Your Next Landlord Could Be 100 Random People
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business
Mar 2023
The three-bedroom, two-bath, split-level house in Fayetteville, Arkansas, looks like a perfect family home. It's got a charming brick exterior, a lush, green front lawn, and a fenced-in backyard perfect for hosting cookouts. It's on a quiet street with two schools and a Boys and Girls Club nearby. But this perfect family home has an unusual owner--or owners.
The property, which these days is known as the Soapstone, is "owned," in a roundabout way, by 102 investors who have collectively purchased just over $100,000 in shares through a company called Arrived Homes. The property is managed and rented out for $1,600 a month, a bit below the city's average rent of $1,795. Investors, who can buy in for as little as $100, get a cut of the profits.
And it's not just the Soapstone. Arrived, alongside a handful of other so-called fractional investment startups, are adding yet more noise to an already-crowded real estate market. Investors can buy into hundreds of similar properties on the company's website, where each listing has an Airbnb-style profile that breaks down the neighborhood, costs, number of bedrooms and bathrooms--and return on investment.
In addition to Arrived, there's Lofty AI, which uses a token model for people to buy in and lets them collect rent later that same day. Another company, reAlpha, sells shares in homes that serve as Airbnbs--including a treehouse resort in the works. Landa lets people invest in shares valued as low as $5 in houses around Atlanta or $20 in Brooklyn apartment buildings. Daniella Lang, a product marketer at the firm, says investors "see this as an American dream opportunity" that lets them build wealth in real estate. Anyone can click a button to invest--but that doesn't really make them homeowners.
Fractional investment startups claim that they lower the barrier to investing in property--and make it as easy as booking an Airbnb. At Arrived, 40 percent of investors are renters themselves, according to Ryan Frazier, the company's CEO. The idea is that people locked out from the housing market can profit without taking on mortgage debt. But they also add small investors to the real estate feeding frenzy at a time when housing shortages continue to push up prices, leaving many Americans stuck in expensive rental properties.
"Maybe some people will benefit from it, maybe they will make money," says Amee Chew, a senior research analyst at the Center for Popular Democracy, a progressive advocacy group. But, Chew adds, more real estate investments may come "at the cost of housing stability" and risk worsening a system where for-profit investors can "wreak havoc on low-income residents."
Right now, fractional investing startups represent a tiny niche in the real estate market, but the idea is "growing faster than it's ever grown," says Casey Berman, managing partner at venture capital firm Camber Creek, which has invested in Fundrise, another real estate investing company that allows people to buy in for as little as $10.
The concept first appeared a decade ago with a Fundrise. The firm made it easier for people to invest in real estate portfolios with less money, says founder and CEO Ben Miller. Today, Fundrise has more than 387,000 active investors and a real estate portfolio worth $7 billion that includes apartments, industrial properties, and single-family rentals. Newer fractional startups play off that small investing concept, but let investors pick specific, individual properties that are more often single-family homes. And that's a hit, too: Arrived has listed new homes on its website and watched their shares sell out in less than a day.
As more players join the real estate investment frenzy, technology is playing an increasingly important role. Big investors thrive on tech that sources the best properties and streamlines investing, making it harder for human buyers to compete. Algorithms search for the best properties for investors to buy--although recent rapid changes in the real estate market left even companies like Zillow and Opendoor struggling. There's also tech to help automate rent collection and lease signing, putting distance between landlords from tenants. Sites like Airbnb and Vrbo carve things up further, and help real estate investors profit from lucrative short-term rentals.
But tech advances across the real estate industry are harming renters, too. The explosion of short-term rentals has priced out local residents in some cities. Automated background checks have become common, though they often reject prospective tenants based on incorrect reports. Landlords can automate eviction filings, creating higher turnover and maximizing profits.
The fractional model plays into concerns about larger investments in real estate that show "housing really is being used for profit and an investment tool" first, says Katie Goldstein, the director of housing and healthcare campaigns at the Center for Popular Democracy. That's because, like institutional investors, they're backed by venture capital, utilize tech to scoop up properties, and keep a distance between renters and landlords through management companies.
Several have drawn dollars from big capital. In 2021, Goldman Sachs gave $300 million in credit for Fundrise to build new homes that would become rentals. In 2022, venture firm Forerunner Ventures led a $25 million Series A investment in Arrived. Other investors in the company include Amazon founder Jeff Bezos and Uber CEO Dara Khosrowshahi. Landa has raised more than $90 million in equity and debt in three funding rounds led by venture firms 83North, NFX, and Viola Ventures, according to Crunchbase.
