The 3 Types of Investment Markets Explained
The type of market you invest in can play a massive role in the success of your rental property. As such, investors need to know a bit about the classification of real estate and how to choose the right investment market. Learning about primary, secondary, and tertiary real estate markets can help investors make the best business decision. Since each market displays differences in population, employment trends, and economic development, it’s important to explore each market type in-depth to learn the pros and cons. If you want to learn more about the classification of real estate and the pros and cons of each market type, just keep reading.
Main Takeaways
- Real estate markets are commonly grouped into primary, secondary, and tertiary markets based on factors like population, economic activity, job growth, and overall market size.
- Primary markets tend to be larger and more established, while secondary and tertiary markets may offer lower entry costs and different opportunities for growth.
- There is no single market type that works best for every investor, so it’s important to consider property prices, rental demand, employment trends, population changes, and your investment goals before choosing a market.
Classification of Real Estate: How It Works
Real estate markets are commonly grouped into three general categories: primary, secondary, and tertiary. These classifications may consider factors such as population, job growth, economic activity, and overall market size. After all, the population isn’t the only factor in categorizing real estate.
That said, each market differs a bit from the next. For example, what happens in primary markets isn’t necessarily the same as in secondary markets. Primary markets are generally established markets with a large population. On the other hand, secondary and tertiary markets are more emerging real estate markets.
If you’re not sure what market you want to invest in, keep reading as we go over a simple explanation for each classification of real estate. Investors looking to grow their portfolios can also turn to residential property management in Northern Virginia
Remember, because there is no universal standard for classifying primary, secondary, and tertiary markets, specific cities may fall into different categories depending on the source and criteria used.
- Primary Real Estate Markets
- Secondary Real Estate Markets
- Tertiary Real Estate Markets
Primary Real Estate Markets
First, let’s talk about primary real estate markets, also known as a gateway or established markets. Primary markets generally consist of large metropolitan areas with sizeable populations and long-established commercial activity. Some classifications use a metropolitan population of around 4 to 5 million or more as a benchmark.
Some of the major cities in primary markets include:
- Los Angeles, CA
- San Francisco, CA
- New York, NY
- Boston, MA
- Washington DC
- Chicago, IL
Primary markets are known for being economic leaders, with a significant contribution to the GDP of the United States. Furthermore, primary markets are home to educated and innovative workforces, along with some of the most expensive housing. Primary markets are some of the major focus points for private equity funds, REITs, and foreign investors.
Secondary Real Estate Markets
Also known as magnet markets, secondary markets typically have a substantial population and significant job growth. In other words, they are in-migration locations for investors and businesses. Secondary markets may experience strong demand when population and job growth are increasing.
Some cities in secondary markets include:
- Nashville, TN
- Phoenix, AZ
- Austin, TX
- Dallas, TX
- Charlotte, NC
- Atlanta, GA
Population and employment growth can drive significant real estate development in secondary markets. That said, secondary markets are popular among real estate investors who want to invest in cities that will provide business growth.
Tertiary Real Estate Markets
After primary and secondary markets, there are tertiary markets. Tertiary markets are generally smaller than primary and secondary markets. However, that doesn’t mean they are a bad investment decision. In fact, it can mean quite the opposite for savvy investors.
Tertiary markets are generally smaller markets that may have more limited or emerging economic and employment growth. Under some classifications, tertiary markets generally have metropolitan populations under one million, although definitions vary across the real estate industry.
Some of the most popular cities in tertiary markets include:
- Kansas City, MO
- Raleigh, NC
- Charleston, SC
- Omaha, NE
- Des Moines, IA
- Colorado Springs, CO
When choosing an investment property in a tertiary market, investors should look for opportunities that provide growth and business potential.
What Are the Advantages and Disadvantages of Each Market Type?
No matter what market you decide to invest in, there are a few advantages and disadvantages to each. That said, investors must learn as much as possible about the market they want to invest in. If you want to learn more about the pros and cons of each classification of real estate, here are a few points to consider.
Pros of Primary Markets
- Primary markets may offer strong rental demand because of their large populations and established economies.
