Deidre Woollard: Hello, I'm Deidre Woollard, an editor at Millionacres. Thank you so much for tuning into the Millionacres Podcast. Today's guest had an experience that I've had as well. He sold his home then he learned a few years later that his home had appreciated by several hundred thousand dollars more. Losing that sort of money is painful. But when you're ready to move on, there aren't a lot of options out there. David Friedman, Co-Founder of Knox Financial, wants to change that. David Friedman has more than 15 years of experience, starting in leading technology companies in Boston. In 2018, he co-founded Knox Financial, a FinTech company offering homeowners a smart and frictionless way to build wealth. A homeowner who is ready to move all landlord who already owns rentals, can put their property on the Knox frictionless ownership platform, and then Knox turn these properties into passive investments. Well, thank you for joining me today, David. We actually met before when you're with Boston Logic and I was working on real estate PR probably at an investor conference or something like that. How did you go from that world to what you're doing now?
David Friedman: Building that company, I learned a lot about real estate data. Spencer, who is the co-founder of Knox, he and I worked together at Boston Logic and over lunches and beer as we come into the data model, we're data nerds. We had this data model and it didn't really have use at Boston Logic, but we said this is the foundation for a lot of things. A lot of things we could do with this data model and it is more or less the intersection of people and property. We sold Boston Logic. That company now owns a bunch of companies in real estate software space. I moved on, and Spencer and I had lunch one day. We said, "You know, we should build something on that data model." He and I in each had this experience that you just mentioned where we own homes and sold them and regretted doing so. We figured out using that data model, we could identify everyone who should hold onto their property when they move and turn it into investment. It turns out it's a vast majority of the population actually. Two guys over a few lunches and a few beers, knowing the property data world, building a data model and then having this experience, instead of looking back at it and going, we just sold the best investment we've ever made. Who sells their best investment? We should make it easy to hold that investment and that is Knox.
Deidre Woollard: I think that's so smart because I had that experience. I owned a duplex in Watertown. I sold it, made a profit, and I was really happy about that. But then I looked at it a couple of years later, and the person after me made an even bigger profit. Is that what happened to you?
David Friedman: That's exactly what happened to me. I owned a condo in the south end of Boston for 10 years. It was my 20s home. All the best parties and met my wife while living there, and my investment there, I'd put down $100,000 when I bought it. When I sold it I'd turn that $100,000 into $350,000. That was a lot of money to me at the time, but I was still thinking, why am I selling this? This is my best investment, I had a day job. I was running a start-up called Boston Logic, and I had to sell it. My wife and I had too much stuff to live in her place or my place so we bought a new one. I looked back four years later when the new owners sold it again and they had made another 200 grand, and I said, "Somebody told $200,000 for me. That's robbery," and it was younger days stealing from older days. Right?
Deidre Woollard: [laughs] Exactly.
David Friedman: I told the story to Spencer and he'd had the same experience moving from Vermont to Boston when his wife had gotten into grad school. We said, why are people selling great investments? We thought about all the other investments we make. When we make them, we call a guy. That guy or girl had a great brand like Goldman or UBS or Merrill Lynch. There is no equivalent for property, and that is Knox.
Deidre Woollard: Well, I think part of that too, when I was ready to sell my place, a lot of people said, "This is a great property, you shouldn't sell it." I thought, well, I don't want to become a landlord. Do you think a lot of people are going through that same process where they think, well, I would like to hold onto it, but I need to move on and I really don't want to be a landlord.
David Friedman: We think that happens literally a million times a day. We know it happens. We've run the data, we've run the survey as we've talked to people, that happens all the time. What's interesting is if you want to invest in equities, you don't buy a share of Microsoft and go to work at the company. But classically, if you want to invest in real estate, it comes with a part-time job and if you buy a bunch of properties, it becomes a full-time job. We don't think that's the way it should be. One of our founding principles at Knox, is we would make it as easy to buy and own investment property as it is to own a share of Apple or Microsoft.