But rather than exacerbating existing problems in the real estate market, these companies argue that they are opening up investing to more people. Frazier says Arrived gives regular people access to home equity sooner in life by lowering barriers. But the hunger for the model reflects a shift in priorities, Frazier says, as younger people are "looking for more flexibility" and want to be "less tied down by debt [and] less tied down by assets."
Harsh economic conditions have demanded younger people adjust. The average age of first-time home buyers in the US has risen to 36, according to the National Association of Realtors. People are marrying later, are more likely to have student loan payments, and have more stagnant wages. All the while, property prices are rising. In Phoenix, Arizona, the median home price in 2004 was $174,815. In 2023, it's $450,000. Average salaries from 2004 to 2021 increased 70 percent, lagging behind explosive housing prices.
That's part of what drew Emanette Peniche to the Soapstone. Peniche, who lives and rents her home in Los Angeles--1,500 miles from the little brick house in Fayetteville--says she regrets not investing more when she first started, and now has a handful of properties in her Arrived portfolio. "I was just immediately captured by the accessibility to investing in real estate," says Peniche, a 33-year-old who works in product marketing at Meta. She was so drawn to the model, in fact, that she gave marketing expertise as an unpaid advisor to Arrived in 2021.
The Soapstone is similar to other investment properties advertised by Arrived, like the Sheezy in Chattanooga, Tennessee, or the Mimosa in Tuscaloosa, Alabama. The first homes to be advertised on the platform likely won't be sold for two to three years, giving them time to appreciate, says Frazier, Arrived's CEO. Then investors can cash out.
The average investor spends around $3,500 on five or six properties, Frazier says. But investments can top $25,000 and include accredited investors, says Bret Neuman, head of brand and content at Arrived. Still, most people invest less than $1,000. And, according to Arrived, it delivered $1.2 million in dividends for investors in 2022. Its portfolio of properties appreciated a total of $1.4 million over the same year, the company says.
Other fractional ownership startups take different approaches to the same idea. reAlpha, the vacation-rental company, sells shares in investment properties to be used as Airbnbs. The company says it uses AI to analyze properties and predict their viability as vacation rentals. Then it buys, renovates, and manages the properties. Y Combinator-backed Lofty AI lets people buy tokens for $50 in homes. People can then use their tokens to vote on management decisions about their properties, like how repairs should be done and whether a tenant should be evicted.
Landa is selling shares in at least a dozen townhouses in Douglasville, Georgia, a city just west of Atlanta, and more homes in Atlanta and its other suburbs. It's a region that has seen an influx of investors, thanks in part to controversial legislation that favors landlords--including a law that bans rent control. But major investor activity in Atlanta dwarfs this space of listings--four big real estate investors in the area own an estimated 27,000 properties.
The affinity for Sunbelt and Mountain states that stretch across the southern US should come as no surprise--fractional investment startups are simply following trends set by other real estate investors. That's largely been the case since the Great Recession, which began in 2007, reshaped the real estate market in the US. Large investors, backed by venture capital and bolstered by new proptech, swooped in and bought not just apartment buildings, but single-family homes in historically more affordable suburbs, like those around Atlanta, Charlotte, North Carolina, and Phoenix.
The move may have helped some areas recover financially more quickly, according to research from the US Federal Reserve. But it brought big investors to the single-family home market for the first time. Their presence has nudged home prices up, and they're also more likely to buy in neighborhoods where Black people live, as opposed to predominantly white areas. And in the rush to profit, foreign investors have become more common in single-family homes in the US, too.
But big and fractional investors aren't the only competitors for home buyers. The real giants of American real estate? Your mom and dad. Smaller investors, or mom-and-pop landlords, own 70 percent of rental properties in the US and the majority of all rental properties with four units or fewer, according to the latest US Census data. Institutional investors own a small share of single-family homes, but their presence is growing.
And if the fractional trend continues, it could shake up the market, particularly affecting the dominance of mom-and-pop landlords. "The barriers to entry [in real estate investing] have really come down," says Jay Parsons, chief economist at RealPage, a property management software company. "There are a lot of different players in the single-family rental market."
Those players now include people like Peniche. She doesn't hold the deed to the Soapstone or field complaints from its tenants, but her investment is making money. Even if she could afford to buy the whole property, she might not want to do so. Peniche says high mortgage rates and rising home prices have made her rethink whether she wants to own her own home at all. And she's happy with the returns she's seeing from her more passive investments. "I'm not sure [home ownership] is a goal of mine anymore--at least for the foreseeable future."
