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This Property Manager Is Chasing 20% IRR … All The Way To South Dakota

Tzadik Properties, a Miami-based multifamily property management company, has gone on a shopping spree — in South Dakota.

With just under $20M, the firm created a portfolio of single-family homes, short-term rentals, multifamily complexes and a mobile home community. The company started buying in South Dakota in 2018 with 700 units in Sioux Falls. Today it holds 2,206 units in the state and has a corporate office there with 35 employees.

Apartments at 210 St. Joseph St. in Rapid City, South Dakota

Tzadik was founded in 2007 and has been active in about 20 states. Adam Hendry, CEO of Tzadik Properties, told Bisnow via email that in 2018 he felt the company needed to be prepared for an economic "melt-up," not a meltdown.

"A year later, our country was headed towards a 'melt-up' or a sharp and unexpected rise in prices, even before the COVID-19 pandemic," he wrote. "Knowing that our next recession would look a lot different than expected, my team and I got to work on a plan to survive it."

They looked at all 50 states for cities that had weathered the 2008-2010 downturn and came up with dream criteria: population growth, lack of supply, no overbuilding, low crime rate, 6%-plus cap rates, low vacancy, 20%-plus internal rates of return, market liquidity, favorable state taxes and governor stewardship. That led them to the overlooked flyover states, where there was accelerated and steady growth despite small populations.

"While everyone else focused on primary and secondary markets, we focused on these quaternary markets," Hendry said.

Both Sioux Falls and Rapid City had double-digit growth and remained stable throughout the 2008 crash. South Dakota had a 3% unemployment rate, the lowest in the U.S., and offered an outdoorsy lifestyle.

South Dakota has over the past few decades become a haven for the wealthy due to some of its financial laws, Bloomberg reports. The state has no income tax, allows trusts to last forever and eliminated a cap on interest rates for lending. As in other markets across the country, a real estate frenzy in South Dakota has led to high prices and put housing out of reach for working-class locals. 

With the recently announced Black Hills Estates Portfolio, Tzadik acquired four multifamily apartment complexes in Rapid City: 40 units at 210 St. Joseph St. for $1.74M, the 17-unit Oxford Square complex for $1.029M, the 30-unit Horizon Townhomes for $2.065M, and the 47-lot, 4.72-acre Marquette Manor Mobile Home Community for $1.4M.

Tzadik also bought the 78-unit Garden Villas complex in Sioux Falls for $9.5M and four single-family homes and one condominium for short-term rentals in Custer, Rapid City, Sturgis and Lead. 

Harrisburg, near Sioux Falls, has been the state’s fastest-growing city for decades, and the town of Tea is right behind it with an 8% annual growth rate, according to U.S. News & World Report. According to Sioux Falls-based Bender Commercial Real Estate Services' midyear report, 2021 was a record-breaking year for Sioux Falls, which has a population of 190,583 (276,730, counting surrounding communities).

The office market had a vacancy rate of 12.6%, with rents at $20 per SF. For new Class-A buildings, demand was so strong that one owner redesigned its building to add additional floors for interested tenants. Retail had a vacancy rate of 13.7%, while the industrial market, comprising 28.5M SF across 1,368 properties, had a vacancy rate of 1.6%.

"The big winner in the construction game is the apartment market, making up 23% of the construction values — over $114M," the report said. "At midyear 2020, Sioux Falls had $286M with only $27.5M in the apartment market."

CORRECTION, OCT. 29, 11:20 A.M. ET: This story has been updated to reflect that the executive quoted is Adam Hendry, CEO of Tzadik Properties.