Deidre Woollard: That makes sense. As I understand it, you guys handle property management, the books, rent collection, taxes, and then you charge a fixed fee of 10 percent. How did you arrive on that as the right percentage?
David Friedman: Sure. We do a lot more than that, but that is a bunch of the things we do, first of all.
Deidre Woollard: Please tell me more of what you do then.
David Friedman: The first thing is we are always we're wealth advisors for property investors. A big part of the value we bring is helping people understand their investments and their options. What does refinancing look like? What does insurance look like? How do you make the property and produce more revenue and more profitable? How does that entire portfolio best perform? Best-performing is different for each client. It depends on your investing goals and your time horizons, etc. Some clients are looking for tax shelters or cash flow or value growth, and we can help make portfolios perform towards those goals. Next, when you work with Knox, you no longer need a bank. You no longer need a credit card for that property. You do not need to figure out your taxes, we do that for you as well. We find you the right insurance. We optimize the property towards best outcomes physically. Whether that's a new kitchen or adding a bedroom or what have you. We handle everything from leasing and legal all the way street through to payouts and tax reporting on the financial side as well. Literally, you get to sit back, kick up your feet, and become a passive owner of the investment. There is nothing that you have to do other than DocuSign and lease every now and then.
Deidre Woollard: Does each property end up in a separate LLC, or are they all part of the Knox platform?
David Friedman: Whether or not it's in an LLC, is up to the customer.
Deidre Woollard: Okay.
David Friedman: Some of our customers have multiple LLCs. In our software, that's just a different tax ID. We are pretty agnostic to that.
Deidre Woollard: Interesting. I also noticed that you pay quarterly instead of monthly. Why is that?
David Friedman: What we do is we settle up our reserve accounts quarterly, but if somebody has a very profitable property, we can distribute fixed amount monthly. What we do for clients as we hold the reserve account, any good property investors holding a cash account associated with that property. That is part of how our platform works. If you have a profitable property at the end of the quarter, we would send you the net profit if there hasn't been a profit and the balances declined in that account, we don't send you anything. If you let's say, have a portfolio that's profiting, five grand a month and you're living off of that, we might set up a quarterly distribution of say, $4,500 and then there might be a few repairs to the end of the quarter, we would settle up that account to a pre-established balance that we aim for.
Deidre Woollard: Interesting. In terms of that balance, how is that set up? Is it standardized across properties? Is it a percentage or does it vary?
David Friedman: As to the monthly operating expenses, we generally like to keep to a minimum of two months operating expenses in the account. If you have low operating expenses, it's generally a minimum of $3,000. If you have a lot of units, it's not 3,000 per unit. It has to do with what would be a normal scenario of let's say you have a portfolio of 10 properties. You'd probably have some incident, say, every month on average or something like that. We will make sure there was capital to cover those without having to reach out and ask the client for capital infusions because of ups and downs in that account balance.
Deidre Woollard: Is there a cushion for emergencies like if a water heater blows or something like that?
David Friedman: Exactly. That's why the minimum is 3,000. A water heater let's just say it costs you a thousand bucks in time and materials, you should have that in your reserve account at Knox and it shouldn't hit your day-to-day cash flow. Excuse me, most of our clients have their life, and the ups and downs of their checking account, they would rather not see that affected by their investment property portfolio.
Deidre Woollard: Interesting. Where they're holding these properties, is it the same as if they had a rental property portfolio? Do they get the same tax benefits like depreciation and deductions?
David Friedman: Absolutely. In fact, one of things that we find when we have portfolios come onto the platform is often private landlords are not good at getting all the introductions they deserve. With Knox, every penny flows through our platform. Mortgage taxes, insurance, maintenance, condo fees, you name it. We make sure that every expense is deductible, is on the statements and it gets deducted. Also, we help you on the math on how to depreciate the property itself. Another huge tax advantage we help a lot of clients with is estate planning. Appreciation of a property can be a really large taxable event. A lot of people, unfortunately, in advance to age, sell property they own either they lived in it and you might have been home for decades and you bought it for a few hundred grand. Now, it's worth a couple of million. You've got a huge taxable event and you sell it when you move into assisted living. That's a huge generational wealth mistake that a lot of families make and if they put a property in our program for a while and then homeless inherited, the gains in the lifetime of the original owner are not taxable. Honestly, it stays worthless than $20 million. For most people, that's a huge tax shelter.
