The 2008 real estate crisis in America left the country reeling. The financial system was thrown into chaos by this severe crisis. The luxury real estate tulum market had also been affected by the crisis. Prices fell to a new record low. The average American house price was 40% lower than the peak rate quoted in 2007, just before the crisis.
Many financial giants were interested in the situation. Warren Buffet stated that he would make a $50 million investment in residential real estate. It didn’t happen. However, this did not stop another large investment company from joining the fray.
Blackstone Group is a major private equity firm. If they see an opportunity, they are capable of raising billions and deploying them. Invitation Homes LLC was formed to do exactly that. This corporation was created to buy real estate below market value and rent it out. Blackstone LLC was, in essence, a landlord. It was a large and powerful landlord.
This article will examine the story of invitation homes and how it changed the American rental market.
The Invitation Homes Story
Blackstone-funded Invitation group is vertically integrated. The company’s core business is leasing, but it has considerable capabilities in managing residential properties.
Invitation Homes has purchased more than 50,000 American homes. The majority of these acquisitions were made in Florida and California, where there are high levels of industrial and commercial activity. The total investment by the company was $10 billion. Blackstone has only invested $2B, with the remainder coming from financial institutions and banks.
Invitation Homes listed its shares on the stock market in 2017. 27% of the stake was purchased for $1.55 Billion. The 100% stake was thus valued at close to $6B. Blackstone, therefore, had created shareholder value of $4 billion in four years.
Let’s look at the business model that allowed Invitation Homes to accomplish this amazing feat.
- Stagflation – Invitation Homes didn’t attempt to predict the real estate market. They waited patiently to see if the market would recover. Even though the economy was growing, the real estate market wasn’t thriving. Invitation Homes saw this as an opportunity. Although most people were reluctant to buy a home, rental trends were strong. This trend was expected to continue in the future. Invitation Homes took the bold decision to acquire billions of dollars worth of the real estate.
- Replacement cost: Invitation Homes made it a goal to purchase real estate at a fraction of the replacement price. Because they were purchasing large amounts of real estate, it was possible to afford this. Invitation Homes would often buy hundreds of houses in the same area. Invitation Homes has also bid on several abandoned houses. The company would then fix the homes and add value. Blackstone spent over $1.5 billion of the $10 billion total on real estate improvements. They wanted to build homes that tenants would love to call their own.
- Leverage – Real estate investments offer a lot of leverage. Real estate is considered a safe asset. Blackstone could put 25% down on a house, and then mortgage it to get 75%. This has increased their equity returns. Because banks were having difficulty lending during this period, high leverage was also advantageous. They were, therefore, willing to lend at special interest rates prime borrowers such as Invitation Homes.
- Benefits for Developers Many developers had a lot of home inventory. These developers considered bankruptcy when there were no sales in the retail sector. Invitation Homes was able to help in such dire circumstances. Even though the purchase was far below market value, the developers still received much-needed cash, which they used to pay off their debt. Invitation Homes added value to all parties.
- Economies Of Scale: The biggest advantage of the Invitation Homes model is the economies of scale. Invitation Homes employs many people to do the maintenance and repair work. They can do it much cheaper than the market. Invitation Homes can generate the value of approximately $50,000 if they spend about $25000 on repairs.
- Lower Turnover Rate: Invitation Homes also built its portfolio in areas with high employment-generating potential. Their homes are occupied for more than 96% of the time. This creates value.
Invitation Homes LLC was able to profit even though the real estate market was in decline by using an innovative business model. Similar business models should be applied in countries such as China, India, Canada, and the United Kingdom, which are all facing a housing crisis.