Investing in rental real estate can be a profitable venture, but it's not necessarily the most accessible or passive way to generate income. To start, you need a significant sum of money for a down payment on a property. Then you have to manage the property, doing things like advertising the rental, screening tenants, coordinating repairs, communicating with tenants, maintaining the property, and dealing with evictions if they happen.
I have owned rentals and the past and am in no way discouraging investors from pursuing this avenue. However, if you don't have tens of thousands of dollars to invest in a rental property right now or simply want exposure to the time-tested rental real estate industry without the stress, here's why you should consider investing in Invitation Homes (INVH 0.82%).
The leading single-family rental REIT
Real estate investment trusts (REITs) were invented in the 1960s to help make the real estate market more accessible for everyday investors. These unique stocks are required to earn the majority of their income from real estate properties like rental homes or from real estate equities like mortgages. They are also required to pay at least 90% of their taxable income to shareholders in the form of dividends, making them a great passive income investment without the stress and hassle of owning or managing real estate personally.
With interest or ownership in over 80,000 homes, Invitation Homes is the largest single-family rental REIT in the market today. The company was founded by alternative asset management company Blackstone in the aftermath of the Great Recession when single-family homes could be purchased cheap. The company bought tens of thousands of homes, renovating them and turning them into single-family rental properties. Invitation Homes is no longer a part of Blackstone, but the REIT has created a name for itself as a leading provider of single-family rental homes since its initial public offering in 2017.
The company's portfolio of rentals is spread across 16 markets primarily in the southern part of the country, commonly referred to as the Sun Belt. This includes major metro markets in Florida like Jacksonville, Tampa, and Orlando, as well as Houston and Dallas in Texas. But it also has a small but growing number of properties in the Midwest. The markets Invitation Homes operates are some of the fastest growing in the country.
Low housing supply and high demand created ideal conditions for record rental growth. Over the past year, Invitation Home's rental rate for new and renewing leases increased by 11% compared to the year prior. This may not seem like a huge jump, but this rate of growth is quite uncommon in the rental industry, particularly in such a short period of time. Occupancy for its portfolio at the end of the year was just over 97%, another indication demand remains strong for its rental properties.
Why Invitation Homes is a great buy right now
There's a growing concern that the slowing economy and weakening demand for rental housing will crush operators like Invitation Homes. However, I don't think it's as big of a concern as many believe. To start, Invitation Homes rents to mostly middle-class and affluent earners who earn more than 5 times their rent. That means its tenants have ample coverage for their rental payments even in an inflationary environment.
It also benefits from having a deeply diversified portfolio of rentals, which helps offset losses in the event certain markets experience a deeper slowdown or more delinquencies than others. Plus, its large network of service providers (like contractors, plumbers, or handymen) helps it streamline the management process and minimize expenses for the company.
Despite the recent slowdown in rental growth, its full-year 2022 earnings were still incredibly strong. Its net operating income (NOI) grew by 9% from the year before and its funds from operations (FFO) -- a key metric that works like earnings per share for REITs -- rose by nearly 12%.
Data source: Invitation Home's Q4 2022 and full-year earnings. Chart by author.
Anticipating some impact from the slowing real estate market, the company pre-paid its nearest debt obligation without penalty. Now it has no major debt maturities until 2026, giving it a lot of freedom to use its $1.2 billion to maintain dividends, pay expenses, and continue growing. If the real estate market does see depressed pricing there's a good chance Invitation Homes will use it as a buying opportunity. It has experience buying in down markets, which is a big reason for its success today.
Invitation Homes is down roughly 27% from its recent high and trading at about 19 times its FFO. This is slightly high, but still very attractive pricing given the quality of the company's portfolio, financial position, and long-term growth opportunities. Plus, its dividend yield of nearly 3% (close to double the average of the S&P 500) makes it a reliable and attractive income stream.