Deidre Woollard: Yeah, absolutely. I think that the aging of America is something that I think a lot of people are concerned about so far, people are wanting to age in place. But as our baby boomers get older, the likelihood of them being able to do that in their 80s gets less and less. There's all that talk about what they called us silver tsunami, that there's suddenly going to be this flood of houses on the market. Is that something that you guys have been looking at and thinking of as something that's going to become an event?
David Friedman: Tsunami is a quick, it's like a multi-year, it's like a decadal change in society.
Deidre Woollard: More like a slow wave.
David Friedman: Yeah. I think if you look at the building rate in the senior housing world, COVID notwithstanding, there's an amazing amount of building of retirement communities, assisted living and nursing, that industry has grown by multiples the last 25 years. In our view, you're going to see a lot more of that building and a lot of people are going to continue to move into those environments, and that's good for Knox.
Deidre Woollard: What about a 1031 exchange if someone had a property in Knox and then they wanted to get a different one and be able to avoid that tax event that you mentioned?
David Friedman: We're big fans of 1031 exchanges. For us, we're helping clients maximize their equity, again, towards the investment goals that they have. 1031 makes a lot of sense if you think the property you currently own is not the best property for serving your financial goals. What we do have is an awful lot of customers on our platform who want to grow their portfolios. Often, what we can do is find another customer who wants to take that property, and we do that transaction at a very low cost for all parties. One property shifts to another customer, and then the customer who used to own it, 1031s that equity into a new property. It's a fantastic strategy.
Deidre Woollard: That's really interesting. Is Knox also benefiting from some economies of scale? For insurance or repairs or things like that, is that also part of what you're doing, is that you're working with particular contractors and things like that?
David Friedman: Yeah, absolutely. That's a big part of the benefit to the investors who use the platform. As an individual investor, even if you have a dozen or two dozen units, you don't really have a lot of buying power versus the institutional real estate, and rentals in this country is like $25 millions. That institutional property market, they have buying power, and our scale allows us to bring that buying power, that advantage to small-scale landlords.
Deidre Woollard: Interesting, because it's not dissimilar to what some of the high buying companies are doing, where they're starting to build those networks of people that fix the houses.
David Friedman: Absolutely. I mean, if you look at, let's just say, Open Door, if they're renovating 50 homes a month in a given market, they obviously have some buying power in materials, in contractors, etc. We're getting to the scale where our vendors are now asking us, "What's the next city you guys are going to launch. We want to be there when you do because you guys are bringing us work, and we're a good client." [laughs]
Deidre Woollard: How long did it take to get set up on the platform? Is it like iBuying, where you need to have repairs done first? How long then does it take before the owner start receiving the income?
David Friedman: To get set up, it's like signing up a property for Airbnb. You go on our website or you go into our app, and you upload a bunch of information, and you're off and running. You going to sign the account manager. We actually go to the property and do a 200-point data intake that the homeowner doesn't have to do. We take in everything from your making model of the fridge to a photo of the electric box and the material of the roof, it's all in our database. We have professional photography taken, and this takes a matter of days, pretty soon it's on the market for a renter. If it is not already rented, a lot of properties come in and already tenanted it, and those are all in a matter of days or weeks. Once we have a tenant in there, at the start of lease, the properties are on our platform. Again, it's usually just a matter of days.
Deidre Woollard: Does the owner get an estimate of the income before they sign up? Is it like that where you can find out what your property would earn on the platform?
