Joshua Heier isn’t your typical homebuyer. Recently, rather than purchasing an entire property by himself, he has started buying fractions of single-family homes around the country, many of them in Sun Belt states.

“I think it’s kind of a stepping stone toward actually buying and owning a full rental property,” says Heier, a 30-year-old investor in California who is using Arrived Homes, one of a spate of new “fractional” real estate investment platforms. It allows him a peek at the ins and outs of what it might cost to be a landlord, or how long it takes to find a tenant in a certain neighborhood. And, he says, “It doesn’t require a $50,000 down payment.”

Heier has invested a pretty modest $2,900 through Arrived, and he says the company currently values his portfolio at around $3,300. The basic pitch of fractional real estate platforms is that in just a few clicks, you can buy a share of a home (or shares of many, many homes) and then kick back and relax as rental profits roll in. So much of what’s billed as passive income isn’t actually passive, but fractional real estate companies contend that property ownership can genuinely require no hustle. Arrived, for example, allows investors to start with just a $100 investment and manages the properties and deducts the fees out of rental income.

Part of the draw is that it takes so little to get started — not just in terms of money, but also the amount of time and research required before buying. “I usually look at the market and the dividends and not too much else beyond that,” says Heier. “I’ll look a little bit at the photos. A little bit about, you know, is it two-bedroom, three-bedroom, four-bedroom.”

Heier makes no secret of his bullish outlook on fractional real estate investing, believing in its power to democratize an asset class that retail traders — that is, individuals who aren’t investing professionally — have had limited access to. Fractional real estate investing platforms claim to remove barriers of entry in an investment space notoriously difficult for most people to jump into: Buying a home on your own requires a chunk of upfront money, it takes time to qualify for and close on a home, and first-time landlords can get bogged down by the additional costs and work required to manage a rental property. (In 2022, the average down payment on homes across the 50 largest metro areas in the US was $62,611 according to data from loan marketplace LendingTree.)

More than 40 percent of Arrived’s investors are renters themselves, according to Arrived Homes CEO and co-founder Ryan Frazier. “When you think about this next generation who might own one or two or three properties, they’re less interested in owning those properties in their hometown because they’re moving around a lot more and they don’t want to be tied down to those assets,” he told Vox.

Arrived is far from the only startup to offer fractional real estate investing; a raft of similar companies have popped up in the past few years, but Arrived has the most buzz, thanks to some high-profile backers: Jeff Bezos joined a $37 million seed round in June 2021 and a $25 million funding round in May 2022; Uber CEO Dara Khosrowshahi is an angel investor, as is Fred Tuomi, former CEO of Invitation Homes, one of the largest corporate landlords of single-family home rentals in the US. Zillow co-founder Spencer Rascoff and Salesforce CEO Marc Benioff also threw in contributions.

The recent growth spurt in fractional real estate investing, however, elicits broader societal worries. Fractional real estate investing platforms are an emblem of how the tech sector has transformed real estate in recent decades. It’s a trend driven in part by the sense that owning a home is out of reach for young Americans. At least investing in real estate, the thinking goes, provides a path to some of the wealth that homeownership has long represented.

But the treatment of housing as a commodity that generates profits rather than as shelter has affected not just rents but housing stability for the 44 million renter households in the US. The question now is what happens when everyday investors — with varying degrees of wealth, market knowledge, and experience — enter the fray.

Another real estate tech trend has moved in

Fractional investing isn’t a novel invention. Similar models of piecemeal investing across a broad array of real estate markets have existed for decades. Buying fractions of individual properties isn’t new either: Fundrise, which allows small investors to buy shares in bundles of commercial and residential real estate, was founded in 2010. More recently, Lofty AI, Landa, Here, Ark7, HappyNest, RealtyMogul, and DiversyFund all offer roughly the same idea, though they vary in the kinds of real estate offered (commercial, residential, vacation, or a mix), and some have even lower minimum investments than Arrived. Landa, for example, suggests that anyone can get into real estate investing for just $5. Lofty AI sells fractional “property tokens’’ purchased with the USD coin cryptocurrency, and users can get started with around $50. The company pays rental income to investors daily, and serves as a marketplace for home sellers, not just investors.

