Leading single-family rental (SFR) company Invitation Homes (NYSE: INVH) recently unveiled the formation of a strategic partnership with homebuilder PulteGroup (NYSE: PHM). The real estate investment trust (REIT) will purchase 7,500 new homes over the next five years that PulteGroup will build expressly for this purpose.
Here's a closer look at this partnership and the red-hot SFR market.
Building out a visible growth pipeline
The companies have initially agreed on the construction and sale of more than 1,000 homes across seven communities PulteGroup is developing. They expect to close the first sales next year, with the initial projects located in fast-growing Sun Belt markets across Florida, Georgia, North Carolina, Texas, and Southern California.
This deal benefits both companies. Invitation Homes has added a pipeline of single-family homes to put into its rental program. Because they're newly constructed, they won't require as much maintenance as existing homes, meaning they'll have lower operating costs. They'll also be attractive rentals because they'll feature sought-after floorplans and other amenities.
Meanwhile, PulteGroup benefits from price and sales certainty. That will help mitigate some of the impact outside factors have on home sales, like changes in interest rates or a weakening economy. This certainly will reduce risk. It will also allow the homebuilder to increase its scale by investing in larger land parcels to build out bigger communities, improving its investment returns.
A high-demand housing market
Demand for SFRs is growing. More people are opting not to buy a home because they prefer the flexibility of renting. However, they still desire the space and privacy of a single-family home. That's driving up rental rates -- they rose 5.3% year over year in April, according to CoreLogic -- leading investors to pour money into the space.
While Invitation Homes is the leader at more than 80,000 homes, other investors are quickly building a large-scale portfolio by purchasing new homes directly from builders. Leading direct-to-consumer real estate investing platform Fundrise has narrowed its investment focus to include building out a large-scale SFR platform. The company started by purchasing a recently completed 124-unit SFR community near Houston earlier this year from leading homebuilder D.R. Horton (DHI). D.R Horton built and leased up the community before selling it to Fundrise.
Since then, Fundrise has concentrated on buying vacant homes directly from builders in batches as they complete construction. It's then leasing them as part of its value-add investment strategy. The platform has secured a $300 million line of credit from Goldman Sachs to help finance its SFR expansion plan. It has already bought hundreds of homes this year and has many more under contract. Overall, Fundrise expects to grow its portfolio to nearly 2,800 homes in 12 markets over the next 21 months.
Meanwhile, Lennar (NYSE: LEN) plans to make a big splash in the SFR market. The homebuilder formed the Upward America Venture with other institutional investors. This platform will acquire SFRs across high-growth markets in the U.S. It has the funds to invest more than $4 billion to buy homes from Lennar and other homebuilders.
These partnerships between investment platforms and homebuilders benefit both parties. Investors gain access to a high-performing asset class that has delivered superior price appreciation and rental growth. Meanwhile, homebuilders get sales certainty to help mitigate some of the impact market conditions have on their businesses.
Everyone comes out a winner
Investors love SFRs because they provide steadily growing income with the upside of price appreciation. Renters love single-family homes because they allow them to have more space and privacy while maintaining their flexibility. Finally, homebuilders prefer to sell directly to investors because they offer certainty. This win-win-win outcome suggests we'll likely see more direct sales between homebuilders and investors in the coming years.
Disclosure: Matt DiLallo is an investor on the Fundrise platform.