How much cash flow is to low for a SFR?

[Alexander Johnson]

I'm considering getting into SFR because MFRS in Sioux Falls SD are few and far between or are in D class neighborhoods.

[Joe Splitrock]

Originally posted by @Alexander Johnson:

I'm considering getting into SFR because MFRS in Sioux Falls SD are few and far between or are in D class neighborhoods.

I have been watching small multifamily properties for the last couple years here and you are right they do sell fast. Too fast for the price which means people are overpaying. They are mostly older converted properties, which means endless repairs. It is funny, look at the sales history on some of these places and they sell every year or two. That says a lot. Even the ones that have been rehabbed have problems lurking under the walls. I have been there, done that... The high demand lately is because of out of state investors. They see a 7% or 8% CAP rate and get all excited, but they don't understand the local market.

The big issue here is abundance of land. South Dakota is the 5th least densely populated state. Lots of land means cheap land that is only minutes from the city center. There are a couple very large multifamily companies that put up apartment buildings and townhouses left and right. So good applicants have the choice of something new that is a ten minute drive or something old that is a 5 minute drive. It is not like the coasts, where high credit score applicants line up to rent places due to location. On these old properties you are stuck renting to sub prime tenants, which means problems.

I buy single family, but even that is getting saturated. The houses that make good rentals are heavily sought after by first time home buyers. Or you are stuck buying something old in a neighborhoods that are already 75% rentals. So although you see a larger supply, that doesn't mean it is a better deal. You have to run the numbers.

As far as cash flow amount, I look for $400 per door with 25% down payment. Cash flow is just one of several metrics. You also want to look at ROI (return on investment) which takes into account cash invested. Other important factors are location, future appreciation and property condition (affects repair and CAPEX).