David Friedman: Absolutely. But we go several steps beyond that, just like those financial brands we were talking about earlier. When you meet with the financial advisor, they're going to go through numbers and charts and graphs, and help you understand how your money can work for you. We do the same thing, but with property. We've built financial analysis software. We used to sit down at the kitchen table of the customer, now it's Zoom in the COVID world, and we show them the numbers, and we show them what their properties can do and what their portfolio can do. We might show them the impact of a refi. We might show the impact of a sale and acquisition of other properties. There's a lot of scenarios depending on the customer, but it's not just rental income, it's net cash flow, it's rate of return, and any number of other goals, tax shelters, I can go on.
Deidre Woollard: How would this work if potentially you're a move-up buyer? Would you potentially refi to pull some money out to get your down payment for the next house, or how would that work?
David Friedman: Sure. There are two scenarios. Some move-up buyers have the capital they need to put the down payment on the home they're going to buy, and so then they don't need to refi, and some percentage do refi. In fact, it's super common for Americans to refi, anyway. Americans are inundated with marketing from banks and mortgage companies. A huge percentage of customers that we talked to have refinance. The number of mortgages written in 2020 was insane. People are turning equity into cash out of their homes on a regular basis, and often, they've already done that. When they come to us, and they want to dawn, we can help them with one of our partners find the right note to refinance and get the cash they need for down payment on the next home.
Deidre Woollard: About how many properties are on the platform already?
David Friedman: North of 175, approaching 200 now.
Deidre Woollard: Just in the Boston area, or are you starting to expand?
David Friedman: We're operating in five states now, four major metro areas. If you know Boston, includes the State of Rhode Island and happy New Hampshire. [laughs] It's a metro region. Then we also operate in Texas, in the Dallas and Houston markets, and in the Greater Atlanta Area and Georgia as well.
Deidre Woollard: What were the decisions for moving to those markets?
David Friedman: That's a great question. We look at a number of factors when we decide to launch a market. Some of them are quantitative, so we look at numbers and how many people move every year and rental rates and things like that. We also look at whether or not we can get data to do the data work we do in that market, and some markets simply can't find a data source. We also look at our maintenance agreements. Do we have a maintenance partner who operates in that city, in that state? Then there's a bunch of legal considerations as well. We own a real estate brokerage that's licensed in every state where we operate. Insurance, we're licensed too. We're licensed insurance broker in every state where we operate. We have to check a bunch of boxes that are really more binary than quantitative, and if all that lines up, then we say, "Okay, here's the markets that we'd like to go into next," and we move on.
Deidre Woollard: Awesome. Interesting. Well, this is a great place to take a short break.
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Deidre Woollard: I'm back with David Friedman, Co-founder of Knox Financial, and we're talking about rental properties. In looking at the Knox website, I noticed that the owners don't have contact with the renters, which I think for some people who are scared of being landlords might be a good thing. But what type of information about the renter does the owner receive, and how does the owner get updates on the condition of the property?
David Friedman: Our customers want to be passive investors. Our owners never going to call from the tenants, and tenants don't have their phone number. They can see their name on the lease. If the tenant signs lease, they see the owner's name. But you signed for Knox because you don't want tenant calling you. [laughs] That's an important part of what we deliver. The commitment to the customer is what we call frictionless ownership. You will be a hands-off investor or passive investor, just like we all are with the rest of our investments in equity. For the second part of your question, how do they find out about the conditions? We do send statements, and we have an app where they can see what's going on. When they sign the lease, we can send the owner all of the background information on the tenants. One of the, unfortunately, often overlooked steps is just a proper background check on every tenant that moves in. We do incredibly deep checking and actually that data is really valuable in our data system. We know an awful lot about every tenant, and we store that data securely, and that helps us from the portfolio and offer financial products to the owners and the tenants. If the owner wants to see that information, we certainly can send it to them, and it's available on PDF.
Deidre Woollard: In general, are they keeping track of their properties on your platform, and then they get periodic updates? Is that how that works?
