JF1931: How You Can Rent Your House With No Headaches, Just Checks with Dave Friedman

December 16, 2019 | Joe Fairless | 00:25:40

JF1931: How You Can Rent Your House With No Headaches, Just Checks with Dave Friedman

Dave recently launched a new business venture in which he helps people rent their homes, hassle free. They help homeowners from A to Z with every aspect of turning your home into an investment property. Once they have placed a renter, they continue to do everything for the owner, and send them checks from their investment. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“People are worried less about square footage, and more about how many people they can squeeze in a space” – Dave Friedman

 

Dave Friedman Real Estate Background:

  • Founded Boston Logic (now Propertybase) in 2004, grew it into one of the largest software providers to real estate brokers, and sold it in 2016
  • recently co-founded Knox Financial, which offers a frictionless way to turn a home into an investment property.
  • They raised $1.4M, launched a pilot in Boston, and began accepting units onto the platform
  • Based in Boston, MA
  • Say hi to him at https://knoxfinancial.com/
  • Best Ever Book: Hillbilly Elegy

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Dave Friedman. How are you doing, Dave?

Dave Friedman: Awesome, thanks for having me.

Joe Fairless: Well, I’m glad to hear that, and it’s my pleasure. A little bit about Dave – he founded Boston Logic, now called Propertybase. In 2004 grew it to the largest software provider to real estate brokers, and sold it three years ago, in 2016. Recently co-founded Knox Financial, which offers a frictionless way to turn a home into an investment property. They raised 1.4 million, launched a pilot in Boston, and began accepting units onto the platform. Based in Boston, Massachusetts. This is gonna be a fun conversation… With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Friedman: Sure, happy to do it. I’ve been in the real estate tech world pretty much my entire career. As you noted, I founded a company called Boston Logic. We make software for real estate brokerages and the agents that work there; the people who help you buy, sell and rent a home – they are the users of the software. It’s actually pretty likely that most of your listeners have interacted with our software, and they didn’t know they were doing so, because it’s white label software.

I built that company over about a 12-year span, and sold it to a 50 billion dollar private equity firm, who said “Hey, this is a great company, but you guys need more stuff, so we’re gonna start buying other companies.” I still sit on the board of that company, it’s a lot of fun… And now that company owns half  a dozen software products and has clients in 60 countries, and offices all over the world. So that’s a fun ride… After that, I took a little time off, had a son…

Joe Fairless: Congratulations!

Dave Friedman: Thank you, sir. There’s another one on the way…

Joe Fairless: Congratulations!

Dave Friedman: Thank you! Last year, along with a friend and former colleague Spencer Taylor, I launched Knox Financial, which is my current day job, we might say. At Knox we make it incredibly easy to turn a home you own into an income property. If you already own an income property, we make owning that property as simple as owning a share of Apple or Microsoft. So  you put your home in the program,  you step away, we take care of everything else. We send you a check and a statement every quarter, we send you a 1099 for your taxes at end of the year, and other than  that you should have to do almost nothing.

Joe Fairless: Really? Okay… So I’ve got a house that I live in, I want to move to another house, but I hear about this and I’m like “You know what, I’m not gonna sell my current house, I’m just gonna sign up for Knox Financial.” You said just now that I put my home in your program, and then I step away, you make magic happen, and then I get money – what, every quarter, every month… And then I get some tax document at the end of the year. Is that accurate?

Dave Friedman: That’s pretty accurate. Let’s get into a little more of how that happens. You’re living there today, it’s time to move, and you say “You know what, this home – it’s been going up in value the entire time I’m here. This neighborhood is highly desirable, and that’s never gonna change. Why would I sell this fantastic investment?” It’s a common thought. Millions and millions of people have this thought every year. And we say “You’re right. Don’t sell it. Sign up with us.”

