In 2008, America was ravaged by a real estate crash. The crisis was so severe that it threw the entire financial system into chaos. The situation caused real estate prices also to fall. Prices were at an all-time low. The average house price in America is 40% lower than the peak rate quoted in 2007, just before the financial crisis.
Many financial leaders had taken notice of the situation. Warren Buffet stated that he would be willing to invest $50 billion in residential real estate. It never materialized. It did not deter another large investment company from entering the fray.
Blackstone Group, a giant in private equity, is one of the largest companies in the world. Blackstone Group can raise and deploy billions of dollars if they find a good opportunity. This is what they did when they created Invitation Homes LLC. This corporation was created solely to purchase real estate below market value and rent it out. Blackstone LLC became a large and powerful landlord.
The Invitation Homes Story
Blackstone-funded Invitation Group is a vertically-integrated company. The company, even though it is in the leasing industry, has considerable capabilities in acquiring, repairing, maintaining, and managing residential properties.
Invitation Homes have purchased more than 50,000 houses in America. Most of these acquisitions were made in Florida and California, with high commercial and industrial activity levels. The company invested a total of $10 billion. Blackstone has funded only $2 billion, with the remainder from banks and financial institutions.
In 2017, Invitation Home listed its shares on the stock market. A 27% stake was sold for $1.55 Billion. Ultimately, 100% of the stake was worth nearly $6 billion. Blackstone created a shareholder value of $4 billion in just four years.
Let’s look at the mechanics behind the business model that allowed Invitation Homes to achieve this fantastic feat.
- Stagflation: Invitation Homes didn’t try to time real estate markets. They waited patiently to ensure the market reached its lowest point. Even though the economy as a whole was improving, the real estate market did not. Invitation Homes saw this as an opportunity. While many people were afraid to buy a home, rental rates were high. It was expected that this trend would continue in the future. Invitation Homes boldly decided to acquire real estate worth billions of dollars.
- Replacement cost: Invitation Homes prioritized purchasing real estate at a price well below the replacement costs. Since they bought large parcels of land, it was possible to afford this. Invitation Homes often bought hundreds of houses in the same area. The company has also bid on several dilapidated homes. The company would then renovate the houses to create value. Blackstone spent over $1.5 billion out of $10 billion in real estate improvements. They wanted to build homes that tenants would like to live in.
- Leverage Real estate investments offer a high degree of leverage. Real estate is, by definition, a safe asset. If Blackstone paid 25% for a house, they could mortgage it and get the remaining 75%. The returns on their equity have been magnified. The high leverage was also advantageous because banks struggled to lend then. Therefore, they were willing to offer loans at special interest rates to prime borrowers such as Invitation Homes.
- Developer Benefits: Many developers had a large amount of inventory. These developers faced bankruptcy in the absence of retail sales. Invitation Homes was a godsend in such a situation. The developers received cash even though the purchase was made at a price way below market value. They used this money to pay off their debt. Invitation Homes added a steal to the deal for all parties.
- Scale Economies One of the most significant advantages of the Invitation Homes Model is its economies of scale. Invitation Homes employ people to do the majority of repairs and maintenance. They can do it much cheaper than the market. If Invitation Homes spent about $25000 in repairs, it would generate a value of around $50,000.
- Lower turnover rate: Invitation Homes also built its portfolio of homes in urban areas with high employment generation capability. Their homes are occupied over 96% of the time. It also creates value.