This article was coproduced with Leo Nelissen.

It’s no secret that buying a new home in today’s market is akin to steering a craft through a treacherous maelstrom. Prospective buyers grapple with a toxic blend of challenges – elevated rates, soaring home prices, and the pervasive financial squeeze exerted by stubborn inflation (core inflation languishes stubbornly at 4%).

For instance, Redfin’s data shows that the median home sales price in the United States concluded the year a hefty 4.4% higher than the preceding year, resting at roughly $363 thousand.

At a staggering 6.6% rate, homebuyers need approximately $3,400 per month to meet mortgage payments on a median home – a stark contrast to the consistently sub-$1,500 figures witnessed in 2020. This, in part, explains the scarcity in housing supply, with homeowners entrenched in favorable mortgage deals unwilling to take on more costly debt, causing them to stay put.

But what’s even worse? The disconcerting fact that Wall Street is now locked in a fierce competition for single-family homes.

Witness The Wall Street Journal’s headline, “Wall Street Moves Into The Neighborhood,” which illuminates the extent of this encroachment.

The increasingly cutthroat U.S. housing market has lured major investors to pivot to a novel modus operandi – the construction of entire suburban neighborhoods tailored for renting.

With towering interest rates, escalating housing prices, and constraints on conventional channels, institutional investors are grappling with the challenge of meeting return goals. And it’s this very predicament fueling their burgeoning interest in single-family homes – a shift attributed to stronger rent growth and longer tenant tenure compared to the conventional domain of U.S. apartments, a trend that’s been a recurrent theme in our Investment Circle discussions.

Yet, the traditional method of acquiring individual houses has grown increasingly inefficient. Furthermore, bulk-purchasing of newly constructed houses becomes an exercise in futility amidst the dearth of housing inventory, which leads to immediate purchases by regular buyers.

Enter the rise of “build-to-rent” communities – a phenomenon gaining significant traction as a means of overcoming these challenges. Approximately 10% of new housing constructions are dedicated to build-to-rent, with 900 such neighborhoods spread across the nation. This approach not only consolidates rental properties but also renders maintenance more cost-effective.

While some firms like American Homes 4 Rent are independently constructing thousands of new family homes, others like Invitation Homes (NYSE:INVH), opt for partnerships with housebuilders, albeit at a higher cost.

And this brings me to Invitation Homes, my preferred vehicle for harnessing the wisdom of Wall Street.

What Sets Invitation Homes Apart?

Let’s start from the top for those getting acquainted with the INVH ticker.

Invitation Homes stands as a major proprietor and operator of single-family homes for lease, boasting a portfolio of over 80,000 homes across 16 markets in the United States entering 2023.

Nestled in coveted neighborhoods, the company makes a compelling case for addressing the burgeoning demand for leased lifestyles, proffering quality residences in close proximity to workplaces and reputable schools.

Operating in markets with robust demand, formidable entry barriers, and a potential for rental growth, particularly in the Western United States, Florida, and the Southeast, Invitation Homes has its gaze fixed on strategic mergers and acquisitions to enable efficient market and asset selection.

Essentially, the company’s portfolio reaps the rewards of local density and economies of scale, affording it a vertically integrated platform.

In essence, the company engages with residents through digital platforms, allowing for effective and efficient management of its expansive portfolio. This digital marketing approach, coupled with initiatives like Resident Appreciation Month, sets them apart in fostering a sense of community and connectivity among residents – a win-win scenario.

For instance, approximately 12,800 homes in Atlanta are under the company’s ownership and are managed by a lean operational team, consisting of a VP of Operations, 2 Directors of Operations, alongside supportive staff like Portfolio Directors, leasing personnel, and maintenance personnel. Impressive yet less than 100 maintenance employees oversee this substantial housing inventory.

To boot, the firm’s highly standardized approach, aiming to minimize employment and maintenance outlays while streamlining operations and enhancing renter comfort, epitomizes operational efficiency.