296: How Invitation Homes CEO Dallas Tanner Scaled a Multibillion-Dollar Home Rental Company at Breakneck Speed

Nathan: The first question I ask everyone that comes on is, how did you get your job?

Dallas: I also wonder sometimes. It’s a great story. We started the business, the Invitation Homes seven years ago. My background has always been in residential companies and residential platform building. So I had a long background in residential and property management, but we saw a need for professional housing in the US and it was at a moment in time and in 2009, excuse me, 2000 … Yeah, 2009, we started buying single family homes, but then we formed Invitation Homes in the spring of 2012.

And so we saw a need that had been met in large scale through a lot of the mom and pops investors in the US and nobody ever done it with real scale institutional management. So we aligned with really good capital partners and figured out how to build this company. And I don’t think we set out to be necessarily private or public or this, that, and the other. We just wanted to build a great company. And today we’ve ended up, going public in 2017 and I was one of the co-founders that started the business and we’re running the business today.

Nathan: Yeah, I see. So before Invitation Homes, you started Treehouse Group companies, what exactly is that?

Dallas: Yes, the Treehouse Group was really our thesis for Invitation Homes. We focused a lot of workforce housing opportunities in the Southwest, primarily manufactured housing and some multifamily. And then our country went through really rough time, 2008 and ’09 with housing and housing prices generally. And so in 2009 we started investing capital, buying single family homes for rent. And so that was all done under the Treehouse Community’s flag.

And then fast forward a couple of years, we built a pretty good business that had 3,000 customers paying us rent in the Phoenix Arizona market. And we ended up connecting with Blackstone as our capital partner going forward and wanted to build out a much more robust version of what we had started in Phoenix with Invitation Homes. And so the Treehouse was really the early days of entrepreneurial residential platform building for us.

Nathan: Yeah, I see. So, you guys have now 80,000 homes for lease across the country. And if that, why you guys decided to go public? To raise more money? To purchase more homes?

Dallas: Well, ultimately the type of capital we used to build up Invitation Homes wasn’t perpetual capital. It had a shelf life to it. So one way to create liquidity for investors and also to create awareness of the business was through a public exit. So we did that in 2017. We only at the time had 50,000 homes. It was still pretty big company. And then after we took the company public in 17 and we ended up completing a merger with a company called the Colony Starwood. And so that took us from say 50 to just under 80,000 homes.

And so, with scale and with all the logistics that can go with having the right footprint and scale, and density, you can offer premium service. And so our focus is making sure that our residents have not only great real estate to live in or to least lease with, but that they have a best in class experience. And so, the scale and the growth has allowed us to really do that as a business.

Nathan: Yeah, I see. And because I’m not in America, I assume you guys do a lot of advertising and campaigns and stuff. Can you tell me what is the strongest unique selling proposition that you guys have compared to, I guess people just renting off a landlord directly?

Dallas: Well, I think, and this was really the thesis of why we wanted to build a business like this is, it happened in the US with the apartment industry in the 70s and 80s. You saw some of these bigger operators formed through different ventures and they were able, because of their scale, to provide suite of service that could be unmatched. And that’s what’s led to some of the fantastic companies in the apartment space today.

And in single families, it’s kind of the same story except just it’s happening a few decades later. There’s always been people in the US that have leased from individual landlords to your point. I think what we figured out early on in Phoenix was if you had enough scale, you could invest the right amount of capital into your infrastructure and create 24 hour customer care and easy onboarding, moving in and moving out, and all the things that come with the pains and hassles of always moving, right?

How do you get into a good school district in a single family home without buying one in today’s market? It’s hard. And so if you can offer a leasing lifestyle to people … Funny enough, a lot of people would prefer that. Being down payment light, and being more focused on just the quality of the housing experience. And so for us, we knew that the market was there because it has existed forever in the US and 15 million people lease something in terms of a single family home today, just nobody had done it with the right kind of scale.

