I often get asked whether the same valuation metrics apply when comparing single-family rentals (SFRs) in secondary markets versus primary markets. The short answer is: the metrics themselves are the same, but their relative importance, interpretation and the assumptions you attach to them should change based on market context. Below I walk through the specific metrics I use, how I adjust them between market types, and practical ways to test deals so you’re comparing apples to apples.
Core income and return metrics I always check
Whether I’m analyzing a property in Phoenix (a primary market) or Dayton (a secondary market), I start with the same basic income and return calculations:
- Gross Rent Multiplier (GRM) — purchase price divided by gross annual rent. Fast screening tool; ignores expenses.
- Net Operating Income (NOI) — effective gross income minus operating expenses (not including debt service).
- Capitalization Rate (Cap Rate) — NOI divided by purchase price. Snapshot of income return before financing.
- Cash-on-Cash Return — annual pre-tax cash flow divided by investor cash invested. Impacts short-term investor decisions.
- Price per Square Foot — useful for comparables and estimating renovation values.
- Rent-to-Price (or Rent Yield) — monthly rent × 12 divided by price. Quick yield proxy.
- Vacancy and Turnover Rates — frequency of renter churn, which affects leasing costs and downtime.
These are baseline metrics — but how I read them depends heavily on whether the market is primary (large metro, high liquidity) or secondary (smaller metro or tertiary town with lower liquidity).
How weighting changes between primary and secondary markets
I think of primary markets as liquidity-rich and appreciation-driven environments; secondary markets are often yield-driven with more operational risk. That changes which inputs I stress-test.
| Metric | Primary Market — What I care about | Secondary Market — What I care about |
|---|---|---|
| Cap Rate | Usually lower; I focus on compression potential and stability of NOI. | Higher on paper but more volatile; I stress-test expense assumptions and vacancy impacts. |
| Rent Growth | Historical growth often strong; future growth tied to supply/demand and migration trends. | More variable — could rise quickly if job influx occurs or stagnate if population declines. |
| Liquidity / Exit Risk | Lower risk; shorter days on market and more buyer demand. | Higher risk; price discovery can be slower and discounts larger during downturns. |
| Operating Expenses | Often higher (property taxes, insurance in coastal/high-value areas), but turnover costs may be lower due to demand. | Lower baseline costs sometimes, but repairs and capex frequency can be higher for older housing stock. |
| Tenant Quality | Diverse renter base: young professionals, households; lower default risk on average. | Can be more sensitive to local employment cycles; screen aggressively. |
Specific assumptions I adjust by market
Below are the line items where I intentionally change assumptions depending on market type.
- Vacancy Rate: In a primary market I’ll model 5–7% vacancy for SFRs; in many secondary markets I use 8–12% unless I have hyper-local data showing consistent demand.
- Maintenance & Repairs: Secondary markets often have older homes and higher per-unit maintenance; I budget 1.5–3% of property value annually versus 1–2% in newer primary-market stock.
- CapEx Reserve: I treat this as 5–7% of gross rents in secondary markets (if homes are older), 3–5% in primary markets with newer inventory.
- Property Taxes & Insurance: Some primary markets (e.g., parts of Florida, California) have very high insurance costs; secondary markets can be lower but watch for recent millage increases.
- Discount for Liquidity: I apply a terminal cap-rate premium (0.5–1.5 percentage points) when valuing exit price in secondary markets to account for potentially higher selling costs and longer marketing time.
Market-level metrics I use to tilt my conviction
Beyond property-level numbers, I rely on several market indicators to decide whether to accept a higher yield or demand more conservative underwriting:
- Population and Job Growth (Census, BLS) — sustained population inflows and diversified job bases lower downside.
- Housing Supply Pipeline (Zillow, local planning) — large planned developments can cap rent growth.
- School Quality and Crime Trends — crucial for SFRs aimed at families; school performance maps and local crime statistics matter.
- Days on Market & Price Trends (Redfin, MLS) — quick litmus test for liquidity.
- Regulatory Risk — eviction rules, rent control proposals, licensing requirements. Secondary markets can surprise you with landlord-unfriendly ordinances.
Quantitative scenario analysis I run
I rarely accept a single-point cap-rate or cash-on-cash projection. My usual approach is a three-scenario stress test (base, downside, upside) and a sensitivity matrix for vacancy and rent growth. Here’s a simplified example I use when comparing a primary vs secondary SFR:
| Scenario | Primary Market | Secondary Market |
|---|---|---|
| Base | Cap rate 4.5%, rent growth 3% y/y, vacancy 6% | Cap rate 6.5%, rent growth 2% y/y, vacancy 9% |
| Downside | Cap rate 5.5%, rent growth 0%, vacancy 8% | Cap rate 8.0%, rent growth -2%, vacancy 12% |
| Upside | Cap rate 4.0%, rent growth 5%, vacancy 4% | Cap rate 5.5%, rent growth 4%, vacancy 6% |
For me, the primary-market deal can be more forgiving of leverage because liquidity and tenant stability are higher. The secondary-market deal needs a wider margin of safety and a lower loan-to-value or stronger covenants to justify the operating risk.
Practical data sources and models I use
I combine national datasets with local intel. My usual toolkit includes:
- Zillow Research and Redfin for rent and price trends.
- Bureau of Labor Statistics and local workforce reports for employment trends.
- U.S. Census (ACS) for migration, household composition and vacancy rates.
- CoStar or local MLS for days-on-market and inventory.
- Local building departments and assessor’s office for property tax history and code compliance issues.
- Property management platforms (e.g., Buildium, AppFolio) for realistic expense baselines when outsourcing management.
Deal structuring tips that differ by market
How I finance and structure a deal changes with market type:
- In primary markets I’m more willing to use non-recourse, higher-LTV loans and assume refinance to capture appreciation — if cashflow supports it.
- In secondary markets I prefer lower initial leverage, a higher cash reserve, and sometimes seller financing or shorter-term bridge loans that allow me to add value before refinancing or selling.
- I often negotiate longer inspection and due-diligence periods in secondary markets to uncover deferred maintenance or title quirks.
Finally, I always convert headline yields into an estimated total return over a 5–7 year horizon, including expected appreciation and transaction costs. That combined view usually tells a clearer story than cap-rate alone.
If you want, I can run a sample spreadsheet template showing side-by-side scenario outputs for a specific primary and secondary market property — share the price, rent, and a few expense items and I’ll model it with adjustable assumptions.