The first thing, you might need to do a refinancing of the home in order to afford your next home, for the down payment. Well, we have a financing arm. Next thing  – you’re gonna need a different insurance policy, because a homeowner’s policy is different than the policy you need for a renter. Well, we’re an insurance brokerage as well. Then you’re gonna need to find a renter, there’s gonna be maintenance needs, someone needs to pick up the phone on Saturday night at 11 PM, when there’s a leaky sink; we’ve got that function as well. If you need legal, and leasing, and background checking – we do all that.

So we find a renter, we put them in the home, we manage all the move-in/move-out, keys – you name it, we’ve taken care of it. We also do all the accounting and bookkeeping. So we collect the rent, we pay all the expenses on your behalf, we actually manage a bank account for you as a homeowner, and at the end of the quarter, every 90 days – again, just like a share of Microsoft or Apple that might pay a dividend, we send you the net profit on your home… And at the end of the year, because every single expense is run through us, we can send you a 1099 and it makes filing your taxes incredibly easy.

Joe Fairless: Huh. Alright… What are your fees?

Dave Friedman: We work different than the ways other people work. Other folks who might hire a property manager for somewhere between 4% and 8%, or higher… A realtor will charge you a month’s rent, so they get paid for more turnover. We never thought that made sense to us. You need to have a bookkeeper and an accountant, all that stuff. We charge 10 cents on every dollar we collect. So I don’t charge to put a renter in, I don’t charge for professional photography… We do professional real estate photography in every single unit in order to get better rent. We don’t charge rent collection fees, we don’t do any of that. All we do is 10% of the revenue that you see is paid to Knox.

Joe Fairless: Okay, so your fee is 10% on the collected income.

Dave Friedman: That’s right.

Joe Fairless: Okay. So when I refinance with you, when I get a new insurance policy, there are no fees to do the refinance?

Dave Friedman: No, the nice thing for a homeowner is that we do make money doing that, but it’s not you who pays, it’s the market. So banks pay for us to find the borrower. The bank pays us, or the insurance carrier pays us. Let’s say we go out to the market of insurance providers and Schwab is the insurer that comes back with the best deal for you – Schwab actually pays any insurance broker, for you bring them that policy. So we make money not from you, but from the market.

Joe Fairless: So on the refinance there are no fees to your customer; they are paid by the lender to you all. So the customer does not have to pay any fees.

Dave Friedman: The customers do not pay a fee to us. The lending market is its own beast, so there are times as markets go up and down that there may be fees for the loan. These days you’re very unlikely to pay fees. Certain borrowers might pay PMI, or something like that… But again, that’s a bank, and Fannie/Freddie thing, not something we really control.

Joe Fairless: Got it. So how many customers do you have on this platform?

Dave Friedman: We launched less than 90 days ago and we’ve got ten units on the platform so far.

Joe Fairless: Nice. Congratulations on the launch. You have a lot of things going on, personal and professional. You launched 90 days ago, and ten units are on…

Dave Friedman: I should say less than 80 days ago, but it’s coming up on 90 days.

Joe Fairless: Coming up on 90 days, ten units are on… Is that your friend, your best friend and some close relative of yours ten units?

Dave Friedman: No, it’s none of that, actually.

Joe Fairless: They’re  your enemies.

Dave Friedman: Yeah, exactly. At the heart of what we do – we’re a data and automation company, actually… So what we’ve done is we’ve looked at hundreds and hundreds of thousands of homes, because — I should say, we’re only focused right now in the Greater Boston Area. We actually run larger-scale models, but when we run the model in Boston, we looked at a few hundred thousand homes, and used the data  – we’ve identified the actual homes that we want in our program. Because we know which homes should be good rental investments and which should be cashflow-positive, or at least break even.

Based on that, we also look at the dataset and say “Okay, who is likely to move soon?” And those are the folks that we are targeting. We’re planning to scale a very large company here. Yes, we have ten units now, but we’re brand new, right?

Joe Fairless: Of course.