And just like in any business, sometimes it’s really hard when you’re getting going when you just have three or four or five or six homes, but when you get to 100s of homes in a market, your opportunities and the types of experiences and services you can provide your resident can get greatly enhanced because of your economies of scale.

Nathan: Yeah, I see. That makes sense. So, yeah basically, with the scale that you guys have, you essentially have shared services across all the different properties.

Dallas: Yeah, exactly. Yeah. And when you … Not that there’s anything wrong with leasing from an individual landlord or something like that, but it’s just a little bit different. We have vans with maintenance techs that can be at your house in any period if there was ever an issue. Your economies of scale give you a really strategic advantage in terms of the services you can provide and for the predictability of the experience, right? It’s hard when you’re just managing one off.

Nathan: Yeah, no, it’s a really interesting model. So talk to me, like your first … Because yeah, 80,000 homes is a lot. If we could go back to the early days, like what was your first home? And did you fund it? Did you and your co-founder self-funded? How did that work?

Dallas: Well, my personal that I ever purchased was in college. I actually did it with my dad and I managed a couple of homes, and some of them that I lived in while I was going to school. And so I got the bug for property management and investing in real estate at a pretty early age. And then as we progressed and started building up and buying a few more properties here or there, you certainly deal with the same challenges of any startup, right? Do you have enough capital? How do you manage it? You can’t afford to hire too much staff in the beginning. But we started to fine tune that over time. And with the 80,000 home company at Invitation Homes, we were fortunate that we already had learned some of, from our earliest mistakes and things in Phoenix, and so we knew what kind of business we wanted to build, but we built it at such phonetic scale and pace to make sure that we could put systems, processes and people in place to create the experience. It’s very difficult.

We bought at first 30,000 homes in the first 18 months. And just building the systems and the mechanics for being able to do that and to refurbish that many properties in that period of time. And then to lease that many properties in that period of time and then offer really good service, it’s challenging. So it takes teams, and partners, and a lot of really dedicated folks who have been part of the journey with us for sure.

Nathan: Yeah, that’s crazy. So when I said, like around your first home, was that the one that you bought in college and then you’ve held onto that, and that was a part of the Invitation Homes portfolio?

Dallas: No, I sold that home long before. So the first home that we bought at the Invitation Homes portfolio was in the spring of 2012. But we had certainly cut our teeth in Phoenix prior to that through some of the different residential platforms that we worked on. But with Invitation Homes, we just had this unique moment and time, very unique capital partner, and a shared vision for what we wanted to try to achieve which was, how do you take a business that’s always been run by really individual landlords in the US and build something of scale that could transform the way people think about leasing a single family home. Because there’s a lot of folks that want to live in a single family home that quite frankly can’t afford it, or need some sort of a transition period in between maybe a new city, or a move, or a new job, or a life change.

And so between that, between all the fundamentals around US housing and the demographics that are coming our way, we really bullish on the opportunity. And so as we started buying these homes, we just wanted to make sure that we not only bought great quality assets, but that we built quality service around it.

Nathan: Yeah, I see. So when you launched and purchased 30,000 homes in 18 months, you had financial backing to do that, it wasn’t a slow buildup?

Dallas: Absolutely. Yeah, absolutely. And we had excellent capital partners here in the US that they had the same vision we did about, that we were going to have to build this thing methodically one by one. I think in our first 50,000 homes, 95% of our homes were bought one by one. It wasn’t in some big …

Nathan: Complex.

Dallas: … transaction or this, that and the other. Yeah, literally one by one.

Nathan: Wow.

Dallas: Which also allows you to be particular about the type of brand you want to build in the business.

Nathan: Yeah. So talk to me around, I guess, what do you guys look for or when you … Because if you’re buying a one by one, there’s a certain kind of consistency. What exactly are you looking for? What are the parameters?

Dallas: Yeah, generally speaking with our business, we want to be much more infill higher barrier to entry locations and markets and sub markets, really focused on making sure that we buy high quality stuff near really good transportation corridors, good schools, and most importantly, along the lines of where the employment and the rooftops are forming, right? And making sure that you’re in a part of the market that’s going to have insulated demand.

