More households are choosing to rent a single-family home than ever before. The combination of flexibility, affordability, and fewer maintenance headaches has grown the single-family rental (SFR) market over the years. With demand for SFRs on track to continue rising as more millennials form households and start families, rent should keep growing at an outsized pace. Add in a healthy dose of price appreciation, and SFR investors should enjoy strong returns in the coming years.
Unfortunately, buying a single-family home as a rental investment comes at a high cost. The average price of a single-family home in the U.S. is more than $287,000. Because of that, the down payment alone is over $57,000 (assuming 20% down), putting an SFR investment out of reach for most beginners.
That's what makes Invitation Homes (NYSE: INVH) such a compelling alternative. As a publicly traded real estate investment trust (REIT), it allows anyone with an online brokerage account to purchase shares with a small amount of money. That makes it easy to start investing in SFRs. Add in the company's geographic focus, and investors with $500 (or less) to spare should consider putting that money into this residential REIT right now.
Invitation Homes 101
Invitation Homes is the largest REIT focused on SFRs. It owns about 80,000 homes across 16 high-growth markets. It concentrates on owning homes in neighborhoods with proximity to jobs, transportation, and schools. About 95% of its revenue comes from the Western U.S. and fast-growing Sun Belt region. These regions have experienced 2.2 times more job growth than the U.S. average since 2012, driving 29% more home-price appreciation. Those strong market fundamentals have enabled Invitation Homes to steadily increase rents, supporting above-average same-store net operating income (NOI) growth.
The company buys homes from a variety of sellers. Deal sources include iBuyers, other SFR investors, sale-leasebacks with current owners, partnerships with builders, auctions, and the open market. The company expects to buy $1 billion of homes this year to add to its rental portfolio, which would be a record. It had already purchased 696 homes for $233 million during the first quarter, putting it on track to achieve its target.
Homing in on two megatrends
Demand for SFRs has been on the rise in recent years. Single-family rental households have grown from around 13 million in 2009 to roughly 17 million today. That's 35% of the total rental market.
That number will likely keep growing in the coming years because many millennials prefer renting over owning a home. It gives them more flexibility while taking away many of the headaches of homeownership. With the largest grouping of millennials still in their mid-to-late 20s, they represent a significant future demand driver for SFRs as they form households and start families in the coming years. Because of that, Invitation Homes has a lot of growth ahead as it acquires homes to meet their needs. On top of that, it should benefit from steady rent growth, given that supply isn't matching demand.
Invitation Homes doesn't buy houses in any market. It focuses on those with above-average employment growth, because people will move away from friends and family for better career opportunities. Some of the fastest-growing job markets are in the Sun Belt region, which is why many of those metro areas also have some of the highest net migration. They've also benefited from strong home-price appreciation and healthy rent growth because developers can't keep up with demand. Given its heavy presence in the Sun Belt, Invitation Homes is in an excellent position to capture strong rental growth and home-price appreciation in the coming years.
A low-cost way to invest in these existing housing megatrends
Invitation Homes is a great way to invest in the booming SFR market and the Sun Belt migration trend. The REIT's focus on those two housing market drivers should enable it to deliver strong funds from operations (FFO) and dividend growth over the next several years, positioning it to produce attractive total returns. That upside potential is why investors with a little spare cash should consider using it to buy Invitation Homes stock.