Nate Gipson is a 25-year-old program analyst for a dual-use tech accelerator in the Bay Area who discovered fractional real estate investing in mid-2021. “At the time, I was a college student who definitely did not have enough money to purchase, you know, a whole home,” he tells Vox. He started with Lofty AI, and got hooked and tried other platforms too.

One benefit of Lofty is that users can sell their property tokens if they decide they want out. Many other fractional real estate sites don’t yet have a secondary market to sell shares — investors would have to wait until the investment period for the property was over. He says he has invested about $75,000 in fractional real estate with about $10,000 in returns over the past 18 months.

Many companies like Lofty and Arrived echo the same selling point: Ordinary people have been locked out of the kind of reliable wealth creation gained from real estate as home prices rise. “I’m in the Bay Area, so homes are pretty expensive,” Gipson says. “I look at a home that’s $800,000 and I see that it sold five years ago for $450,000. There’s just no way for the average person to keep up with that. There’s just no way.”

“It’s so easy to just click a button on an app or website,” he continues. “And I’m not necessarily saying that’s a good thing — but there’s a desire for that.”

Gipson says he is using fractional real estate investing to save for a down payment on a single-family home in the Bay Area for him and his wife to live in. “My returns have been pretty darn good,” says Gipson. “Some of the properties I invested in turned out to be absolutely terrible. But I made money on others, so it is what it is.”

Typically, if someone wants to “invest” in real estate, they either buy a whole property and rent it out, or they invest in a REIT — a real estate investment trust — which spreads money across a range of real estate assets. Some fractional real estate companies are doing exactly this, allowing clients to choose a portfolio of properties. Other platforms, such as Arrived, allow retail investors to pick and choose individual properties they want a stake in. That allows more choice, a selling point the company leans on — but also, potentially, more risk. The ability to handpick individual houses to invest in allows retail investors, who by definition don’t have the same resources as professional investors, to potentially put all their eggs in the wrong baskets.

Unsurprisingly, there’s a price to pay for the convenience of having a company purchase, improve, list, and manage a property. Fractional real estate investing comes with a panoply of listing fees, management fees, and selling fees. The amounts differ by company and property type. On Arrived, vacation rentals have property management fees of up to 25 percent of all rents and fees made from the rental.

“The fees, I think, are not low,” says Heier. “I think there’s room for improvement there for sure.”

Are the high fees worth it? That depends on what returns look like. So far, Arrived has raised over $76 million to fund more than 200 properties. It paid out $1.2 million in dividends in Q4 of 2022. Annualized yields on the 192 properties last year ranged between 2 percent and 7.9 percent; in a breakdown of historical returns, for example, two of its Arkansas properties — both purchased almost two years ago — boast returns of more than 100 percent. But the vast majority delivered much more modest returns. Thirty-five of the properties have depreciated in value as of January 2023.

Investors are snapping up homes, with worrisome results

Real estate investing is experiencing an incredible boom: Investors made up 28 percent of all single-family home sales in the first quarter of 2022, according to a report from the Harvard Joint Center for Housing Studies; in some parts of the country, the share purchased by investors is even higher — they made up 41 percent of home sales in Atlanta in the first quarter of 2022. Between 2017 and 2019, the share nationally was about 16 percent. Single-family home rentals are in high demand, and rents for these rose faster than apartment rents between Q1 of 2021 and 2022.

That might be great for investors, but pernicious for the families who live in these homes. Investors getting in on the single-family home market aren’t the primary cause of high rents climbing even higher, but they do often worsen the experience of renting.

“What are the sorts of practices that they have to engage in in order to deliver these lucrative returns?” asked Nemoy Lewis, a professor at the Toronto Metropolitan University’s school of urban and regional planning. For real estate investment models to deliver decent returns, high rents and “lean” management practices were basically a given. “You have to have an expeditious eviction practice,” Lewis says, which means that investors are likely to buy up properties in jurisdictions that allow quick evictions.

