The South Dakota real estate market has seen a massive shift towards favoring rental real estate investors since the 2020 year of Covid-19.
While this led to South Dakota becoming one of the best markets to invest in, the shortage of for-sale inventory has led to a highly competitive market that is a thrilling playground for any savvy real estate investor.
So, to give you – the reader – an advantage over your competition, this blog will delve into the South Dakota real estate market performance of 2021, predict where the market is headed in 2022, and highlight the top cities for investing in South Dakota’s market.
South Dakota Real Estate Market in 2021
Since the Great Recession of 2012, the South Dakota real estate scene has seen nothing but growth.
With rapidly rising appreciation rates, investors who seized the opportunity back then, which were mainly rehabbers, flippers, and wholesalers, were dealt the winning card as their short-term investment strategies favored their timely entry into the market.
However, over the past nine years, the same appreciation that favored these types of investors has become their biggest obstacle. Due to the increasing property prices, homeowners are reluctant to sell their homes as they can’t afford to buy a new one.
On the other hand, all of this was great news for rental property owners and investors – as the inventory shortage and price increase only led to more people leaning towards renting instead of buying a new home.
This trend began in early 2020, and it continued throughout 2021, where the median home value in the state of South Dakota reached just above $200k.
Compared to last year, the South Dakota real estate market saw an average annual appreciation rate of 16.81%, according to Neighborhood Scout. Additionally, Q3 of this year saw an increase of 24.51% in its average annual appreciation rate, which is remarkably high.
As for homeownership, the South Dakota market has 65.2% properties occupied by owners, while 34.8% are occupied by renters. That leaves only 12.2% vacant homes, indicating a high occupancy rate across the state as well as a small inventory.
In terms of average market rent, the South Dakota real estate market had an average market rent of $1,074 for traditional rentals, and the average continues to grow in a number of cities there.
In terms of the types of homes, the South Dakota market is dominantly a single-family home’s market, with 67.6% of properties falling under this category, followed by 14.8% apartment complexes and 8.7% mobile homes.
South Dakota: Top 8 Cities to Invest In
So, now that we have established that the South Dakota real estate market is leaning further towards rental property investors, let’s take a look at some of the best-performing markets or cities in South Dakota based on their rental performance.
The data I’m using here is from Mashvisor’s database, and it includes both traditional and short-term rental strategies.
The criteria for the Mashvisor analysis is based on each city’s historic data, which includes thousands of properties that were listed and sold over the past year as well as previous years to provide you with each city’s medians and averages in terms of rental rates, occupancy rates, property prices, projected returns, and much more:
#1 Madison, Lake County
- Median Property Price: $197,014
- Median Property Size: 125.69 Sq. Ft
- Traditional Rental Income: $1,144
- Traditional Cash on Cash Return: 3.88%
- Airbnb Rental Income: $1,317
- Airbnb Daily Rate: $114
- Airbnb Cash on Cash Return: 3.18%
- Occupancy Rate: 47.8%
- Walk Score: 70
First off on this list of top real estate markets in South Dakota is Madison, in Lake County.
While most other cities on this list have appreciated above the $200k mark for the median property prices, Madison’s real estate market has a median property price that is very affordable for most investors, especially first-time buyers.
Additionally, Madison is the most stable market on this list for traditional renting. With a modest yet safe 3.88% cash on cash return, it will be easy for any beginner investor to manage a rental property in this market.
To top it off, Madison has a pretty respectable walk score, meaning that your tenants are more likely to stay in the property for longer.
O the other hand, short-term renting, while still viable, is not as lucrative as long-term rentals in this market. This is probably due to the relatively low occupancy rate average for short-term rentals. However, skilled short-term rental investors should be able to manage their property well enough to increase its occupancy rate and therefore their earnings.
#2 Rapid City, Pennington County
- Median Property Price: $476,175
- Median Property Size: 233.42 Sq. Ft
- Traditional Rental Income: $1,309
- Traditional Cash on Cash Return: 0.96%
- Airbnb Rental Income: $3,944
- Airbnb Daily Rate: $177
- Airbnb Cash on Cash Return: 5.7%
- Occupancy Rate: 66.89%
- Walk Score: 85
Despite some attempts from the local government to place limitations on short-term Airbnb renting in Rapid City; with a business license, short-term rental investors can enjoy a very lucrative market that promises a high potential for profits.
While entry-level investors might find it challenging to afford a property in Rapid City, if they can manage to get finances for their purchase, they might be looking at a great investment opportunity here.
Although, this is a high-risk high-reward market as you will not have a solid plan to fall back to by using traditional renting if your short-term rental doesn’t kick-off.
The average traditional rental income in this city is very low compared to the property prices. However, due to Rapid City’s rapid growth in the past years, it is a very attractive city for short-term business travels and vacations, and it has a very impressive walk score of 85.
All of this led to Rapid City becoming the best performing city in the South Dakota real estate market when it comes to investing in short-term rentals based on their projected returns.
#3 Parker, Turner County
- Median Property Price: $305,340
- Median Property Size: 181.67 Sq. Ft
- Traditional Rental Income: $1,230
- Traditional Cash on Cash Return: 2.76%
- Walk Score: 28
While the previous city was the best choice for short-term renting, the city of Parker in Turner County has some Airbnb restrictions that make it not a viable strategy.
However, when it comes to traditional rentals, the city of Parker is actually a solid investment but with a very niche market.
Since it’s a small rural city, Parker has a very low walk score and relatively cheap properties that are sizeable.