And so for us, as we’ve continued to refine and hold up, rank ourselves and rank our assets, and find ways to deliver exceptional service, you get better over time and distance.

So a typical home in our portfolio today is probably three bedrooms, two bath, maybe somewhere around 17, 1800 square feet. And we’ll lease for somewhere around maybe $1,800 a month. And so that’s pretty typical. And it would probably be in and around the major city that we’re active in, but would have really good proximity to schools and good retail and everything else.

Nathan: Yeah, I see. And do these places have good capital growth or they’re more for the yield?

Dallas: It’s a balance. We’re total return investors. So we want to try to find, to your point, really good yield, but then we also want to make sure that we’re buying assets that we believe are going to have really good fundamentals behind it in terms of how it appreciates over time. So that’s the general thesis, right? You want both.

And what’s nice, if you think about US housing, it’s probably one of the most liquid asset classes in the world. So just as easily as we buy a home one by one, we can also sell a home back into the market place really at any given point in time, because of the individual nature of US housing. So it’s a unique business, unique hedge, and you have an opportunity to go in and out of markets as you see fit or where the opportunity is.

Nathan: Yeah. So if you guys started effectively seven years ago, you guys would have had a tremendous capital growth, especially in the first 30,000 in the 18 months. So have you guys been selling? You said it sounds like you have. You do sell off as well, some of your assets.

Dallas: Yeah, a little bit here and there. Sometimes, we actually sell to our residents. So if we make a decision to sell a home, we will go to our residents first, that’s actually what the programme is called. It’s called Resident First Look, and we’ll ask them if they want to own the home they’re in, in the event that they decide not to renew the lease. And we’ve had over, I think 150 clients take advantage of that.

But yeah, generally speaking, we’re always looking at the bottom, five to 10% of our portfolio and looking for better ways to return capitals to investors. And so if homes are not performing for a variety of reasons, we will then sell homes to other investors or back into the public marketplace and reinvest that capital in the parts of the market that we have conviction in.

Nathan: When you said not performing, in what way? Not the yield you’re looking for or not the capital growth or what?

Dallas: It could be a little bit of both. Sometimes you could be selling a home, quite frankly because maybe it becomes too valuable and it’s better off being sold back into the end user market. Right? And sometimes you may see some risk around a particular area or sub market, something you don’t love from the fundamentals perspective, and then you may think that there’s better risk adjusted return elsewhere.

So there can be a variety of factors. Not all negative, quite frankly. Sometimes an asset is worth more in the end user market than it is in the investor market. And so you’re better off when that lease comes up and doesn’t renew putting it back into the end user market. And then you can recycle back into parts of the market that maybe are a little bit better from a return perspective.

Nathan: Yeah, okay. That makes sense. So with 80,000 homes at that scale, making those decisions, what hierarchy do you have to make? Would you make a decision on, yes, let’s sell that one individual home or do you have a framework or a formula that is spread across the 80,000 to make quick decisions? How does that work?

Dallas: Yeah, it’s a blend. We look at … We have a whole team that this is all they do, right? Where we’re high touch in terms of the way that we invest capital or how we sell homes. And we have local offices in every market that we’re in that are on the ground really running the business day to day.

And so we have these regional investment committees that look at the parameters and they certainly have parameters from us in terms of the types of return profiles you want to look at. But it happens daily in our business. We look at how homes are behaving over time and over distance, and then weigh out all the factors. There’s a lot of data that goes into our business as you can imagine.

Today our resident stays with us for almost three years on average. And so you learn a lot about your customers over that period of time. You learn a lot about your assets and you figure out ways that you can offer better service and better opportunities to the residents over time and distance. Because ultimately, we’re not any good if our residents aren’t happy with the service.

And so for us, with an average length of stay of nearly three years, I think our team is doing an excellent job where it’s just how do we enhance that? And then those types of decisions all fit into which assets you want to hold longterm and which ones maybe aren’t non-core, not going to stay in your portfolio forever. And just like any good asset manager, you make those decisions real time as you’re looking at the business.