David Friedman: Yes. Thinking about it like your statement from your wealth advisor, so you're going to get a statement that says, this is how much rent you received, these are your expenses, this is your net. It's basically a bank statement that you get, and there's some detail in there. If there was an incident, the property, let's say a broken door or something like that, you'd see that, you'd see when the incident was fixed and the costs. You've pretty detailed view of what's going on.
Deidre Woollard: When you started this company, obviously, you've raised money before you've gone through this, this isn't your first rodeo, what was that process like in terms of how you positioned this to people and how you got your first clients?
David Friedman: When we built bars in logic, we had a bunch of investors there, and they all saw really nice returns. Initially raising money for Knox, we went back to those folks who had success in the past. Two-thirds of the capital came from that group of folks. We then actually found some really awesome new investors that we hadn't worked with before. But they're incredibly value-add folks who were successful in their own right. That was the initial fund raising. It was the first time I'd raise money with basically just a PowerPoint presentation. We had no company, we had no revenue, we had Spencer and David, and a lot of energy. It was a new experience, that was interesting. Then we went out and raised our first venture round a little over a year ago, which was actually the first time I'd raised venture capital, I'd raised all sorts of other types of capital, but not from venture capital firms before. That was a huge learning process. We really lucked out. We're working with amazing venture funds now and very happy with what I learned. [laughs] It was a lot of work and it was a lot to learn, but it's valuable for the career on then.
Deidre Woollard: What do you think is happening with PropTech right now? I've been noticing, just we've seen a bunch of SPACs come out. There has been a bunch of IPOs. There's a lot of activity. It seems like second half of last year, things just went nuts. Are you seeing that, too, from your vantage point?
David Friedman: We're at the intersection of FinTech, InsureTech and PropTech, and in all those spaces, there's a lot going on. I think that FinTech and InsureTech are probably a little bit more hot right now, PropTech, it's been hot and so it's not as sexy these days. You're seeing seeing maturity in a lot of your PropTech companies with IPOs, and SPACs, and things like that. I think that the SPAC trend is super interesting. You're seeing companies go public earlier, which is good for venture fund actually, which is good for the venture ecosystem, which I like to see, which is good for founders, and shareholders, and startup. That's great. I think that the IPO process is or was ripe for disruption. When you see Airbnb going public and going up 80 percent on the first day, and how much money that means they left on the table, a lot of people are going to look at that, and furl their brow, who messed up here? Why did so much capital get left on the table? How do we get this better? SPACs are an interesting way to change that. If you can do it without the involvement of investment bank and all the unbelievable fees that they charge, that's really attractive.
Deidre Woollard: That makes sense. I want to circle back on what you said about InsureTech and being an insurance broker in all of the markets that you're in. Does that mean that you're not working with a separate insurance company on ensuring these properties or what does that look like?
David Friedman: We don't actually carry the risks. We do work with third-party insurance companies. What Knox has in our portfolio is a growing pool of non-correlated risk-bearing assets and that is insurance 101. That is something that the bigger it gets, the more efficiency we can find. We can save our customers a lot of money on insurance. When we take on a portfolio, we always find that either they're overpaying for insurance or they're drastically underinsured. It's very rare that it's been done bright, honestly. The other reality of how insurance works is we don't just insure properties, we have other risk products. For example, we recently rolled out something called Knox Rent Protection. For one percent of the value of the lease, we will backstop up to three months of missed rent payments. We're seeing really good sign-up rate on that with our customers because a lot of our customers are investing for reliable cash flow and what we can almost guarantee and I don't want the word guarantee, but all of those guarantee with that is that you're going to see 12-months of full rent received. Vacancies in our platform are really rare, and if there is one, it barely last more than a month or two. The fact that we're covering even that third month means you're virtually guarantees to get 12 months of rent for one percent the value of the lease, that's a no-brainer for a lot of our customers.
Deidre Woollard: Did this rent protection idea come out of the pandemic? Have you been impacted by non-payments or the eviction moratoriums?