Dave Friedman: So we plan to soon have 10 units a month and then units a week entering the program. Then we’ll go into other markets; we’ll go from Boston to, say, Atlanta, and San Diego, and Chicago, and so on and so forth. And in order to do that, when we go into a market we need to do so in a scalable way, and it’s not only gonna be our friends and family; it needs to be that we can run a marketing campaign, describe the value we deliver, and have folks say “Yeah, Knox is a great investment. I’m gonna jump in that program.” So we’re launching that and figuring out how to do that in Boston first.

Joe Fairless: What do you need to accomplish in order to then move into another market?

Dave Friedman: That’s a great question. It actually comes down to a couple of things. First of all, we need to be able to acquire customers at a certain rate, for a certain customer acquisition cost. This is sort of business growth 101 if you’ve scaled a business in the past. So what does it cost me to acquire a customer? What do I see in revenue for that customer? …and therefore, is that a scalable revenue model?

One of the funniest things – it’s been in the news lately; I go a little bit off-topic here… It was in Lyft’s S-1, when they went public, they said “We’re not profitable. We may never be profitable”, and Uber said “We’re gonna need driverless cars in order to become profitable.” I thought that was amazing… Like, “How are you not making money every time I get into an Uber or get into a Lyft?” I just couldn’t believe that.

Joe Fairless: Details… No one needs a profit. It’s just speculation. That’s the foundation of our economy. [laughter]

Dave Friedman: Yeah, exactly. So we do not exist in that reality.  I don’t know how to get over there in that reality. We live in the real world, so we need to prove that in this market we can run units in a profitable, scalable way, and ideally in a very profitable way… And that’s where the automation parts of our business really shine.

Again, if we can acquire customers for a reasonable amount of money… If I have to market and spend $10,000 in ads buy to acquire a customer, I’m never gonna make any money. So we need to get some brand recognition out there, we need people to tell their friends and be happy about the service that we’re delivering, and so far all of our clients are very happy.

Then, say [unintelligible [00:10:38].23] we’ve got a few hundred units here in Boston, we’re growing. Let’s go do that in another city, and then two more, and then ten more.

Joe Fairless: Help us understand a little bit about how you’re making money with that 10%. I imagine it’s because of the infrastructure you set up, one and done, and maintain and enhance while you go… But the bulk of the work is upfront with your software, and then you rock and roll. But please, will you elaborate?

Dave Friedman: Sure. For starters, we have made certain things that are best practice standard in our product. For example, every single lease we sign – it includes a direct debit form for the tenant. We automatically collect rent. We will not be chasing rent checks. That automatically deposits that rent into an account; again, separate for every units, we don’t co-mingle funds. And then we automatically pay all the expenses on the unit. So we’ve created this automated financial management system so that the money flow is taken care of.

These accounts are also where maintenance costs come out of. So we have not built a construction company or a maintenance company; we have a license deal — that’s the wrong term… We have a contract with large maintenance providers at a rate that’s far below what a homeowner could get on their own. So we don’t include the maintenance cost in that 10%. If you’ve got a home that’s in good repair, you’re not gonna have a lot of maintenance costs. If you don’t, it might not make a good rental, and we’ll tell you that, we’ll be honest with you about it. But in that 10% we’re doing the financial management, not the actual work of nuts and bolts and hammers and screws on the home.

In addition, we are all about keeping tenants happy. Anybody who’s been a landlord knows the turnover will kill you, because a) you have the cost of turnover, and b) you have the risk of vacancy. That is something we work very hard to eliminate. We are treating tenants in a very different way.

I’ll give you an example… When you move into a Knox property, we send you a toolkit. It’s a gift. It’s got our logo on it. But we say to you “Hey, someday you probably wanna be a homeowner.” If you call us and say the garbage disposal is broken, we say “Hey, there’s this number 3 Allen wrench; go under your sink and just wiggle this. Put the Allen wrench in there and wiggle it. It’ll be fixed.” Tenants love that. So we’re treating tenants in a different way, and hopefully they’ll stick around longer.