Nathan: Yeah, I see. And talk to me around systems because that kind of scale, 30,000 homes in 18 months, even with the capital behind you, the pure organisation of just managing teams across teams. That’s incredible. I’d love to delve a little deeper on that. What is your … Did you have a framework for developing these systems? Or how does it work? Talk us through when you had that vision, you and your team, operationally how the hell did you operationalize like that, that kind of scale because that’s impressive?

Dallas: That’s a great question. And we have all the challenges of big real estate company, but we have a lot of logistics to your point, right? And so as we think about our business, we’ve gotten more and more efficient in year seven. But we certainly are focused on what are the types of things that can, as I mentioned earlier, deliver a really good experience but make us as optimised as possible. And the technologies and things are getting much better too, that we’re able to incorporate into our business.

So I’ll give you a couple of examples. At first it’d be like, how do we communicate between the resident and our team, right? And a lot of our residents we never hear from, except we have a system called ProCare where we’re in the home every six months regardless, just making sure that we check on mechanical systems and the processes. This is delivered by over 300 technicians and superintendents that we have in our business across our 17 markets. That all they do is routine maintenance and inspections. So they’re in and out of a home no matter what, whether we get a call or not every six months to just look and make sure that the residents are having a great experience.

Then you have things like, well, how do you collect rent 80,000 times a month? Right? Well, we create really good accounting systems and user interface to where over 80% of our customers, I think today are automatically paying online through Autodraft or ACH services. And they sign up for that at the point of lease. The others have other opportunities. They can go into the mobile payment centres, they can send it over via credit card or whatever they want to do. But we make it very easy for the resident in terms of how to pay.

And then we also try to make the experience really unique in terms of if there’s ever an issue. And so the logistics of managing all of that really happens locally because we want to be high touch. And I’ll give you an example of that. In the market like Atlanta, Georgia, we have over 12,000 homes in our portfolios today, and that will be managed by a team of probably roughly 80 people locally, right? And not including some of our field folks that are in and out of properties doing inspections and low maintenance orders.

And so for us, that team has to be really efficient. So we use CRMs, we use all sorts of data and communication tools so that a pod, or as we call it like a team of property managers, typically manage about 2,500 homes. So in that market, we’ll have roughly five pods, five teams that look at things and from a geographic perspective. And they become the absolute experts in terms of the geographies and the homes, and their, of course, their smaller books or their smaller portfolios that they manage. And each of those pods has a leader with a couple of assistants. And then a few folks on the team that also help through with all the scheduling and accounting and things like that.

So when you break it down, it gets quite efficient, but you’ve got to have the right scale. And it takes a leader that leads those teams to really create cohesion and make sure that everybody understands the mission of the business, which is, “Together with you, we make a house a home.” And so it’s not just a business. As long as you keep the resident first in your mind, then your focus tends to follow. And so that’s been key for us in terms of building a culture and making sure that everybody understand at the end of the day what we’re trying to achieve.

Nathan: So when you talk about pods, how many in a pod?

Dallas: It’s typically about a dozen. Probably anywhere from 10 to 15 depending on the market. And then each of those people will have somewhere between three to five maintenance techs full time that are working with them.

Dallas: And then we keep getting better. We keep finding ways to get more efficient. And then we have stock vans that travel around the country that can do a lot of the smaller maintenance and handyman work. And then for bigger jobs, like if somebody’s got to get on a roof or do an HVAC unit or something like that, we outsource with national partners to help us with some of that stuff.

Nathan: And when it came to setting up these systems, what was the framework to create a system? How did you work that out?

Dallas: Well, unfortunately we had pretty good partners on the accounting side that have been doing this in multifamily and other industries like ours for a long time. So some of the base systems there. But as you can imagine, really getting in the , you got to create journal entry codes and GL lines, different things that ultimately create the different line items in your business.