David Friedman: We really haven't been impacted by that, but it's not what it came out of either. Most of the products we are thinking about launching that we haven't already are purely based on customer demand. Our customers say things like, what can you do about vacancy? What can you do about a tenant that moves out in the middle of the night or gets sick or loses their job? Our customers ask us these questions on a regular basis. The ones that we hear over and over and over again, we say we have a solid solution. We own a creative a solution for that. Knox Rent Protection is absolutely in response to questions we started getting from Day 1 before the pandemic was a thing. Before COVID-19 existed in anybody's brain, was what can you do about a tenant who doesn't perform on the lease? Knox Rent Protection is the answer.
Deidre Woollard: Was there anything else that happened during the pandemic that impacted you, difficulties with contractors or anything like that?
David Friedman: The biggest impact on notch and the pandemic was we had a plan, if you go back a year ago, to launch in a certain way into new cities. The very most fundamental piece of that launch was you take somebody who launched a city for you before, or worked in a city for you before and you put them on an airplane and you send them to the city you want to run because they know how the systems work and they know where the paperclips are, etc, etc. Say, hire people and train them on what you know how to do. Well, nobody wanted to get on an airplane. Still don't. Nobody gets on an airplane very often anymore. We had to change our playbook and we spent a lot of Q2 of 2020 focused on our products, our technology, and our systems, so that we could launch a market without ever setting foot there. We'd hire one person in that market, but everything else happened from HQ and I use HQ in air quotes because nobody shows up in our office these days. What actually came out of that product work was we need fewer people the day we launch a market on the ground. That's been a really interesting development because it changes how we can scale. It's a lot more efficient.
Deidre Woollard: Interesting, when you're launching a new market and you're marketing, where are you marketing? Is it to existing investor groups or is it to consumers in general? What does that process look like?
David Friedman: Our marketing does a double lift. We're doing two chores at once. One is introducing Knox as a company and the other is introducing the vertical. As we said, before there was Knox, investing in property came with a part-time job. Now, it doesn't. We need to educate the public in general saying, hey, when you move, there is another option now. It used to be you move, you buy, and you sell. Now there is, well, maybe I'll buy and hold. Maybe when I retire, I can keep my investment property portfolio. Maybe if my kids don't want it, I don't need to sell it and take the tax hit. There's a whole new set of thoughts. In order to introduce that to a market, we start with some mass media. We're on the radio, we do PR. We're really trying to get the message out that we now exist in that market. We call the people who have inquired already because people inquire all the time from places where we don't operate. We call them and say, "Hey, we're launching in Dallas. We can serve your property now." Then we do a lot of data work and we do a lot of very direct marketing digitally to people in those markets using the data model that we discussed earlier. We come up with an audience based on our data model and start marketing to those folks. Then hopefully, the goal is they see us from a lot of angles. They see us on digital media. They hear us on, say, the radio. They see us in the newspaper because we have a pretty good PR presence. They go, "Okay, this brand is now here and now it's a viable thing to do in Atlanta," or wherever.
Deidre Woollard: Is there any competitor in your space? Because I would say that the competitors are probably small-time real estate investors. But aside from that, are there other startups or competitors that are doing anything similar?
David Friedman: We say our top two competitors are number one, selling a home, and number two, DIY, do it yourself. A decent number of the people who inquire with Knox choose to sell anyway. Again, we're an alternative to selling a home. If you are moving or selling a property portfolio, if you're an investor, sometimes they just can't make the numbers work and sometimes they just go, "This whole thing is just too new. It's not for me." They sell. Then a huge percentage of the people we talk to are doing this themselves now. Or they might be doing part of it themselves, but let's say they work with a realtor to find a tenant every few years when they need one. They are doing the rest themselves, they are doing their own bookkeeping, and accounting, and maintenance, and figuring out their insurance, etc. But they might work with a couple of vendors here in there. They're not their own plumber. That kind of thing. Those are two main competitors. As far as other startups doing what we're doing, we'd actually really love to see some other financial firms focused on the real estate world pop-up. Not that we want competition, but we don't actually believe that competition is a bad thing. This is an enormous space and if Ford had been the only car company forever, we would not have three cars in every driveway in America.
