There are many opportunities by investing in real estate assets located in secondary and tertiary markets. Yet, in order to realize those attractive risk-adjusted yields it’s imperative to vet these opportunities different from primary markets.




If underwritten correctly, these alternative markets have the potential to offer investors significant benefits. Here are some tips for those looking into these markets:




Supply and Demand:




Job announcements and immigration receive more national press than local news, however, the lack of new developments (homes, apartments, regional medical centers, commercial, etc.) in secondary and tertiary markets is a crucial, often-overlooked, factor. These markets are consistently less attractive to nation-wide developers than primary markets.




Some opportunities in secondary and tertiary markets may not be apparent at first glance. Local governments play a huge role, and some may be averse to new development, rezoning, cost of infrastructure, etc. Partnering with a local developer or lender is crucial to Investors.




Conversely, in first-tier markets, pronounced demand growth fosters excessive new development. In several Texas markets, for example, the job and household growth that fuel housing demand have been remarkably strong. The local governments aren’t extremists in their opposition to new residential and commercial developments. 




Geographical areas:




Proximity to an investment is key in these types of markets. Through the last recession, many of the secondary- and tertiary-market investments that experienced trouble suffered because out-of-town Investors lacked a realistic understanding of the local markets in which they invested, and that rarely visited them. Thus, when times became tough, those Investors didn’t know where to begin to address those challenges, including their lenders which didn’t know how to apply work-out scenarios.




In secondary and tertiary-markets flying-to a distant may not be an option, due to the time involved and commercial-flights limitations. Unless the Investors accesses these markets by investing alongside local and regionally-focused developers and lenders, the Investor is starting out with a disadvantage.




Don’t underestimate the local advantage:




Although many local and regional Investors may not appear to be very sophisticated, be careful not to underestimate the well-connected owners that live and breathe those markets every day.




Local real estate investors elect their local politicians, pay their taxes to the local governments, and are country club members with the owners of the primary local employers. Local players may have shortcomings in apparent sophistication, but they overcome it through local business-savvy and local-insight that can’t be found on the Internet. 




Less-conventional market analysis:




Market information packaged up nicely is more difficult to find regarding secondary and tertiary opportunities. Visiting with the staff of a convenience store located at “Main St” within a submarket can be more useful than reading a quarterly magazine.




The local sources in secondary and tertiary markets are decent and reliable. Since everything is more tight-knit, it makes easier to keep up with another people’s business.




Regional Investors 




Real Estate is local, and you should consider partnering with locals if you are planning investing in those markets. experience and local knowledge are highly needed when looking at risk-adjusted returns. 




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