This makes it attractive to the type of tenants who prefer to live in these types of rural areas and their unique lifestyle.
While this might mean that you will struggle to find tenants for your property, it’s a great place to own a house that you can use as a vacation rental when it’s not being occupied by a tenant.
#4 Aberdeen, Brown County
- Median Property Price: $246,838
- Median Property Size: 111.33 Sq. Ft
- Traditional Rental Income: $845
- Traditional Cash on Cash Return: 3.12%
- Airbnb Rental Income: $2,004
- Airbnb Daily Rate: $133
- Airbnb Cash on Cash Return: 4.34%
- Occupancy Rate: 59.38%
- Walk Score: 72
Aberdeen is another top pick when it comes to investing in short-term rentals, as well as in traditional rentals.
It is the second most affordable city for buying a house in the South Dakota real estate market, and the projected return on investment is pretty solid for traditional rental properties in this city.
However, short-term rentals are what truly shine here. The city has a good occupancy rate, a good walk score, and great cash on cash return for short-term Airbnb rentals.
Combined with the cheap property prices, this makes Aberdeen one of the best cities for investing in South Dakota.
#5 Dell Rapids, Minnehaha County
- Median Property Price: $315,900
- Median Property Size: 188.9 Sq. Ft
- Traditional Rental Income: $1,097
- Traditional Cash on Cash Return: 2.45%
- Walk Score: 54
Another city that doesn’t support short-term renting, Dell Rapids is a growing market that is considered a safe market to invest in when it comes to traditional rentals.
With an ok walk score that is expected to improve and a traditional rental income rate that just broke through the $1,000 barrier, Dell Rapids is looking like a great investment for those who are looking to own a property for a long time and generate a positive cash flow while also waiting for the property’s value to appreciate.
Additionally, with a median property price of just over $300k, this is an affordable market for real estate investors of all levels.
#6 Sioux Falls, Minnehaha County
- Median Property Price: $325,622
- Median Property Size: 192.17 Sq. Ft
- Traditional Rental Income: $1,049
- Traditional Cash on Cash Return: 1.22%
- Airbnb Rental Income: $2,676
- Airbnb Daily Rate: $127
- Airbnb Cash on Cash Return: 4.83%
- Occupancy Rate: 70.64%
- Walk Score: 57.83
Another affordable market that is suitable for most types of investors is Sioux Falls in Minnehaha County.
This market has a relatively affordable median property price coupled with a high potential for returns in short-term renting.
Before investing in Sioux Falls for short-term rentals, however, make sure to read the city’s laws and regulations for Airbnb-style short-term renting, as it is a requirement to obtain a permit before being able to rent out your property that way.
And while this market is lacking in terms of traditional rental income return on investment, the very high occupancy rate of 70% for short-term rentals makes this a relatively safe and stable market to invest in even with a short-term rental strategy.
#7 Sturgis, Meade County
- Median Property Price: $369,841
- Median Property Size: 187.96 Sq. Ft
- Traditional Rental Income: $1,131
- Traditional Cash on Cash Return: 1.18%
- Airbnb Rental Income: $2,723
- Airbnb Daily Rate: $318
- Airbnb Cash on Cash Return: 4.44%
- Occupancy Rate: 41.88%
- Walk Score: 61
Sturgis is very similar to the previous market that we mentioned. The difference here is that the city of Sturgis has a low occupancy rate as a result of the way the city’s regulations work when it comes to short-term rentals.
In fact, there are plenty of laws and regulations that you should definitely know about when it comes to renting out short-term or Airbnb type properties.
But the reason why the occupancy rate is very low is that property owners are allowed to rent out their properties for short-term guests up to 14 days per year before they start getting taxed for it.
For this reason, many homeowners keep their properties vacant of any short-term renters for most of the year on purpose in order to avoid the extra taxes.
However, with all of that in mind, the city of Sturgis has one of the highest Airbnb daily rates across the South Dakota real estate market.
So, investors who opt-in for traditional rentals but manage to squeeze out those 14 days of short-term renting during the year will be maximizing their overall annual rental income and increasing their return on investment by a considerable amount.
#8 Custer, Custer County
- Median Property Price: $699,400
- Median Property Size: 330.15 Sq. Ft
- Traditional Rental Income: $1,157
- Traditional Cash on Cash Return: -0.3%
- Airbnb Rental Income: $4,432
- Airbnb Daily Rate: $265
- Airbnb Cash on Cash Return: 3.78%
- Occupancy Rate: 58.4%
- Walk Score: 64
Last but not least, if you have a large amount of money that you want to invest, then perhaps you would be interested in Custer, one of the most expensive cities in the South Dakota real estate market.
The median property price in Custer is very high compared to the rest of the state. And while the walk score in the city doesn’t really justify the price, the property size that you’re getting for the price makes it worth it.
In addition to being one of the most expensive, Custer also has some of the largest-sized properties in the real estate market of South Dakota.
However, and as you might have already noticed, Custer is a terrible choice when it comes to traditional rental investments. In fact, based on Mashvisor’s data, the city’s projected Cash on Cash Return is in the negative – meaning that traditional rental owners are expected to lose money on their investment.
And while there are plenty of laws regulating the use of short-term rentals in the city of Custer, if you manage to own and operate an Airbnb rental in this market, you should expect a lot of monthly rental income from it.
The South Dakota real estate market is booming in the eyes of rental property investors.
If you’re looking to invest in a rental property, then you should consider one of the cities I mentioned which matches the investment strategy that you’re going for.
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