As anyone who has been involved in the real estate investment sector for any length of time will probably tell you, it can be a complex and sometimes confusing industry to try to understand.

This can be particularly the case if you are a foreign investor – for example someone who is looking to negotiate the local complexities of a market like Mexico’s. There are many different housing sectors to assess and, on top of this, challenges that include everything from understanding unique legal requirements such as fideicomiso through to finding a local real estate agent you trust.

Classifying the markets

But there is an approach that I think can be helpful for new investors looking to enter the real estate sector, particularly one as complex as Mexico’s. That is to try and do everything that you can to understand the different ways that real estate markets are actually classified – and to see how this process can then directly inform some of the decisions you might make as you look at where to put your money. So what exactly do I mean by this?

Well, before we go into the ways that different real estate markets can be classified, it is probably worth quickly explaining how and why understanding these definitions and what they represent can be useful to potential investors.

The bottom line is this – how you define the difference between real estate markets really depends on what is important to you as an investor. The point here is that as an investor it helps to have a strong strategy for being able to clearly define the difference between target markets in order to both help you choose where to invest your money, but also to help you to create a more coherent investment strategy overall.

Many different approaches

So, for example, it may be that you decide to define the difference between the various real estate markets you’re looking at on population alone. It is a very narrow definition, but it could help you to begin to see the potential of different markets that you are considering and help you to compare them to other, similar-sized markets.

Commonly, real estate investors will divide the areas they are looking at into primary, secondary and tertiary markets, and again, population size is one possible starting point for beginning this process.

But there are also a huge number of other potential data points we can take into account when we are looking at how you might begin to classify different markets – and we’d certainly suggest that this broader approach is probably a more reliable strategy for someone who wants to build up an accurate picture of potential targets before they go ahead and invest.

Taking the broader view

With this in mind, you may choose to include demographic factors, the levels of economic activity in the area, retail occupancy rates, car ownership, job growth or rent prices, all as additional ways of beginning to classify the different areas you are looking at. Of course, we live now in an age where huge amounts of information are available to investors in order to help them to make more informed choices, and so we are now able to classify markets in much more sophisticated ways than simply by population.

As a general rule, the benefit of understanding the difference between what represents a primary, a secondary and a tertiary market for the investor lies in the fact that primary markets are the ones that are often the most exposed to the ups and downs of the market. Secondary and tertiary real estate markets are often more affordable and are less likely to be over-priced, even when the market is on the rise. Identifying where these markets are, in the area you are interested in, could be the first stage of your investment strategy.

Build slowly

Our advice then is simply to take your time. Begin to build your investment strategy, not just on a broad understanding of the overall real estate market and its current trends, but on a view that takes into account all of the factors that are coming into play on a local level.

So, understand how these factors directly effect the area you are looking at – for example a local employer expanding their premises or a new airport being built nearby with direct, cheap flights to the US. Gain a clear understanding of the consequences of these myriad factors, and then use them to build a comprehensive picture of the overall real estate sector, divided up into primary, secondary and tertiary markets, that will help you to take a much more focused and deliberate approach.

Finally, build your strategy around those areas where there is the most potential for the highest yields – and again, remember those might not necessarily be those that have the highest populations or the most expensive properties.