In a city like Atlanta, for example, the growth of investor-owned single-family homes has led to extra fees, fewer or more delayed landlord services — with services becoming increasingly digitized or automated — and a marked increase in eviction filings. These filings aren’t just a way to kick out tenants, but a way to threaten them into paying fees that tenants are trying to dispute, reporting by the Atlanta Journal-Constitution revealed. There is no minimum grace period for late rent, and Atlanta landlords can file a dispossessory proceeding the day after rent is due and begin the eviction process.

One of the biggest institutional landlords in the nation, Progress Residential, has been accused of trying to rent out homes that are far from move-in ready, such as a home that had been ruined by an electrical fire, according to the AJC report. Local government agencies in Atlanta have tried to enforce criminal charges against investor landlords for failing to make their homes habitable, but the fact that these landlords are out of state makes enforcement difficult.

Renters are fed up with the quality of life in investor-owned rentals, says Katie Goldstein, director of housing and health care campaigns at the Center for Popular Democracy (CPD). “How do you make money in real estate?” Goldstein asked. “You often are trying to reduce the amount of services, or raise rents on tenants.”

In 2021, CPD launched Renters Rising, a campaign to organize a national tenants union to take on corporate landlords. “Something you see systematically is corporate landlords neglecting repairs on the property,” says Amee Chew, a senior research analyst at CPD. Tenants that Renters Rising are organizing with have cited problems with rodents, even walls coming apart from their floors, mold, and much more, while their distant landlords ignored them.

Across the nation, tenants have complained of rising rents, higher eviction rates, and concerns over properties falling into disrepair under big landlords. Last year, a Washington Post investigation found evidence that major corporate landlord Invitation Homes had frequently hired contractors who performed shoddy, unpermitted renovations. (A spokesperson for the company told the Post that it expected its third-party contractors to comply with “applicable laws and regulations, including permitting laws.”)

Mel Melcon/Los Angeles Times via Getty Images

Fractional real estate companies say they’re providing a much-needed opportunity for small, individual investors — the opposite of Wall Street. But the companies themselves are backed by venture capital. Hundreds of individual investors jointly own many properties across the nation, using third-party management companies to find and communicate with tenants.

More investors also means there are fewer homes available, especially for first-time homebuyers who are low- to middle-income. “They’re buying up huge swaths of neighborhoods and housing, many in historically Black and Latinx communities,” Goldstein says. Atlanta and Detroit have particularly high proportions of recent home purchases made by investors.

“If you have entities who are buying a lot of the properties that would have been available to first-time homebuyers from racialized communities or from economically disenfranchised households, it’s helping to exacerbate the wealth gap,” says Lewis.

So, do small investors benefit?

This is the age of the retail investor. During the pandemic, there was a sharp rise in the number of Americans investing, whether in crypto or the conventional stock market for the first time. And who can forget the incredible, baffling GameStop surge in 2021 driven by retail investors on Reddit?

But not everyone is excited by fractional real estate investing.

“As an industry, it makes no sense to me,” says L.D. Salmanson, CEO of real estate data analytics company Cherre. A fractional market works for commercial real estate, he says, because commercial real estate tends to be a lot more expensive, and so institutional investors who have a lot of capital and a sophisticated knowledge of specific housing markets might band together. But fractional ownership for retail traders is “just a fancy way of saying, ‘Give me money, I’ll get fees, but I’m not promising anything.’”

“If I’m even a mediocre investor, I’d still go to a REIT.” REITs can give investors more exposure to real estate, with more diversification — an investor would be less likely to put their eggs in one housing market basket. “At that same level of risk, I could have gotten a higher return,” says Salmanson. “Or I could have gotten the same return at a lower risk.”

Right now, mortgage interest rates are high, and institutional real estate investors are slowing down amid recession fears. The return on investment is lower now, to the point where some institutional investors are getting out, according to Ted Tozer, a non-resident fellow at the Urban Institute’s Housing Finance Policy Center. “It’s always an interesting situation when the institutional guys back off and you start having retail [investors] come in,” Tozer says. That in itself can be a warning sign that the rental market is hitting a cap. If capital starts being raised from individuals instead of institutional investors, that means retail investors are actually buying out the positions of the more sophisticated institutional investors.

