5 Best Practices for Investing in Secondary & Tertiary Markets
There are many opportunities for multifamily investing in secondary and tertiary markets. If you have good, strong underwriting, these markets can yield some significant benefits, but to realize the returns, you really need to assess these opportunities differently from a primary market deal.
So, here my 5 best practices for investing in secondary and tertiary markets:
1) Meeting Supply where there is Demand: In any market, you can’t ignore the fundamentals, like jobs and migration. However, the lack of multifamily housing supply in secondary and tertiary markets is not usually covered in the press. These markets attract fewer developers than the primary markets even if the fundamentals are there, such as the addition of a regional medical center or expansion of a university. It’s developments like this that can create a stable rental market.
But, getting into a market where you can pick up a B or C class value-add property to support the influx of new renters can create an opportunity for investors. It’s also worth noting that there may be a case where the local government makes it expensive to build and keeps developers out making those B’s and C’s that much more in demand.
2) Stay Close to the Property: Having “boots on the ground” at the property is a key factor. In the last recession, many out-of-town owners did not understand the market they were invested in when the market got soft. Some owners rarely visited the area and the property, so they were not in a position to address the challenges. This problem is magnified in secondary and tertiary markets.
With that said, if your plan is to buy in these markets, Driving or flying to the property on a regular basis is paramount. Doing so allows you to also meet with other local sellers and investors that like the area and gets you intertwined with the market. You will be up-to-date with what other sellers are unloading their properties at and if it’s time for you to so do. Trying to do all this remotely is difficult.
3) Don’t underestimate home-court advantage: Often, the active investor in the target area is connected to other owners, has a deep understanding of the vendors, and works closely with them. This investor knows the local politicians and attends the meetings at the country clubs with their PTA peers. While an outsider from a large city and with loads of money may be sophisticated in their underwriting and even in handling a large deal, people typically like to deal with others that are like them – or at least they are familiar with them. Staying in tune with the local market and visiting the places these investors attend will help offset the home-court advantage.
4) Unconventional ways of learning the market: When you are walking a tertiary market, getting a view from Main Street can be a telling sign of where that town is going. It’s better to see with your own eyes what is going on that to pull data from a spreadsheet from 4 states away. You will want to get in front of people to see what they think about the area and about any rumblings of new business moving to the city. A bartender at a local hot-spot may provide info on the scene and they are usually in tune with the lifestyle drivers of the city.
5) Look at the suburbs: Many local jobs have migrated to the suburbs, fueling renter demand. Typically, there is not much in the way of mass transit and can be a consideration for your target tenant – especially if it is a lower-income one. Make certain to consider jobs and proximity to bus/train lines but be wary of walkability factors until you experience the actual walkability by walking the property.
There are many renters that live in secondary and tertiary markets by choice. Treat them well and they will stick around for a long time.
What are some other best practices you employ when considering a secondary or tertiary target market? Leave them in the comments below.