- Primary markets often have large, diversified employment bases and significant concentrations of major employers.
- Larger cities like Los Angeles and Chicago often have more diversified economies and employment bases.
Cons of Primary Markets
- Investment prices in primary markets are generally very high.
- Competition in primary markets can drive up home prices, resulting in a high price-to-rent ratio, which can potentially lower income.
- Some secondary markets have attracted residents from larger metropolitan areas, although migration trends vary considerably by location and over time.
Pros of Secondary Markets
- Prices of homes are typically more affordable than those in primary markets.
- Some secondary markets may offer business-friendly policies, lower costs, or quality-of-life factors that attract residents and businesses.
Cons of Secondary Markets
- Risk of significant economic slowdown if population decreases occur.
- Job markets centered around only a few significant industries may lead to higher unemployment rates.
- Some secondary markets may experience greater volatility, particularly if their economies depend heavily on a smaller number of industries.
Pros of Tertiary Markets
- Real estate prices are generally more affordable than primary and secondary market homes.
- Demand may potentially increase as the population and job opportunities grow.
- Tertiary markets may offer higher cap rates or yields in some cases, although potential returns and risks vary by property and market.
Cons of Tertiary Markets
- Smaller cities can be more affected by state and national economic changes.
- If companies lower staffing levels, cities with fewer financial institutions can see more unemployment.
- Schools, police stations, and other municipal services could become overwhelmed or understaffed with a significant increase in population.
What Type of Real Estate Market is Best For Investors?
Now that we’ve gone over the pros and cons of each real estate classification, investors may wonder what market is best for them. However, it’s hard to say which market is best, since there are excellent opportunities for real estate investors everywhere, no matter what the market. Clearly, there are advantages to any market type, but it’s essential to do your research before deciding on an investment area.
Additionally, your investment goals and current strategies also play a significant role in which market type you should choose. If you’re unsure of whether you want to invest in a primary, secondary, or tertiary market, explore the ways each market may benefit your business and make decisions accordingly.
Frequently Asked Questions About Real Estate Investment Markets
Understanding the different classifications of real estate markets can help investors narrow down where they want to buy. Here are answers to a few common questions about primary, secondary, and tertiary markets.
What are the three types of real estate markets?
Real estate investment markets are commonly described as primary, secondary, or tertiary. These classifications generally reflect factors such as market size, population, economic activity, employment, and real estate development.
What is a primary real estate market?
A primary market is typically a large, established metropolitan area with significant economic activity and a large real estate market. Examples often include cities such as New York, Los Angeles, Chicago, and Washington, DC.
What is a secondary real estate market?
Secondary markets are generally smaller than primary markets but may have growing populations, employment opportunities, and real estate activity. These markets can attract investors looking beyond the country’s largest and most expensive metropolitan areas.
What is a tertiary real estate market?
Tertiary markets are generally smaller real estate markets with smaller populations and economies. Property prices may be lower than in larger markets, but investors should carefully evaluate local rental demand, employment, population trends, and economic conditions.
Which real estate market is best for rental property investors?
There isn’t one market classification that’s best for every rental property investor. The right choice depends on your budget, investment strategy, risk tolerance, expected returns, and the conditions of the specific market you’re considering.
Are secondary and tertiary markets good for real estate investing?
They can be. Smaller markets may offer lower property prices or opportunities for growth, but those benefits can come with different risks. Investors should research the individual market rather than assuming an investment will perform well simply because it’s classified as secondary or tertiary.
What’s Next Once You’ve Found a Good Investment Market?
Before investing in rental properties, you’ll want to look at each classification of real estate. Once you’ve found a good investment market, you can start to plan out your investment. Whether it’s your first investment or 100th investment, if you want to maximize ROI, it’s essential to recognize what each market can do for your portfolio. Additionally, it’s crucial to learn the steps for rental success.
One of the most critical steps for rental investors is finding a good property management team to help with day-to-day processes. Bay Property Management Group is a full-service management team with resources and professionals to help your rental business succeed. Contact BMG today if you need rental management services in Baltimore, Philadelphia, Northern Virginia, and Washington, DC.