Joe Fairless: Oh, alright… I thought you were going a different direction. You’re actually saying “Here’s  a wrench, go fix it yourself”, in a nicer way. What else is in the toolkit?

Dave Friedman: Oh, jeez. It’s like a 50-piece toolkit.

Joe Fairless: Name three or four others, please.

Dave Friedman: There’s a screwdriver, and then…

Joe Fairless: Oh, so they’re actually tools. [laughs]

Dave Friedman: Yeah, it’s a toolkit. [unintelligible [00:13:17].20] “You have to do your own maintenance.” If they say “No, I don’t wanna touch that thing”, we’ll send someone there.

Joe Fairless: You’re strongly implying it. [laughs]

Dave Friedman: To some ext– but this is one of the many ways we’re treating tenants differently. Also, for example, we require renters’ insurance on every single unit, on every single tenant. And we can offer that. We don’t make much money on renters’ insurance. It’s like $15/month. Most of that money goes to the insurer. But we’re treating tenants differently, and we’re actually treating homeowners differently.

When they jump in the program, they go “Oh, you guys are doing all of that?” Professional photography, and all these other things that we do that — yeah, there’s probably some property managers on the phone going “Oh, we do professional photography”, but they’re the really rare ones. So we’re really sort of packaging an awful lot of best in practice, and then we’re doing the bookkeeping and the accounting, and then we’re making sure they’re paying less in insurance and less on maintenance. When you add it all up, it’s a win/win.

Joe Fairless: Yeah, it’s a whole lot of stuff that you’re doing, as any landlord knows… I imagine there has to be a certain price point of rent that you look for in order to have the home participate in your program, for it to make sense for you… So what is that price point, if there is one?

Dave Friedman: That’s a great question. We have not figured that out yet… And for that matter, we don’t know if or when we might come into such a situation. The fact is we launched in a top five market… So I’d say the lowest value of any home we’ve brought into our program is over $400,000, and the average home in America is worth $230,000. So we’re almost double the average American home, just by being where we are.

There will come a day when we will launch in some great cities that just have a lower average home value. We’ll go into Houston some day, third-largest MSA in the country, but the average home value is like a third of the Boston area, and we’ll figure out how to operate there.

Joe Fairless: And I’m just curious, why are you talking about home values when you’re compensated on the collected income? In my mind, I would be thinking about the rental income. So out of the ten homes, the lowest amount or rental income we’re getting is $3,000, so we’re still getting that spread of $300.

Dave Friedman: That’s a good point. There are obviously — or maybe I shouldn’t use the word “obviously.” Home value and rent are proportional. They’re not necessarily linearly related, but if you take a look at the ratio – and [unintelligible [00:15:39].05] large data model, so let me paint this picture for you…

Joe Fairless: Yeah. Please.

Dave Friedman: If you look at the ratio of home value to 12 months of rental income opportunity, of a home or of an entire market… Let’s say you take all the two-bedroom homes in Houston and compare them to the two-bedroom homes in Boston; you take the average value of a home in Boston, the average value of a home in Houston, you take the average rental projected for that two-bedroom in Houston and Boston, and you get a percentage. That percentage rate in Boston is about 6%. That percentage rate in Houston is about 12%. So your rental potential to value ratio is actually much better in Houston, which is really interesting. That said, what insurance costs in Texas is very different. Insurance is more expensive.

So you can develop these models to be pretty darn intelligent, understanding where you’re gonna be breakeven or cashflow-positive, and what kind of profitability you can see on the units… But it is somewhat indexed to value.

Joe Fairless: As an entrepreneur, this is number two for you, right? Three — what was the other one?

Dave Friedman: I started  a small real estate investment partnership a long, long time ago. We bought some assets and then we liquidated them. It’s mostly like you buy it, you let it sit, and then you liquidate… But that was a long time ago.

