The phrase “passive income” is thrown around to describe how people can make money by owning rental properties. It’s a dream of many Americans, but the process of becoming a landlord can be intimidating and complex. And those who are already landlords can get overwhelmed by the headache that is managing their properties.
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One startup out of Boston, Knox Financial, is out to help people manage and identify residential rentals with its algorithm-based platform, and it’s raised a $3 million seed round to help it advance on that goal. Greycroft led the round, which also included participation from Pillar VC out of Boston.
The investment brings Knox’s total raised since its inception in 2018 to $4.4 million. The company closed on a $1.4 million pre-seed round in January 2019, mostly from angel investors.
Founder and CEO David Friedman is no stranger to startups. He founded Boston Logic–an integrated marketing platform and online marketing services for real estate offices and agents–in 2004. He sold that company (now under the name Propertybase) to Providence Equity for an undisclosed amount in 2016.
Knox says it offers homeowners who are ready to move “a completely hands-off way” of converting a home they’re moving out of into an investment property. It also claims to help landlords more easily and efficiently manage their rentals.
The company has built a service that automates many aspects of generating passive income through rental properties. It also has developed a rental pricing and projection model for calculating the investment rate of return a property will produce over time.
“When homeowners are ready to move they traditionally sell their home, and lots of them look back at properties they used to own and realize that they’re now worth multiples more,” Friedman said.
How it works
A homeowner who is ready to move, or a landlord who already owns rentals, can put their property into the Knox program. Knox then works to turn those properties into “hands-off” investments. Via automation, the Knox platform manages all aspects of the process including financing, accounting, tax, legal, insurance, property maintenance, tenant sourcing and communication.
The company says its model understands the value, mortgage data, taxes, insurance costs, and rental market trends related to each home. As such, Knox is able to “quickly and accurately calculate the cost to operate a home as an investment property.” It’s also able to predict the net cash flow and investment rate of return a property will produce over time.
Knox does not charge brokerage fees or management fees. Rather, “the owners simply receive a check for the net profit each quarter.” Knox keeps 10 percent of the rent it collects on behalf of homeowners every month.
The company first launched a pilot in Boston in March 2019. So far, its models and algorithms have helped people manage 75 units (defined as an “address,” such as a single-family home or one of three apartments in a three-apartment building). The company reached $100,000 in recurring revenue in August and is up to $200,000 today, according to Friedman.
Its three main buckets of customers include young people looking to move into bigger homes, older people looking to downsize and private landlords who want to get better returns on their investments.
For Greycroft Principal Will Szczerbiak, the technology Knox developed “allows the company to quickly analyze whether a single-family home, condo, or multi-family is a good investment, aligned with the owner’s financial goals.”
The six-person company plans to use its new capital to expand into new markets this year. While Friedman said those markets have not yet been “fully decided” on, the company is looking to expand into markets (one at a time) with unit economics that are relatively similar to that of Boston’s. Potential markets include Washington, D.C., Denver, all the major cities in Texas, Chicago and Nashville.
“We’re on a mission to change how homeowners build wealth,” Friedman told me. Still, he emphasized that Knox is a fintech startup, and not a real estate tech one.
“We’ve created a financial product that helps people better manage residential properties and get increased cash flow and higher rates of return,” Friedman said. “We’re like a financial adviser, but for residential properties.”
Illustration: Dom Guzman