And then from an internal communication perspective or reporting perspective, we had to make sure that we had a really good CRM. And so we’ve been on companies like Salesforce for a long time where we can fine tune and refine some of those systems to fit the needs of our business. And so the communication, the IT, staying involved with technology advancement, route optimization, for example, with our maintenance techs, how do we get more efficient in scheduling maintenance visits and some of those things. All that data is really important.

And so we’re now starting using machine learning that’s telling us, for example, which maintenance tech is better at appliances versus plumbing, right? And some of that stuff is really helpful because you can put people in a position to be successful with what maybe their best app, right? And start to fine tune kind of approach in which creates greater efficiencies, which should enhance experience, and ultimately fall down to your bottom line as a business. And so for us, we want to keep getting smarter.

So every year we get 15, 20, 25% smarter in a certain area based on the amount of data that’s starting to come the business. We’re learning a lot.

Nathan: Yeah, that makes sense. So, one thing that I find interesting is, a lot of our audience are early stage startup founders and their businesses are maturing and they start to build a team, and they start to get traction. So it’s not about, it is my hypothesis for this business. Is there a market need? There’s a market need and they have customers, but they might have a team, they would have a team and things get messy. It’s one to one. There’s no systems. There’s no documentation on how to do anything. There’s no internal Wikipedia if people need to find things. There’s no playbooks to do anything. I’m just curious, what would your advice be for people in that position? Because it sounds like you’re a pretty strong guy around the operations side.

Dallas: Well, look, I’ve been fortunate that I had a lot of great people. As we are building the business, we had a lot of employees, partners, people that understood the vision. And I think, first thing first, you’ve got to make sure that you align yourself with a few good people in your organisation, and make sure that you’ve got people that are willing to carry the flag so to speak. And that helps.

And then I think also strategically you’ve got to be willing to also understand that you don’t have the answer to everything yourself and you’ve got to do a little R&D from time to time and be inquisitive and challenge yourself as you develop systems and processes and people, and not be afraid of being wrong, because you learn a lot through trial and error.

But I do think that as you’re building operating companies or specifically and the way data management is going in the world, you’ve got to early on figure out a way how to capture some of that data early. Because some of your earliest findings will be really influential in the decisions you make in year two and three, right?

Nathan: Mm-hmm (affirmative).

Dallas: In terms of best practises and things. It doesn’t matter really what the business is, but if you’re not capturing that data from an early stage in any startup, then you’re playing with one arm behind your back so to speak. And you’ll want that data in year two, three and four to help influence decisions and give you keen insight and the things you got right and things you got wrong.

And so I think for any entrepreneur, obviously it takes vision. It takes usually a couple of key partners and you’ve got to, with any business in my opinion, make sure that you’re building a system that can handle the data.

Nathan: Interesting. And when you talk about data, there is a lot of it. How do you know genuinely what are the things you need to be focused on? Like cost to acquire a customer, average lifetime value. Like, what kind of data? Like that kind of stuff or?

Dallas: In our business specifically, yeah. We definitely want to figure out which HVAC units for example, are going to be the most efficient over time, right? What type of home and what type of weather? Think about, in our business, we have 80,000 homes sitting out in the climate all the time. So what climates are most conducive? What are the things that …

Our challenges for example in Arizona are far different than our challenges in Chicago, right? Where you get colder weather in the winter and you got to think about furnaces and things like that, where in Phoenix it’s really dry. And so how do you manage that from a landscape perspective and how do you make sure that you’re being environmentally friendly while running a great business? There’s all of those things that come into play.

And so to your point around shelf life of things and cost of acquisition for a customer, all of that is really important in our businesses. And I would assume, and many of your listeners or your readers feel the same way, you’ve got to spend your time being as efficient as possible, but driving growth at the same time. And so it’s always a balancing act because sometimes you get it right in the beginning and sometimes you don’t. You adjust and then you figure out something that works really well.

And so it’s just about balancing that out and figuring out where’s your best use of time, given whatever an entrepreneur is trying to build? And our best use of time, we want to find the customer that stays with us the longest, and ultimately a home, and a market, and a sub market that’s the most appealing, that is as efficient to manage as possible. Because if we can wind up all those things right in our business, we can have a great customer experience, which always makes your business a bit better.