Deidre Woollard: Good point. Your last role at Boston, you were very involved in the real estate agent world. Is there any crossover with what Knox does and the real estate agent world in general?
David Friedman: There is. There are real estate agents who work with investors, almost exclusively or for a big part of their business. What you find is a lot of your real estate investors get to a point where private investors, where they run out of bandwidth to deal with a portfolio. Knox makes owning investment property so easy that if you have a day job, if you are a teacher, a doctor, a reporter, whatever you happen to do, you're in marketing and you want to own investment property, you can do it and not have it impact your life as a professional, or for that matter, a parent and simply a child of other people. It gives you back to your life and allows you to expand the portfolio. Realtors can refer customers to us, we offer referral feedback to them, so they get compensated, and it allows their investor clients to grow their portfolios without taking on a burden on their life.
Deidre Woollard: Makes sense. I was just wondering since you mentioned that a lot of people decide to sell anyway if you had a referral system in place to refer them to real estate agents.
David Friedman: We do that. The other thing is, a lot of our clients are looking to expand their portfolios. What we refer out more than sell-side transactions is say, this client over here wants to add three properties to their portfolio, meet this real estate agent over here, he or she will help you find those properties. Or we might even refer them to a couple of realtors in a couple of different markets, so they can have a little bit of geographic diversity in the portfolio also.
Deidre Woollard: Interesting. How many of your current clients are multiple property owners?
David Friedman: I don't know of the top of my head, but it's at least a third, I would say. I don't think it's half, but it's probably somewhere in there.
Deidre Woollard: People are using this really to develop their portfolios and then expand and grow within the platform. Does that mean that they're investing in multiple markets?
David Friedman: Some are. I'd say what we see more often is people looking to expand their portfolio and their first thought is, I'm going to do it near where I live or in a market that I know. Very common in real estate acquisitions is, let's say they had a successful career in Silicon Valley. They had an option payout a year or two ago. They say, "Hey, I want to diversify into real estate." They grew up in Dallas or they grew up in Atlanta. They start New Hampshire, wherever. They start buying property elsewhere because they feel, "I could try to buy in the Bay Area, but everything is so expensive, I can buy maybe one property and the net cash flow is going to be mediocre, it doesn't feel as safe to me. I'm going to go by four properties in Atlanta, and they'll be profitable and they'll grow in value, and that makes some sense." You see these really interesting distance buyers building portfolios. They're not always really diversifying across markets. But that's something that we're bringing to them. A lot of them are thinking, "I'm going to buy in Atlanta." We say, "Have you thought about diversifying into Houston." They go, "I hadn't thought about that, but I guess if it's all with Knox, that makes it a lot easier." Again, we're educating them and opening up a new possibility.
Deidre Woollard: Obviously, last year was crazy for residential real estate. I think in just about all markets, we're watching the existing home prices go up and up. Is that something that you're thinking about? Are you thinking about when this crazy market ends, and what the next cycle is going to look like?
David Friedman: Interestingly, in late 2019, there was a bit of shakiness in the real estate market. I don't know if you remember.
Deidre Woollard: Yes.
David Friedman: Our phone started to ring and people right around October, they started to say, "Our property has been around the markets since May or June. It started out at $600,000, we've reduced it to $549,000 we're now halfway through the fall market, our realtor says we should reduce it to $509,000, we don't really want to do that." They're coming to realize that their property for whatever reason was a victim of a softer market at that moment and that's why they were calling Knox because they had a lot of confidence that someday it will be worth a lot more. They didn't want to do more price reductions. They didn't want to take 100 grand less than they originally had been told by their realtor it would sell for. There definitely might be some adjustment in the real estate market. We expect that from time-to-time, real estate markets don't just go up. [laughs] We all know that. In those scenarios, we think a lot of people will look at holding as a better alternative to selling. That would mean that Knox is in a really good position.
Deidre Woollard: In terms of the parameters of the types of properties that Knox brings on, do you have any highs and lows of what you will bring onto the platform?
