Although real estate is the world’s biggest asset class, it is largely inaccessible to non-institutional investors. The large sums of capital often required for an individual to purchase property combined with the industry’s reliance on manual, antiquated processes pose substantial barriers to entry for individual investors looking to gain exposure to real estate.
These challenges are further compounded for those who aren’t accredited investors and therefore shut out of most private real estate investment opportunities. (Under U.S. Securities and Exchange Commission rules, accredited investors must have a net worth of $1 million or individual income over $200,000 per year.)
“Real estate ownership is the biggest source of wealth generation, and it’s out of reach for most Americans. As housing inequality grows, wealth inequality grows and property ownership remains inaccessible,” Landa co-founder and CEO Yishai Cohen told TechCrunch in August.
In the U.S., the homeownership rate has been steadily declining as prospective buyers grapple with low supply, weakening purchasing power and record-high costs. If current housing policies remain unchanged, communities of color in particular will face yet another setback in their ability to build generational wealth, research from the Urban Institute shows.
While many of the barriers to homeownership stem from policy decisions, startups like Landa are working to help people access real estate wealth through a different means — investing. Investing in shares of property is obviously not a perfect substitute for buying it, but it can be a more accessible entry point into the real estate market.
It’s worth noting that REITs (real estate investment trusts) exist to solve similar issues of access. REITs are publicly traded vehicles that allow individuals to invest in portfolios of properties, but they are limited in their scope by highly specific regulations and can differ in their return profile from private real estate, meaning there is still plenty of white space for tech startups to build new solutions.
The need to broaden access to real estate has, in part, driven a funding boom for tech in the sector. Real estate-related venture capital funding hit a record in 2021, with over $5 billion in capital deployed across 219 deals, according to PitchBook data. Over the last six months, TechCrunch covered fresh venture funding rounds from at least four different startups that are using technology to bring real estate investing to non-accredited investors.
Landa, which raised $25 million for its Series A earlier this year, saw its user base grow to over 25,000 people in 2021, up from 600 last year, Cohen said. He noted that the startup spent most of 2021 navigating regulatory processes rather than focusing on acquiring users.
The company allows users to invest in residential properties through its platform with as little as $5. It is able to provide access to real estate without requiring much initial capital because it purchases properties through an LLC and then sells fractional shares in those properties to its customers.
Much like with other pricey alternative assets such as artwork and luxury goods, fractionalization has been a key driver in broadening access to real estate investment. Startups like Arrived and Fintor use a similar model to Landa’s to enable even non-accredited investors to access the asset class.
Both companies also raised funding this year, signaling that some VCs are bullish on the long-term resilience of demand for real estate from retail investors, despite short-term macroeconomic headwinds such as rising interest rates. Arrived nabbed $25 million for its Series A led by Forerunner Ventures and Jeff Bezos’ personal investment company, while Fintor recently earned an $80 million valuation from its seed investors, who put a collective $9 million into the startup.
The possibility of a recession could even serve to strengthen investor demand by presenting a lucrative opportunity for them to scoop up cheap shares in properties today that will likely appreciate in the long run.
These startups seem to be more focused on onboarding long-term investors into the asset class than they are on profiting from the fickle whims of frequent traders. A lack of demand from investors isn’t the issue, Fintor founder and CEO Farshad Yousefi told TechCrunch. For Fintor’s largely Gen Z and millennial audience, the problem is a lack of real estate literacy, Yousefi said.
“Individuals have no idea [how to start investing in real estate]. If you’re 22 years old in college, and someone mentioned real estate to you, the first thing that would come to your mind is this 80-year-old person investing in real estate with $500,000,” Yousefi said.
The nascence of the market and the widespread need for education about the asset class are two reasons why Yousefi said he isn’t concerned about having competitors in the real estate investing space — in his view, the stock and crypto markets are Fintor’s real challengers.
Dallas-based fintech Nada is taking things one step further. The company is betting that homeownership will continue to decline even as individual interest in real estate investment surges.
Like Landa, Arrived and Fintor, Nada is currently focused on residential properties (though there are similar platforms like Fundrise and Cadre out there that are more heavily indexed toward commercial real estate). Nada offers index-like real estate investment products called “Cityfunds” that allow anyone to buy into a city’s home equity market with a minimum of just $250 — a cheaper, more diversified way to bet on the growth of a particular regional market compared to purchasing property there.
In addition to more “Cityfunds,” the company also plans to launch a real-estate-backed debit card that would allow homeowners to spend their home equity on everyday costs, its CEO and co-founder, John Green, told TechCrunch in July. To that end, Nada raised $8.1 million from investors in a seed round earlier this year.
“We are not looking to build products that are just transactional. We want to build this relational partnership with a homeowner/consumer in real estate as an asset,” Green said at the time.
If these startups are able to weather short-term pain in the real estate market, they just might be able to unlock this sleeping giant of an industry for thousands of individual investors.