Joe Fairless: How long ago?

Dave Friedman: We sold out in maybe ’05 or ’06… So that was the end of the [unintelligible [00:17:00].09]. It was like an ’03 to ’05 or ’06 story. It was pretty quick, because back then we could do that kind of thing. You could buy, the value would go up 10%-15% a year, and you could be out. We returned 56% per year cash-on-cash to people before tax… The financing terms you could get back then – that’s all evaporated now.

Joe Fairless: It would have been an interesting story if you had waited till ’09 to sell. [laughs]

Dave Friedman: Right. You know what’s funny – I’m trying to remember the exact… For the Boston market we were at the cusp. Things were leveling off and you just knew give it another 6-12 months they were gonna come down. It was already getting harder to get financing when we sold. We could not have recreated day one of that deal on day final, but we were able to still sell.

Joe Fairless: Yeah. Thank goodness. Alright, so this is round three for you on ventures… What in your approach have you honed, knowing that this is round three, that wasn’t as honed in round one and round two?… which sounds like they were a tremendous success, round one and round two, but you learned some stuff too along the way, and you get better as you go, regardless of the outcomes.

Dave Friedman: The number of things that you learn along the way are actually critical, and we should have done a few years ago… And then this time we’re putting  in place [unintelligible [00:18:12].15] is enormous. Putting in the right marketing software, putting in the right CRM, putting in the right accounting software, mechanizing any part of the business process you can to make it simpler and more repeatable and accurate – all that.

Joe Fairless: What CRM do you recommend?

Dave Friedman: Salesforce, all day long.

Joe Fairless: How come?

Dave Friedman: Well, with Salesforce if you’re a relatively technical person — I don’t mean like you have to be a coder; I’m not personally a coder, by the way. But if you have an attitude of like “Hey, I’ll get into something and I’ll figure it out. Enough clicking and button-pressing, I’ll figure just about anything out”, and if you’re an entrepreneur, you’re probably that type of person, you can get so much done with Salesforce. That’s bullet one.

Bullet two, it’ll scale with you to whatever size you wanna be. And third, it connects to everything. We’ve got Salesforce connected to Hubspot, which is our marketing automation system, it’s connected to DocuSign, which is how we do all of our contracts electronically… DocuSign saved my butt more times than I can tell, or just saved me thousands of hours of my life.

Joe Fairless: Yes… I use AdobeSign, but… Either one.

Dave Friedman: Yeah, sure. One of the cool things here is that DocuSign will actually take information out of Salesforce and fill in the fields for you if you do the integration correctly.

Joe Fairless: Wonderful.

Dave Friedman: So it accelerates that. We’re connecting – we haven’t done it yet – DocuSign to NetSuite, which is owner by Oracle; great accounting package and GL package. You need to have a third-party middleware company to connect them, but we’re doing that… So Salesforce becomes the hub for your data, it’s not just a CRM. That’s why I think it’s really great.

If I was more strapped for cash than I am, I might be using the out-of-the-box CRM in HubSpot, because I use HubSpot anyway and it comes with it… There’s a lot of decent CRMs out there. Even NetSuite comes with a CRM, so technically we have access to three of them, which is ridiculous.

Joe Fairless: That’s good. I’m glad you talked about that; I’m just interested in hearing your perspective. Alright, what’s your best real estate investing advice ever, based on your eclectic experience as a real estate entrepreneur?

