% below the national average
- Average state property tax rate 0.620%
- State income tax 2.59% - 8.00%
Factors to Consider When Investing in a Tertiary Real Estate Market
Not all small markets provide the same potential opportunities for investors. Some of the factors to consider when analyzing a tertiary real estate market include:
- Long-term trends, such as the historic increase (or decrease) in population and job growth, rent growth, percentage of renter-occupied households, and the change in home values.
- Comparison of tertiary market statistics to nearby secondary markets, as well as state and national averages.
- The Roofstock Neighborhood Rating, which is based on key attributes like school district quality, employment rates, and home values.
- Potential returns based on financial formulas, such as cash on cash return, net operating income (NOI), cap rate, cash flow, gross yield, and annualized return.
Pros and Cons of Tertiary Real Estate Market Investing
Because tertiary markets are smaller than secondary and primary markets, they may experience more upside and downside movement through various phases of the normal real estate cycle:
Pros
- Home prices may be generally more affordable than in larger secondary and primary markets.
- Demand for rental property may exponentially increase as the population and job markets grow.
- Potential for more robust returns with higher cap rates and yields.
Cons
- Municipal services, such as police, fire, and schools may become overwhelmed in the short term if there is rapid population growth.
- Smaller cities may be significantly affected by changes in the state and national economies.
- Economies with only one or two major employers may see unemployment rise if companies reduce staffing levels.
Final Thoughts on Tertiary Real Estate Markets
Tertiary real estate markets generally have home prices and rents that are more affordable than larger secondary and primary markets. During the pandemic, smaller cities such as Greenville, Las Vegas, and Tallahassee saw unprecedented population growth as residents migrated from larger urban areas.
Of course, not all small cities offer the same potential for real estate investment. No matter what the size of the market is, investors should judge each potential opportunity based upon the varying levels of risk and reward.
