8 Things to Look at When Investing in Secondary Markets
June 25, 2020
As most of us already know, investing in apartment communities is widely considered to be a smart investment, but there may be areas that are a bit smarter than others. Primary markets are rich with units and full of people, but that doesn’t ensure you’ll be able to invest in a property that will yield a good return or even have low vacancy rates. As the markets change, units in primary markets are becoming inaccessible to the average median wage person due to affordability and large numbers of luxury apartments and condos are sitting empty due to this problem. This leads residents to look for places they can afford to live, which are the areas that present the most potential for apartment investors.
What are Secondary Markets?
Secondary markets are medium-sized cities that have begun to experience an increase in growth. That growth usually consists of steady growth in the local economy, new jobs and businesses, and emerging technologies. These areas of growth attract people to move to these locations, thus creating an increased demand for housing.
But how do you determine if an area is considered a secondary market, and more importantly, how do you determine whether they are a good investment for you?
Compare National and Local Population Growth
The first step is to look at the population growth percentage of an area and compare it to the national average for the growth of the population. In 2019, the growth rate of the United States population was .5%. Comparing these two numbers can give you a picture of the number of people who have moved into the area. In addition, it would be an added benefit to look at the level of population and the population growth rate of ages 15-34. These will be your current and future residents if you decided to invest.
Watch the Job Market
Due to the increasing costs of operation, many businesses are pulling their industries from heavily populated, primary markets to mid-sized cities and even some rural areas. This will create a boost in the area’s employment rates and give you an idea if the market could sustain rental costs over time due to the industries remaining stable. However, don’t just look at the past few months, or even the past year. You want at least five years’ worth of job growth data before you can make an accurate prediction of the area’s job stability. It may also benefit you to follow local news to see which businesses have relocated to the area you’re interested in. Unknown companies may not provide as much financial stability to the area, but large, Fortune 500 companies most likely would.
How Much are the Houses?
The current median home sale price sits at $320,000 dollars. If the median home sale price of an area is equivalent to or higher than the national average, there’s a good chance that the area will be filled with people who cannot afford to purchase a home but can afford to rent. In fact, there are 12% of the millennial generation (60% of the rental market) that believe they will rent indefinitely due to the outstanding prices of homes.
Are Home Prices Increasing?
This may seem like the same thing as the median home sale price, but it isn’t. Home price growth takes that data a step further by showing how the market has grown or decreased over time. Typically, if home prices are trending upward over a period of several years, it is due to increased value in the area or an increase in demand. By utilizing this data, you can predict whether the area will continue to see home price growth and retain a need for rental homes.
Who Can Afford Homes in the Area?
The home affordability index measures the ability of a family earning median income based on their area to afford a home. A score of 100 means that a family of median wage has just enough money to afford a home, including a 20% down payment. Areas where the index score lower may be a worthwhile place to invest, as this means that the majority of the area’s population cannot afford to purchase a home. However, numbers over 100 can be beneficial as well, as numbers over 100 may show that the population is earning well and could afford more expensive, luxury apartments. It’s best to weigh this information along with the other factors above and to take a look at the various percentages of local wages. (For example, “X” population consists of 17% of people who make between $0 - $25,000 per year.)
Watch Rental Market Trajectory
Household growth provides a snapshot of the number of households being created due to the population aging into the rental market as well as moving in due to the area’s popularity, job opportunities, etc. Use this statistic alongside population growth for the best comparative data on households relocating to the area you are interested in.
How Much Income is Going to Rent?
In 2018, the gross rent as a percentage of household income averaged 40.6%. In secondary markets, rent usually takes up a smaller percentage of income than their primary market counterparts. This affordability benefits investors in two ways. First, affordability is the number one request for renters, and this will aid in resident retention and decreasing vacancies. Second, because of the smaller percentage, there is more room for rent growth. In fact, the secondary markets led rent growth in March of 2020.
Blockades on Construction
The last thing you should look at before sinking your teeth into an investment property includes local laws and regulations as well as the area’s natural terrain. Some secondary markets have policies and regulations in place that prevent investors from building in certain areas. When considering an area, make sure to speak to someone who knows the local land and construction policies before you purchase. In addition, keep costs in mind when considering construction on difficult terrain. While some areas may hit all the areas listed above, if the terrain makes construction difficult, the cost of building may not be worth the investment.
Secondary markets provide investors with ample opportunities to scale their businesses while also provided homes to those relocating to newly populated areas. Keep an eye on trending markets and spend the time to research the area, including visiting it yourself, before making the decision to purchase.