Dave Friedman: Yeah, it’s funny, I just contributed to an article for Forbes. They asked a similar question… Their question was “How do you maximize value in a home?”, so this is sort of a top-of-mind answer… If you look at a property and there’s a way to add bedrooms, do it. This could be like you’ve got a house you’re buying and you’re gonna rent it out. I once turned a two-bed into a four-bed when I bought it. I’m actually in the process of turning a one-bed into a two-bed that I’ve just bought recently… And it’s usually not that much money to  put up a wall and a closet. You could do it on a  weekend if you’re handy. You could do it for a couple grand if you hire a contractor, or a few grand… Maybe you need to put another light switch or something, so maybe it’s five grand if you want it really crazy…

Joe Fairless: You need the egress and ingress too, but yeah…

Dave Friedman: And the rent you’ll get is just dramatically greater. And if you’re looking at a large multifamily, look at every unit and go “Okay, what’s my total number of bedrooms here?” Can I squeeze 10%, 20%, 50% more bedrooms out of this property? And suddenly, you’re renting better. In today’s market people are worried – in rentals anyway – less about square footage total, they’re worried more about “How many people can I squeeze into this house?” And that’ll get you better returns.

Joe Fairless: The thing I enjoy about this conversation is you’re coming at this from an investing standpoint, but then also from a data standpoint, right? So I imagine you’ve taken a look at the data, and that’s what it’s also showing you…?

Dave Friedman: Oh, yeah. Let me give you an example. One of my favorite places to look at data is short-term rentals, actually. One of my rental properties is only short-term rentals – Airbnb and VRBO. If you happen to own one – or even if you don’t – search in your neighborhood for one-bedroom rentals on those platforms, and then go and  search for five, or six, or seven-bedroom rentals. You’ll find there’s dramatically more competition when there’s fewer bedrooms. Again, you pay the same amount for the house, it’s got the same amount of square footage, it costs the same amount to heat, the bills are the same, you’ve still gotta plow the driveway, that costs the same… All your costs are the same, but one more bedroom? Revenue goes up.

So the minute you buy it, invest in putting in that extra bedroom for the lifetime that you own it, and you’re making more money.

Joe Fairless: That’s something to think about for every landlord. Thank you for that tip, and again, I really like it because it’s coming from your analysis of data, in addition to your first-hand experience. Alright, we’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Dave Friedman: Let’s do it!

Joe Fairless: Alright, first a quick word from our Best Ever partners.

Break: [00:22:38].12] to [00:23:19].06]

Joe Fairless: Okay, best ever book you’ve recently read?

Dave Friedman: Best ever book I’ve recently read… I’ve recently read an amazing book, Hillbilly Elegy. What’s amazing about that book to me is it’s an economic look at what happens to the Midwest – I don’t even know if Midwest is right; sort of like the Tennessee Valley and the Ozarks, that whole area – basically in the last century. And what it’s meant for the economic outcomes for several generations of people, and how they migrated for work and how populations have shifted, what that’s meant for housing… There’s a bunch of real estate meta. What it meant for the author, because it’s a memoir… So it’s an awesome book. It’s not a lot about real estate investing, honestly, but it is an amazing book.

I think the best book on technology that I’ve read in the last five years is The Innovators by Walter Isaacson. It’s a 200-hundred-year history of the computer and electronics industry starting in 1800. Isaacson is the guy who wrote the Jobs biography, the Einstein biography, the Franklin biography, and they’re amazing.

Joe Fairless: What’s the best ever way you like to give back to the community?

Dave Friedman: I was the president of my neighborhood association for a while, and I’ve found that incredibly rewarding, because it wasn’t just the community at large, it was literally my neighbors within a few blocks radius. It was great to be volunteering and helping out, but it was also great to build those relationships.

Joe Fairless: How can the best ever listeners learn more about what you’ve got going on?

Dave Friedman: Check us out at KnoxFinancial.com.

Joe Fairless: And we will include that in the show notes. Dave, I enjoyed our conversation, learning about Knox Financial, learning about your business model, how you arrived at that, thought process, what the value exchange is, talking a little bit about the services within it, and then also taking a step back – mindset, as well as the ventures that you had prior to this and how that’s led to some certain enhancements in how you approached your next venture.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Dave Friedman: Thanks, I really enjoyed it.

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