Navigating Secondary Real Estate Markets: Hidden Gems for Investors

As a real estate investor, your first decision when making a new investment is to decide what type of market you want to explore. While it’s important to consider your overall investing strategy and priorities, secondary real estate markets are often overlooked by most investors. These hidden gems are largely a win-win, offering more affordable purchase prices, lower cost of living, and steady growth potential.

What makes these secondary real estate markets so profitable is that they appeal to both homebuyers and investors. Largely considered to be smaller cities, medium towns, and associated regions, these markets are worth exploring when you’re seeking to expand – or start – your investment portfolio. 

With increasing competition and rising property prices in big cities, investors are increasingly switching to secondary real estate markets for a better return on their investment (ROI) and long-term appreciation. 

At Privy, our comprehensive data and real-time insights make it easy to navigate secondary real estate markets to identify lucrative investment opportunities. In this article, we’re sharing our advice on how to navigate secondary markets and how to overcome potential challenges when investing in these areas.

Understanding Secondary Real Estate Markets

The exact definition of secondary real estate markets is relatively contested. When you’re researching secondary real estate markets, you’ll see some suggestions that a primary market is one with 5 million or more of a population with secondary markets having 2 million to 5 million people and tertiary markets having less than 2 million people. 

These market definitions don’t hold up. For example, a “big city” is any principal city with 250,00+ residents. Under this definition, Austin would be considered a tertiary market, even though it has a robust market that is highly competitive. 

So how can we compare primary vs. secondary real estate markets?

In general, primary markets are the largest in the country and often earn the nickname “gateway markets” as they have a large population density, providing market stability due to having more established industries. By comparison, secondary markets are cities and large towns that have a smaller population with slightly less economic activity. However, these areas are attractive for investors as they’re seeing steady growth in population and commerce.

Secondary real estate markets are attractive to investors and renters/homebuyers as they have many of the same features as primary markets, including public transport access and amenities, while being more affordable. Known as “magnet markets”, these secondary markets are seeing faster job market growth than the national average, making them attractive to younger demographics. As a result, single-family residential (SFR) properties are particularly attractive for investors. 

The Benefits of Investing in Secondary Markets

While primary markets typically attract the highest amount of investor activities, the benefits of investing in secondary markets offer hidden gems for investors. It’s an ideal way to diversify an existing real estate portfolio, while also being more accessible for first-time investors or those with limited financial liquidity. 

Post-pandemic lifestyle changes, including the rise in remote working, have made secondary markets even more appealing. These markets are seeing strong population growth, major economic activity, and increases in rental prices, while property purchase costs remain comparatively affordable. 

With lower property prices, secondary markets have higher yield potential, thanks in part to the lower level of competition compared to primary markets. Most secondary markets are emerging markets with a strong local economy, suggesting a potential for strong appreciation growth. 

Cities and metropolitan areas like Fort Worth and Phoenix are ideal examples of booming secondary markets. Their rapid population growth is sustaining continued job growth and rising levels of real estate development. What’s important is that these markets are not yet oversaturated. 

Research shows that single-family residence (SFR) properties have the highest rental growth potential in these areas. Within one year, from 2020 to 2021, SFR rent grew in Phoenix by 19.2%. By comparison, primary markets saw a much slower rate of growth for the same property type, averaging under 2%. Even though secondary markets are seeing increased demand for SFR rentals, the median price of homes has remained relatively affordable and stable.

Why Secondary Markets are Becoming Popular Amongst Investors

In the last decade, secondary markets – particularly smaller cities – have shown increased promise to real estate investors as one of the best strategies for short and long-term returns. With smaller cities increasingly becoming business hubs, many are experiencing significant economic growth, even surpassing the expansion rate in larger primary markets.

It’s also important to consider the population movement that is currently underway. The United Nations estimates that almost 70% of the world’s population will live in urban areas by 2050. 

There are two trends at play here: renters and homeowners in primary markets moving to smaller cities for better affordability and amenities, without sacrificing their lifestyle, and individuals moving from rural areas to small cities. 

As big cities begin to struggle under the pressure of overpopulation, particularly those with a higher population density, smaller cities will become more appealing to businesses, investors, and individuals. 

Technology has also played a role in this shift, driven in part by the rise of remote working and the ability for businesses to operate in smaller cities without losing a competitive edge. Increasing digitalization across industries is bringing growing levels of venture capital and investment to smaller cities, making them attractive business hubs.

How to Identify Promising Secondary Markets for Real Estate Investing

You’ve decided that the focus of your real estate investing is going to be secondary markets, but how do you find secondary markets? At Privy, our comprehensive data provides nationwide coverage with advanced analysis tools and live market insights to make confident, data-driven decisions anywhere in the United States.

Whether you’re working with an investor-focused agent or navigating the market yourself, it’s easy to identify secondary markets suitable for real estate investing. Along with single-family residential (SFR) properties, Privy can help you identify lucrative opportunities for condos, townhouses, fix-and-flip properties, and long-term rentals. In these markets, it’s more achievable to find below-market value properties, new construction opportunities, and fix-and-flip properties. 

