Historically, only institutions have been able to be part of REIT (Real Estate Investment Trust), which are made up of companies that own or finance income-generating real estate in various real estate sectors.
A startup called Flocking wants to give owners a similar ability to hold shares of a portfolio made up of multiple properties, and it just raised a $26 million in Series A funding for this effort.
Andreessen Horowitz (a16z) led the funding, which also included participation from 1Sharpe Ventures (led by Roofstock co-founder and chairman Gregor Watson) and Human Capital, as well as existing backers Susa Ventures, Primary Venture Partners and BoxGroup .
Founder Ari Rubin dropped out of business school to pursue his concept behind the startup, which launched in May 2021 with four homes in Denver, Colorado. Its typical user is an owner of single-family homes of one to four units who does not necessarily want to get rid of his investment but no longer wants to deal with its management.
“Flock buys the property from the owner, who then gets a stake in this partnership that owns a bunch of homes,” Rubin told TechCrunch. “They can retain all the benefits of owning real estate without any of the burdens such as paying taxes or maintenance.”
Once the properties enter Flock, the company owns and operates the assets. Meanwhile, owners then get shares in a diversified portfolio similar to a REIT, Rubin said.
So someone who owns a $500,000 house can sell it to Flock and get $500,000 worth of equity in the fund. As the portfolio increases in value, so do the stocks.
“They also receive their share of all rental income, which we collect and retain a portion for maintenance, property taxes and insurance,” Rubin said. “Then we pour the rest into a distribution.”
Some people decide to reinvest their proceeds while others opt for cash flow, with the ability to redeem shares over time.
“Most people, however, want to keep them forever, live off the earnings and pass them on to heirs,” Rubin said. “So it can also serve as an estate planning tool. But either way, they can put their property on autopilot and live on diversified incomes.
The company makes money by acting as the fund’s asset manager and charging a management fee, which is 1% of someone’s account value. He claims to save the owner money in taxes and other “friction” if he had sold the house traditionally.
Today, Flock has 110 homes in its portfolio in Denver, Austin, Texas and Kansas City. The company plans to launch in Seattle and “a handful of additional markets” this year.
“Institutions have been doing this for a long time through a mechanism called 721 exchange and it takes an army of lawyers and tax specialists and complicated sheets of paper to make it work. We are developing technology to streamline this process,” Rubin said. “We’re taking something that’s been around for decades and using technology to make it more accessible to more people.”
The company aims to build a standardized portfolio of homes, so it won’t include a $25 million mansion outside of Palo Alto, for example. It uses third-party appraisal models to determine the fair market value of a home.
The way it works is that a homeowner submits a home’s information through Flock’s website. The Flock team then uses a proprietary valuation system to derive an overall valuation, then adjusts the final price based on the amount of repairs and deferred maintenance found in the home. Unlike an iBuyer, Rubin said, the company “never profits” from the value of a home.
“We strive to make sure the system is fair and transparent for every homeowner setting up their home,” he said.
But what if homes lose value? Rubin said the initial goal was to only include homes with greater upside potential.
“We are looking for homes that will add value to other owners and landlords who have put homes on Flock,” Rubin said. “We have no idea what the market is going to do in the long term. Maybe it will continue to go up and down. But we only take houses that we are confident we can operate efficiently and offer very good returns to the owners and good experiences to the residents who live there.
Primary Ventures, Susa Ventures and BoxGroup co-led Flock’s $6.5 million seed round last March, so this latest funding brings its total capital raised to $32.5 million. With 17 employees, it has dual headquarters in Denver and San Francisco.
It plans to use the capital from this increase to continue to develop its technology and to hire. The company operates with an asset-light model, Rubin said, in that it doesn’t need money to buy homes and instead uses money the moment people roll in their equity from their home.
A16z general partner Alex Rampell believes that one of the problems with being an owner is that it can be very difficult to simply retire.
“Owning stocks and bonds can provide you with passive income and asset appreciation, but owning means you have to fix toilets, worry about vacancies, find tenants and more,” he said. . “The grass is always greener on the other side, except when you’re trying to enjoy your retirement and literally need to water the grass to find a new tenant.”
He was attracted by Flock’s ability to allow any owner to fit their properties into the portfolio he created, while providing the previous owner with the same stream of income without immediate tax consequences.
“In the process, he’s assembling a powerful machine for aggregating many properties, democratizing investor access and improving residents’ experiences with technology,” Rampell added.
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