Nathan: Yeah. One thing that strikes me about yourself, Dallas and probably the vision and the culture within your company, is these element of speed. Would you say that you guys, within your culture, you have like a high performance culture around speed and growth?

Dallas: High speed low drag. Yeah, absolutely. Yeah, absolutely. We want to be smart, but we don’t want … Especially in the early days, we knew we were working against the clock, so to speak. We had to get out and get scale and have it be really meaningful quickly. And then you start some of the precision management piece of it while you’re doing that. But yes, speed to market is really important.

Nathan: Yeah, with that kind of aggressive, relentless growth though, there is collateral damage, true?

Dallas: Can be, yeah. Especially if you’re not careful. Like I said, if you’re building an aeroplane while flying it, then there’s always a risk that you may miss a step. And I think we were really lucky in that, while weren’t perfect by any means, we didn’t really have any really major issues because we were comfortable in the environment that we were building. We knew the asset class, we understood the resident profile and what people wanted. But we were definitely not as efficient in year one as we were in year seven. So to your point, there can be drag if you’re not careful. Right? I don’t disagree with that at all.

Nathan: How do you know if there’s drag though? One thing I find interesting is you talk about efficiency, but just how do you know, because like you said, you don’t know what you don’t know?

Dallas: It goes back to what I said about data. You got to always be looking backwards. And use regression analysis to test your theories on whether they were right or wrong. Be honest with yourself about what the successes are and what they’re not. And then I think this is going to sound a little bit cliche, but hire people that are different from you. I don’t want 20 Dallas Tanners around me. I want people that have different perspective, opinions, backgrounds, and experiences that help drive their thought process. There are things in our business that come from the apartment industry, that come from e-commerce, that come from social networking, right? All of that speeding into our business today, that’s not anything that we thought of initially.

It’s just how you incorporate some of those successful pieces that are out there in other companies and then you figured out the stuff that’s unique to your own business. And we’ve had to figure some of those things out. A great example of that would be like in our homes, for example, today, a typical home doesn’t have smart locks and smart electronic features. And we figured out a couple of years ago that this was an easy way for ingress, egress for our residents, to have smart locks on their homes.

And then through our mobile apps and through our websites, our residents if they want that can have ease of use of going in and out of their home. The nice thing about that as you think about it from a landlord perspective is, we’re not changing the locks every time if somebody moves in or moves out, you’re changing code, right?

Nathan: Mm-hmm (affirmative).

Dallas: And that’s much more efficient. So that’s a good example of where just seven years ago we were changing locks, yet in the last two years, we’re not having to change locks anymore. We’re just changing electronics and systems that make it more efficient. And so there’s value there. So that’s some of the stuff that you don’t know that’s going to be in front of you because the systems don’t exist yet. So stay up reminded that things can change.

Nathan: Yeah, that makes sense. Also, we’ll look … We have to work towards wrapping up Dallas, just two last questions. One, where can people find out more about yourself and your work, and two, any parting words of wisdom or anything you’d like to share to finish off?

Dallas: Well, thanks. Well, first of all, thanks for having me. It’s a great story invitation. It has been an excellent case study for high speed growth in an environment that’s pretty dynamic. You can learn more about our company at invitationhomes.com. That’s our website. There’s a lot about the team, the processes and things that we feel really strong about.

And then lastly, I think for any entrepreneur that’s out there looking for advice on how to build successful companies, there’s just a couple of things that are always synonymous with good companies. I think one is, you’ve got people with a shared vision in the beginning stages of anything. They’re working side by side. And two, not only are you working hard, but you need a good timing, you need good luck, you need a few things to go your way. But the only way that those things go your way is if your head down and going really hard, and passionate about what you’re doing. If you don’t have the passion, then you’re not in the right space. And if you find something you’re passionate about then good things can happen.

Nathan: Love it. Awesome. Well look, thank you so much for your time. I really appreciate it.

Dallas: All right, excellent. I appreciate it, man.