Along with Privy, you can use resources like job growth forecasts, local government reports, and economic indicators to identify promising secondary markets. Here are some things to look out for:

• Steady population growth with predicted long-term migration trends
• Strong job market with economic diversification across multiple industries
• Ongoing and upcoming infrastructure developments and urban planning
• Purchase price affordability with strong rental demand

Advantages of Investing in Real Estate in Secondary Markets

Why are real estate investors increasingly choosing to focus on secondary markets vs. primary markets? The advantage of investing in these markets is their affordability. You’ll get more for your investment and these cities are attractive to a broad range of investors, as well as homebuyers and potential tenants. 

The lower purchase price offers a better chance of securing a higher ROI and positive cash flow as financing options are usually more affordable with more reasonable mortgage options. Just like bigger cities, these markets have growing rental demand, creating stable long-term income streams for investors. There’s a high potential for long-term tenancies, creating an opportunity for passive income for investors, particularly those who also choose to outsource maintenance and tenant communication to a property management company.

Although rent is higher in these cities than in medium towns, they have a lower cost of living compared to larger cities, making renting and homeownership more affordable for professionals, particularly those relocating from more expensive urban areas.  

Now is the ideal time to enter secondary markets as they offer stable long-term growth, continuing to attract new residents with a high potential for strong property appreciation. If you’re investing in secondary markets, this high-growth potential means it’s important to consider the impact of capital gains taxes and plan accordingly. 

Secondary markets may currently be hidden gems for investors, but they have a short window for optimal ROI due to their steady growth. Growing tourism, infrastructure investment, and increased job creation provide secondary markets with consistent economic growth, even out-performing larger markets.

Market Trends Which Drive Growth for Secondary Real Estate Markets

Several market trends are driving growth for secondary real estate markets, both for rental properties and redevelopments. Secondary markets are increasingly benefiting from a so-called ‘spillover’ effect from nearby primary markets, particularly if they’re easily reachable by public transport. 

Smaller cities and towns are increasingly undergoing gentrification and revitalization, making them more attractive to investors and potential homebuyers. Infrastructure projects, such as improved public transport, new amenities, better roads, and upgraded utilities, further support market growth.

The continued pattern of long-term hybrid and remote working is also driving demand in secondary markets as migration patterns show professionals moving out of major cities to more affordable smaller cities.

What Makes Secondary Markets Attractive to Investors

The strong growth potential isn’t the only reason why real estate investors are increasingly being attracted to secondary markets. These smaller cities have growing and diverse economic bases with business hubs that provide support for multiple industries, making them more resilient to potential market volatility.  

Such cities provide strong diversification opportunities for established investors with high growth potential for commercial, residential, and industrial properties. Strong transport connectivity makes these cities accessible for residents and businesses, supporting the efficient movement of people and goods for further economic growth.

What also makes these secondary markets so appealing is their pro-growth leadership. It’s common for local governments to offer incentives for investors with supportive governance, including more streamlined planning processes and development incentives. 

Smaller cities provide a higher quality of life, meeting the needs of younger demographics as they search for a healthier work/life balance than their predecessors. They have extensive recreational amenities and more affordable housing, offering the ability to live somewhere with good job potential without having to live in a neighborhood with a high population density.
 

Strategies for Successful Investing in Secondary Markets

As an investor, you’ll need to adjust your strategy when focusing on secondary markets, compared to when you’re investing in rural areas and bigger cities. However, the many strategy takeaways are largely the same.

• Do your due diligence and market research, analyzing localized data, including real-time and historical data, to assess the area’s growth potential.
• Become a local expert by building relationships with investor-focused agents, property managers, developers, and construction experts. These relationships can provide vital insights and opportunities, giving you an inside track for off-market deals and investment opportunities for new developments.
• Keep your focus on up-and-coming neighborhoods within these secondary markets that aren’t over-saturated and will be appealing to newcomers to the area. They’ll offer the best long-term appreciation as they’ll typically have a lower purchase price.
• Utilize predictive analytics and comprehensive data, provided by partners like Privy, to spot hidden gems and below-market value properties before the competition. 

Common Challenges and How to Overcome Them When Investing in Secondary Markets

Secondary markets aren’t without their challenges. Compared to primary markets, there is limited comparable market data and there’s still a perception within financial institutions that secondary markets are riskier investments than primary markets. These perception issues are still common amongst the general population, who may continue to view bigger cities as having better job opportunities and lifestyles. 

Your nearest secondary market may not be within a convenient distance from your primary residence, creating the need to outsource to a property management company. However, positive property appreciation can boost your cash flow over time, enabling you to still make a healthy profit when paying for these additional expenses. 

Local laws, zoning issues, and regulations can also pose challenges for investors, particularly those focusing on renovations and new construction opportunities. However, expanding your local market knowledge and researching the local economy can help address many of these challenges. Predictive analytics can help investors make more informed decisions when exploring secondary markets.