Denver Startup Flock Properties Wanting For Random Or Retired Landlords – The Denver Put up
When Shirlee Turner lost a longtime tenant in her Denver rental home and her property manager announced he was retiring, it forced a settlement.
“The incentive to keep the property at all was the revaluation and a further stream of income. But I was spoiled. I had a great experience with my tenants and not had many of the headaches people usually have, ”said Turner.
Turner, the chief medical officer of the Denver Hospice, bought her home in 2005 and lived there for about six years before moving and converting it into a rental property her ex-neighbor helped manage. Holding on turned out to be a wise move, given the huge rise in the price of home rentals in Denver over the past decade.
In Turner’s case, Zillow estimates that the house gained $ 285,000 in value, in excess of the original purchase price. However, this meant that any sale would come with a heavy capital gains tax, not to mention the monthly rent payments.
Using the tax known in the tax code as the 1031 stock exchange could have avoided taxes, but it does require the proceeds to be used in another real estate investment. Doubling down in her 60s isn’t an appealing option, Turner said. It wasn’t about keeping the house and rolling the dice when it came to finding a new property manager and tenant.
While searching for options, Turner came across a Facebook ad for a Denver company called Flock Homes that was recruiting landlords to try another model of real estate ownership.
The startup founded by Ari Rubin and Matt Litovitz in Denver, which met at Stanford University’s Graduate Business School, works in a similar way to a real estate investment trust or REIT. But instead of depositing cash for shares, the landlords bring their investment property into what is known as a 721 exchange. In return, they earn a chunk of the dividend stream spun by a much larger pool of homes.
“Millions of Americans own rental properties,” said Rubin. “We focus on the casual landlord and the retired landlord. We will seamlessly convert your rental property into part of a pool of houses. “
The company offers landlords like Turner the ability to move from active to passive ownership, avoid capital gains taxes, preserve income and diversify their real estate holdings, Rubin said. He adds that the model is intended for those “in trouble but selling dearly”.
Flock Homes has raised money from angel investors and venture capital firms, but it’s not as capital intensive as investment pools that buy homes outright. The company recently assembled a group of 20 Denver properties on a trial run of the concept with the aim of scaling it in a variety of markets.
And while 721 exchanges aren’t new, it’s the financial technology behind the company’s platform that makes the whole process a lot easier. Rubin said Flock Homes would not have been available 10 years ago.
The company charges an administration fee of 1% of the asset fee, which is very high for a REIT. But for someone used to paying fees to actively manage their stock portfolio, that number isn’t wrong, said Troy Miller, executive director of the Investment Community of the Rockies.
“Yes, that seems high, but when you look at that you have to consider the active or passive investor,” Miller said. “You have someone who has invested more mainstream through their financial institution and just expected a more conservative return.”
Miller said Flock Homes was “ideal” for casual landlords, such as heirs, to pick up homes that they cannot deal with through inheritance proceedings. Splitting a monthly dividend payment is easier than repairing and selling Grandma’s house and sharing the proceeds. It also avoids the separation of a house that may have been in the family for decades and has sentimental value from being completely severed.
Rubin adds that there is a greater benefit to the community. Many independent landlords allow their properties to show their age as they show and often lose either the ability or interest to look after them. The first group of properties Flock Homes acquired had several issues to address, Rubin said.
Flock’s model is to upgrade the homes it purchases, add greener amenities like native ground cover and solar panels, and get a higher rent that benefits investors.
However, the model has the potential to poke heads with a concept that Denver and other cities are exploring called Naturally Occurring Affordable Housing (NOAH). In exchange for a lower rent, some tenants are willing to live with 1980s decor and outdated floor plans. Often it is not a question of choice. A wider mix of houses allows a more diverse mix of households to live side by side.
As part of a NOAH approach, Denver would have restrictions on having older homes with below-market rents as part of the housing stock. This could range from banning buy-and-scrapes in popular neighborhoods to limiting home upgrades to prevent them from getting the highest rents possible.
There is also the broader problem of the inadequate inventory of the Denver subway. When fewer landlords are selling, tenants who want to become homeowners have fewer options.
Once landlords bring in their properties, they lose the ability to pull it out and conduct a future deferred tax exchange. In this regard, it is an end-of-the-road strategy.
Another question that landlords need to consider is what joining Flock Homes will cost them in terms of the monthly income they will receive. Rubin said this depends on a variety of things, such as the value of each property and the performance of the overall portfolio. In general, managing multiple properties offers scalability and cost reduction, with those savings passed on to the owners. Vacancy risks are also reduced if they are spread over a larger pool of houses.
Turner said her desire to keep things stable with her tenant had resulted in her falling behind the market in the rents she was charging. When she comes to Flock Homes she will be earning more every month than before.
She can also put her flock interest in a trust for her special needs son and guarantee him a stream of income when she dies rather than the burden of dealing with a rental home. And as an added bonus, she doesn’t have to handle those nightly calls.
“You don’t worry about the 12am call that the pipe is frozen or the water heater has stopped working. You sleep better, ”she said. “I told them I wish I had 15 or 20 houses to give you.”