Exiting the landlord game

[mickj]

I am planning on exiting the landlord game. I found a company called Flock that will buy the home and exchange it for shares in their company (basically a REIT). They pay a pretty decent quarterly dividend. I am able to sell some shares after three years, with six months notice.

I feel like I have won the lottery with being a landlord over the past few years with real estate appreciation.

I would love to exit totally but the tax bill would drive me crazy.

I feel like this company is providing a graceful exit and I can delay the tax consequences for much longer without some of the risk of being a landlord .

I guess the only question I have for the forum is, do you think their one percent annual fee ultimately make this a bad choice?

 

[Souschef]

I also left the landlord game. When I retired in early 2009, the housing market was in the dumper, so I rented it out.
I had the place appraised in 2005 after my wife died, to establish the stepped up basis.
I sold it in 2014 for less than the 2005 appraisal, but the loss canceled out my depreciation recapture.

 

[captain3d]

I have briefly looked into this type of exit using 1031 sales and moving the money into a fund like this. I would not worry about the 1%. I would worry about the health of the company running the fund. The risk is high.

 

[calmloki]

We've sold an eight and a nine unit building over the last couple years. We opted to carry the contract on both places and have 4.75% and ten year balloon on the first and a very modest down payment with 4% and a thirty year contract on the second (which expires with our demise). The second is kind of a sweetheart deal to someone we care about, but also reduces our annual tax greatly.

The taxes and depreciation recapture we paid were painful. Earning about 4.5% average on the balances is pretty sweet, and we didn't go as high as we should or could have. I like knowing what backs up our investment. I have big trust problems when thinking about property managers - or fund managers, which Flock looks to be.

This infomercial didn't really inspire confidence, but again, I'm not really a trusting soul:

https://www.clarkscondensed.com/flock-homes-review/

 

[njhowie]

I am planning on exiting the landlord game. I found a company called Flock that will buy the home and exchange it for shares in their company (basically a REIT). They pay a pretty decent quarterly dividend. I am able to sell some shares after three years, with six months notice.

I feel like I have won the lottery with being a landlord over the past few years with real estate appreciation.

I would love to exit totally but the tax bill would drive me crazy.

I feel like this company is providing a graceful exit and I can delay the tax consequences for much longer without some of the risk of being a landlord .

I guess the only question I have for the forum is, do you think their one percent annual fee ultimately make this a bad choice?

So, let's think for a moment.

What you are doing is moving the entire value of the property, all of your principal and equity into stock of a company that you really would not be investing in otherwise. Understand that your entire investment is being put at risk. Getting straight to the point, Flock is a high risk early stage venture capital company and could easily wind up in bankruptcy with your entire investment being worth zero.

What are they charging you 1% annually for? You no longer own the property, there shouldn't be fees for owning equity in their company. Are the folks putting up the venture capital being charged 1%? Of course not. You should be on equal footing with the venture capitalists.

Follow-up: Having read the article at calmloki's link, I see it isn't shares in the company, but rather the portfolio of homes that Flock has acquired and is renting out. So I'm guessing the 1% is their management fee. I would still be very careful and read the fine print of whatever the terms are as far as the "stock" you own. If the company goes bankrupt, who has first dibs on the properties/value, you or other creditors who are in line at the bankruptcy hearing?

 

[tryan]

Hmmm .... well just finished calmloki's read/link. Looking forward if/when the music stops on the upward trend of RE, these guys will run out of cash. Like any ponzi scheme, they HAVE TO HAVE new cash coming in i.e. sales of assests to pay dividends. So they would be FORCED to sell into a soft market at losses.

This one doesn't pass the "sniff test". It stinks.

 

[FlaGator]

IME, doing clever things to avoid taxes on handsome gains hasn’t worked out.

Seems like there are multiple ways this proposed deal could fail or fall short of projections. Looks like a VC deal specifically designed to take advantage of people like the OP.

Suck it up, pay the taxes and be happy your RE experience worked as well as it did.

 

[wolf]

Not for me ! For the reasons others have noted.

There is no "free" lunch.

