Why we invested in Flock Homes
1Sharpe Ventures is excited to partner with Ari Rubin and the Flock Homes team to introduce a better alternative to single-family rental ownership and management for the millions of small-scale “accidental landlords” around the country.
Managing Single-Family Rental Units is a Full-Time Job.
More than 17 million Americans own $4 trillion worth of rental properties. Many of these small-scale (1–5 unit) owners juggle being a landlord with other obligations — or have inherited rental properties they were not equipped to manage. These “Accidental Landlords,” may derive meaningful income from these properties, yet don’t have the bandwidth to manage them. They are caught in a conundrum. They don’t want to sell their properties because they could lose income, end up paying high taxes, and find themselves facing logistical hurdles such as removing tenants, making renovations, cleaning and staging the home, and dealing with uncertain sales cycles. But if they choose to keep their properties, they may not have the capacity to manage their properties affordably and efficiently.
The risk of vacancy, raising rents to market rates, tenant issues, and unforeseen management costs are ever-present. Few mom-and-pop owners have the scale to afford best-in-class property management or the wave of tech-enabled services, clean energy, digital payments, and predictive and on-demand repair and maintenance that benefits both landlords and tenants. Without the benefit of scale or full-time oversight, tenant satisfaction and home equity can suffer.
There’s Enormous Pressure to Sell.
Institutional real estate investors have raised billions to grow SFR portfolios, and with increasing competition in new markets, many have launched acquisition strategies targeting mom-and-pop-owned assets. An urged sale can come with predatory terms and conditions and can be extremely inefficient in positioning an asset for sale. Selling individually-owned rental properties can cost the owners up to 30% of asset value given taxes and costs of listing, staging, and closing, in addition to lost revenue from rental income. Mom-and-pop landlords face a slew of impersonal robocalls and high-pressure options that don’t help them avoid costly tax burdens or provide an exit strategy that meets their needs.
One solution for these owners is to transfer appreciated property from individual ownership into a trust in exchange for shares in the trust. An UPREIT, or Umbrella Partnership Real Estate Investment Trust, allows for such transfers. This exchange, also known as a Section 721 exchange, allows the investor to defer capital gains taxes and continue to potentially benefit from property even after transferring ownership.
While UPREITS are not new, a digital, consumer-friendly solution in the single-family rental space did not exist — until Flock Homes entered the market.
Flock Homes offers an asset aggregation technology platform for real estate, focusing on single-family rental properties.
The Denver startup, founded by Ari Rubin, offers software and a digital experience that allows small-scale landlords to seamlessly exchange their rental property for shares in a liquid, diversified portfolio of homes. Flock manages the portfolio, and landlords get steady income and upside potential while letting go of the hassles of traditional rental property ownership. Flock acts as a tech-enabled UPREIT, offering small-scale single-family rental owners a tax-advantaged way to stop being a landlord and still retain value from rental properties.
Flock is the first direct-to-consumer brand in the space.
Flock wants to be the household name when landlords think about their options for exiting or preserving the long-term value of their assets. They aim to present landlords with a delightful, digital experience and reframe how property owners view an exchange as an option. Spanning asset classes and strategies (partner vs. vertically-integrated), Flock is building a brand where no one else has, transforming who can access the benefits of real estate investing and ownership.
Here’s how it works today:
- Owner submits their rental property for valuation.
- Flock evaluates and inspects the property and makes an offer.
- Owner accepts the offer, transfers title — tax-deferred — through a 721 exchange to Flock, and becomes an investor in Flock’s portfolio of homes at the equivalent value of their former property.
- Flock handles all property management and provides passive income to investors who benefit from a more diversified portfolio.
- Investors can track portfolio performance in real-time.
- Investors can exit through cash-out or transfer to heirs, with Flow handling all details.
When owners exchange rental property with Flock, they join a larger portfolio of homes and diversify their investments by gaining exposure to real estate in different cities and neighborhoods. Flock’s technology makes the process simple.
As pioneers in the single-family rental space, 1Sharpe Ventures is excited for Flock to bring a new wave of innovation to the asset class.
The 1Sharpe team has collectively owned, managed, and sold thousands of single family houses, and has built multiple technology platforms in the space — like Roofstock and Lessen. Through this experience, we have been humbled by the grit and collaboration it takes to scale best-in-class operations, teams, and big ideas. We have been impressed by Ari’s ability to build a world-class team around him, and aim to support the Flock team through our relationships with national single-family rental property managers, our understanding of the nuanced OpCo/PropCo structures, our in-house real estate teams, and our shared vision for a more sustainable and equitable housing industry.
When owners contribute their real estate to Flock, a new journey begins; one that has been carefully crafted to both relieve their pain points and provide tangible benefits for years to come. Flock Homes has discovered a better way to sell and a better way to own investment real estate. 1Sharpe Ventures is thrilled to be supporting this journey.
Join the amazing team at Flock! Check out open roles: https://boards.greenhouse.io/flockhomes