David Friedman: We don't. Knox has a fundamental philosophy that everybody deserves a safe and comfortable place to live. We will not take on a property that's not well maintained. It doesn't have to look like the Taj Mahal, but it has to meet our safety standards. We do a health and safety inspection on every property. If there's an outlet cover missing and there is wires sticking out the wall, we require that repair. We do believe that there is a budget for almost every home so long as it's in decent shape and we have properties that go for $800 a month in our platform and we have properties that rent for $8,000 a month. Everybody should be able live in a property and be comfortable and live there with dignity.
Deidre Woollard: I love that. You've obviously raised some money, you're expanding into different markets. What other things are you looking at as the future of Knox?
David Friedman: We have had so many requests from customers to solve other problems in their financial sphere, in their risks sphere, and around their properties, and from tenants, for that matter. We're going to be rolling out other products. I'll give you an example. A lot of our clients, they have a reserve with us, but maybe their boiler dies. They thought they were going to get 25-years out of that boiler, but 19 years in, their boiler goes, and the cost is more than their reserve and that's a challenging hit on their cash flow. Who knew? We're going to probably offer the ability to finance that purchase through Knox. If we can help them flatten the ups and downs of their cash flow, capital purchases, that'll be something we roll out. There are tenants that are looking to finance their security deposits, we'll roll that out. We already offer renter's insurance, but renters are asking us, ''We love working with you guys, do you offer auto insurance? Do you offer all other financial products they need?'' We will be rolling out other financial and insurance of risk products as time goes on and we'll probably be offering some kind of a mortgage offering as well, what we call equity financing, whether it's mortgages or home equity loans or re-financings, we will likely be offering those as well.
Deidre Woollard: Interesting. Well, that brings me to my final question is, I've followed your career for a while, you're are a serial entrepreneur. Is Knox what's it for you, or are there other ideas you're interested in solving, and would you be solving them through Knox, or is there something else that you're thinking about?
David Friedman: If you put a bunch of smart people in a room and you look at our data model, you come up with 100 products we can build on the Knox platform. [laughs] We are not in a shortage of things that we can solve with Knox. That said, we try to stay focused and we don't run after every opportunity, we run after, say, one a quarter or one every six months or something like that. I do see opportunities in residential real estate every day and commercial real estate, retail. I think there's all sorts of opportunities in retail because retail showing through such amazing change right now. Retail spaces can be used in so many interesting ways they're not being. But I am intensely focused on what we're building at Knox because we know that real estate is the way people build the majority of their wealth and there's nobody helping them do that. There's fantastic people helping them buy and sell homes. There's fantastic people helping them build homes and add additions, but nobody is helping them with those homes as an investment, even though it's where they are actually investing. We think that opportunity is enormous. We're very focused on realizing that opportunity and making it a really long-lasting and reliable company.
Deidre Woollard: Are you ever interested in expanding into commercial? You mentioned retail, obviously, hotel is another area that is going through huge transition. We may see a lot of the conversions to multi-family and things like that. Right now, it sounds like you're mostly doing single-family. Are you also doing multi-family?
David Friedman: We're doing multi-family up to a point. A lot of the properties that come into the Knox platform are 2, 3, 4, 8, family properties. There comes a scale when our model doesn't make sense. If you have a 300 unit property, you probably have full-time people on site, makes a ton of sense, right? Somewhere our model doesn't make sense and that's fine, we don't try to compete on that level. As far as commercial property goes, say like office or the other pieces of the retail market, we're very focused on residential. We do have some commercial and retail in the portfolio because you'll have a multi-family building that maybe has a retail space or two on the ground level. That does come in, but we don't really focus on that. If it came to placing a tenant in that, we would outsource that.
Deidre Woollard: Well, this was fantastic. Thank you very much for your time.
David Friedman: This was great. Thank you. I enjoyed the conversation.
Deidre Woollard: Just a reminder to our listeners, you can find out more on Knoxfinancial.com. Stay well and stay invested. [MUSIC]
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