 

[mickj]

Hmmm .... well just finished calmloki's read/link. Looking forward if/when the music stops on the upward trend of RE, these guys will run out of cash. Like any ponzi scheme, they HAVE TO HAVE new cash coming in i.e. sales of assests to pay dividends. So they would be FORCED to sell into a soft market at losses.

This one doesn't pass the "sniff test". It stinks.

Dividends aren’t paid with new money, they’re paid with the rents.

 

[mickj]

I am looking for all questions and criticisms.

I did some more research, and the outside money that was invested is in the management company, which is separate from the REIT.

 

[aja8888]

I am looking for all questions and criticisms.

I did some more research, and the outside money that was invested is in the management company, which is separate from the REIT.

Do you not realize that RE prices are crashing nationwide and will continue as the FED raises interest rates? I don't know what this will do to the property rental REIT's but it can't be good.

 

[RobbieB]

Sell your house, take the hit and move on.

At least you will have your earned dough and not have to worry about the future.

 

[Another Reader]

Run away. Selling a house with a known value for shares in a company with an unproven concept and no track record is insane. Exchange the house for something with less management hassle, or sell it and take the recapture and capital gains hit. Calculate those first, however, as the pain will be considerable. Maybe turning it over to a decent management company and letting the heirs deal with it would be a better choice.

 

[ivinsfan]

The one percent management fee is the only thing that concerns you? Oh dear..


What do you mean when say delay the tax hit for a few years? How would taxes work in this scenario? How did you find this company?



Just keep renting the home if the taxes are so intimidating. But don't come back in a few years and say you lost money if/when your selling price goes down. One thing us old folks here have learned is you can have some things, but you can't have everything when it comes to taxes and there is no free lunch. Oh wait that's two things!!!

 

[mickj]

Ideally I would like the option to reinvest dividends for a few more years. Once I retire I would consider partially redeeming shares to fund my retirement if my 401k/IRA aren’t enough.

Taxes are deferred through a 721 exchange (similar to a 1031 exchange)



Per flock website:

Shares can also be redeemed for cash, either all at once or spread out over a number of years to potentially reduce tax liability. Just like a traditional sale, redeeming your shares for cash is a taxable event.

The sale of any shares will be treated like the sale of any property, meaning regular capital gains and depreciation recapture taxes apply. One of the benefits to joining Flock is the ability to spread out tax liabilities across years, which could result in lower costs over time.

 

[calmloki]

Ideally I would like the option to reinvest dividends for a few more years. Once I retire I would consider partially redeeming shares to fund my retirement if my 401k/IRA aren’t enough.

Taxes are deferred through a 721 exchange (similar to a 1031 exchange)



Per flock website:

Shares can also be redeemed for cash, either all at once or spread out over a number of years to potentially reduce tax liability. Just like a traditional sale, redeeming your shares for cash is a taxable event.

The sale of any shares will be treated like the sale of any property, meaning regular capital gains and depreciation recapture taxes apply. One of the benefits to joining Flock is the ability to spread out tax liabilities across years, which could result in lower costs over time.

Hmm. much like selling on contract, as I did. There is a danger that the purchaser flips the place or sells it at an inconvenient time tax-wise for you to receive a bunch of cash.

 

[captain3d]

I sold a rental where I cashed out 1/3 and 1031 2/3 into two cheaper properties. So in effect I am splitting the sale into 1/3s from a tax point of view.

Maybe do something similar

 

[luckydude]

Ideally I would like the option to reinvest dividends for a few more years. Once I retire I would consider partially redeeming shares to fund my retirement if my 401k/IRA aren’t enough.

Taxes are deferred through a 721 exchange (similar to a 1031 exchange)



Per flock website:

Shares can also be redeemed for cash, either all at once or spread out over a number of years to potentially reduce tax liability. Just like a traditional sale, redeeming your shares for cash is a taxable event.

The sale of any shares will be treated like the sale of any property, meaning regular capital gains and depreciation recapture taxes apply. One of the benefits to joining Flock is the ability to spread out tax liabilities across years, which could result in lower costs over time.