“I think we have a really credulous society,” Salmanson says. “We love taking risks. We love being part of the American dream of ownership of property.”

Even Heier advised less experienced investors not to go too deep on fractional real estate investing. He’s an accredited investor, an SEC designation that requires either some kind of professional expertise or a net worth of more than $1 million or an annual income of at least $200,000. “If you have $5,000 in the stock market, and that’s your total investments, then I don’t really think you should be jumping off into all of these other platforms,” he says. “I think you probably want to build a strong base of assets in the traditional markets first.” Heier has been building his investment portfolio since 2014 and also runs Asset Scholar, a website providing information on alternative investing options.

Dustin Chambers/Bloomberg via Getty Images

Frazier pushed back on the notion that retail investors were in danger. “I think you could argue really the same thing 20 years ago with the stock market — should retail investors have access to buy individual companies, did they have enough information to buy those companies? I think, in general, we’re just kind of going through that same phase in the real estate cycle.” He added that Arrived was run by an experienced institutional real estate team. “Our investments team comes from some of the largest single-family REITs in the country,” he says.

Tech’s role in transforming the housing market

Investors are wont to say that the boom in real estate investing is merely a reflection of what happens when there’s high demand and historically low housing supply — prices go up, and savvy investors can make a pretty profit. But focusing only on supply ignores how specific tech-fueled innovations in real estate have led to crowding out people looking for a home to purchase and live in, or have made it less pleasant to live in their home.

While real estate investors are still a minority of homeowners, they hold a disproportionate amount of power in the housing market — and as Desiree Fields, professor of geography and global metropolitan studies at UC Berkeley, wrote in a paper published earlier this year, big investors wouldn’t have gained so much market share in the aftermath of the 2008 subprime mortgage crisis if it weren’t for “innovations like cloud and mobile computing, digital platform architectures and business models, and massive data sets and the algorithms that sort them.” Fields concludes that the growth of “click-to-invest” real estate platforms is more likely to lead to further consolidation of corporate power in housing than to democratize it.

It’s also true that real estate tech platforms have contributed to the constrained housing supply. Take the now-ubiquitous model of online vacation rentals, for example. “Some owners might choose not to rent out their particular property because they know they can make a lot more money off Airbnb, on a monthly basis, as opposed to collecting monthly rent,” says Lewis, the urban planning professor. Such a low-vacancy housing market also allows landlords to become more selective and potentially discriminatory.

Fractional real estate investing — or any kind of real estate investing — isn’t the progenitor of unaffordable housing nor the primary driver of it. But each new trend and paradigm selling a way for investors to profit from the tight housing market reinforces the financialization of housing that has swept the economy over the last few decades. The advent of digital platforms and automated systems has only accelerated the commodification of housing as a high-yield asset class.

The truth is that there’s something off about the oft-touted narrative that homeownership is the pillar of the middle class, the way for families to gain and hold onto some financial security. For one, it simply hasn’t been true for all Americans. It has historically been a wealth-building tool for white people. Not only did discriminatory policies like redlining exclude Black Americans from getting mortgages, the benefits of the 1944 GI Bill, which included free education and affordable mortgages for veterans and were key to building middle-class prosperity in post-war America, were mostly unavailable to Black veterans.

Even today, Black homeownership trails that of white Americans. Does that mean the way forward is to give up on owning a home to live in, and jumping in instead as an eager investor angling for a piece of the real estate pie? Even if these new investing platforms are for average-Joe investors, are they a solution or just worsening the problem of unreachable homeownership, leaving only crumbs for those looking for a home to actually live in?

“The farce of the American dream is homeownership,” says Gipson, the Bay Area fractional investor. “It’s what we’ve all been sold on since we were born, or since we moved here to the United States.” He sees fractional real estate investing as a stopgap, not a solution.

“If someone is able to invest $10, $50, even $1,000 into a home and reap the benefits, rather than it only being accessible to people willing and able to invest $50,000 or $100,000 — I see it as better,” he says. “It sucks either way, but I may as well make a few bucks off of it.”