Classification of Real Estate: 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, demographics, 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.

Classification of Real Estate: How It Works

Most investors know that real estate is classified into three types of markets: primary, secondary, and tertiary. In addition, each market is separated by job growth, population, and demographics. 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.

• 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 consist of large cities with a high population (around 5 million people or more) and long-established commerce development.

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. With the population increasing and the job market growing faster than average in the US, secondary markets are driving high demand.

Some cities in secondary markets include:

• Nashville, TN
• Phoenix, AZ
• Austin, TX
• Dallas, TX
• Charlotte, NC
• Atlanta, GA

Rapid population growth drives secondary markets and accounts for the majority of real estate development and job growth. 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. When it comes to the classification of real estate markets, tertiary markets are at the bottom. 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 emerging markets with steady but controlled job growth. Typically, populations in tertiary markets are under one million, and both traditional and innovative economic influences can drive them.

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

• Investors can gain higher income with real estate properties in primary markets.
• Primary markets are home to some of the most educated and innovative workforces in the United States.
• Larger cities like Los Angeles and Chicago are more diverse and economically varied than cities in other markets.

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.
• More people have recently moved from primary markets to more minor, secondary markets.

Pros of Secondary Markets

• Prices of homes are typically more affordable than those in primary markets.
• More people are starting to move away from primary markets, looking for homes in secondary markets instead.
• Secondary markets have more business-friendly governments and better quality of life.

Cons of Secondary Markets

• Risk of significant economic slow-down if population decreases occur.
• Job markets centered around only a few significant industries may lead to higher unemployment rates.
• Secondary market prices fluctuate more frequently, influenced by more factors.

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.
• There’s greater potential for significant returns with higher cap rates and yields.

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 decking in 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. If you’re looking for ways to maximize your rental portfolio, residential property management in Northern Virginia can help you explore new business opportunities.

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.