By signing up for this, you're taking on unforeseen and possibly substantial financial risks for the sole purpose of reducing cap gains taxes. That's a perfect definition of letting the tail wag the dog. Just take the tax hit and move on.

 

[tryan]

The scenario I would worry about for Flock is a prolonged down turn in the RE market and the full-vested dump thier shares for greener pastures. The only thing they can do is SELL into a soft market at losses to pay off the full vested.

Sell the property carrying a note. Escrow the taxes and insurance. That's a SURE bet.

 

[ERD50]

I sold a rental where I cashed out 1/3 and 1031 2/3 into two cheaper properties. So in effect I am splitting the sale into 1/3s from a tax point of view.

Maybe do something similar

But does splitting the sale in 3rds have much effect on taxes? Depending on the amount, even 1/3rd could push most of it into a higher bracket anyhow.

And now you have the risk (and possible reward) of 2/3rds still being in real estate, and there must have been closing costs?

Taking a note carries risk of default.

What % of the sale is cap gains?

-ERD50

 

[ncbill]

Ideally I would like the option to reinvest dividends for a few more years. Once I retire I would consider partially redeeming shares to fund my retirement if my 401k/IRA aren’t enough.

Taxes are deferred through a 721 exchange (similar to a 1031 exchange)



Per flock website:

Shares can also be redeemed for cash, either all at once or spread out over a number of years to potentially reduce tax liability. Just like a traditional sale, redeeming your shares for cash is a taxable event.

The sale of any shares will be treated like the sale of any property, meaning regular capital gains and depreciation recapture taxes apply. One of the benefits to joining Flock is the ability to spread out tax liabilities across years, which could result in lower costs over time.

Until they run into a cash flow problem and restrict share redemption to only "upon your death or permanent disability."

Yep, had that happen with a couple of private investments...had to use a 3rd party exchange and take a huge loss to get rid of those.

Right now I've got an oil/gas investment which hasn't paid anything in years & where the last communication noted:

"The partnership continues to apply all free cash flow to pay down the <Partnership's name> note per the terms of the loan...

Management continues to work to sell the partnership’s assets but can make no assurance that a sale will occur, or if a buyer is found, will be sold profitability."

Can't even interest 3rd party exchanges to sell the above...now I hope to sell it back to the partnership for $1 so I can take the LTC loss & pursue a FINRA claim against the broker who sold it to me.

 

[Spock]

Ideally I would like the option to reinvest dividends for a few more years. Once I retire I would consider partially redeeming shares to fund my retirement if my 401k/IRA aren’t enough.

Taxes are deferred through a 721 exchange (similar to a 1031 exchange)



Per flock website:

Shares can also be redeemed for cash, either all at once or spread out over a number of years to potentially reduce tax liability. Just like a traditional sale, redeeming your shares for cash is a taxable event.

The sale of any shares will be treated like the sale of any property, meaning regular capital gains and depreciation recapture taxes apply. One of the benefits to joining Flock is the ability to spread out tax liabilities across years, which could result in lower costs over time.

Nothing personal to the OP, but this brings personal flashbacks of when I was dealing with my declining mental capacity Dad who was donating significant sums to "charities".


When I would research the entity and point out that it was a scam (financial reports showed the board making loans from the charity to the popular-figurehead-personality-in-charge to buy PERSONAL real estate or investing in significant quantities of gold), Dad would call the charity and ask "are you a scam"? to which they would answer "no".
Dad would come back to me with "I asked them about it and they said they weren't a scam, so it's OK".

He didn't want opposing conflicting information, he just wanted affirmation on what he wanted to do.

 

[captain3d]

But does splitting the sale in 3rds have much effect on taxes? Depending on the amount, even 1/3rd could push most of it into a higher bracket anyhow.



And now you have the risk (and possible reward) of 2/3rds still being in real estate, and there must have been closing costs?



Taking a note carries risk of default.



What % of the sale is cap gains?



-ERD50

It helps quite a bit splitting $500k gains over separate years. I was also selling in a pumped up price area and exchanging into a less pumped area. The rental income was the same and I get the 1/3 cash out

So a few moving parts there