Risks to Small Investors

[James M.]

"If you build to rent, be aware that many hedge funds are buying rental properties and that the rental market has gotten to be very competitive." - Harry Dent, The Demographic Cliff, 2014, page 97.

One of the things that I have wondered about as a small investor is risk. I have three properties and am working my way to ten. I am considering risk factors to be aware of as an investor.

How do hedge funds hold the ability to affect a local rental market? What would happen in a down market? Thoughts?

[James M.]

@Hersh M.

I liked the book for the fact it was simple. One issue ties together all the others ... demographics, which should concern us as real estate investors as we need PEOPLE to buy or rent the homes we are providing. If we have mortgages out on rental properties (like me), we really need to be concerned about things like demographics as decreasing populations means lower rents.

That being said, the concern for Harry Dent and his bullish ilk are that the fears of deflation and a stock market crash is that it keeps people out of the market for many of the potential gains. As you saw in the original title of the books (it's been changed) that the great deflation was supposed to come between 2014-2019. I read his stuff every day and they always have a way to show why it didn't happen. I'm gathering that they have been saying the same things for the last few years and not a lot has happened since 2008. While demographics is important, economics are not simple.

Still, as for me, Dent's concerns line up with other real estate investor podcasts I've been listening to who advocate paying down the mortgages and owning the houses outright, rather than carrying many mortgages. When I started I thought I would aim for ten rentals, all with mortgages, and then start paying them down one by one. I am reconsidering that strategy for something smaller and more conservative.

All bubbles burst. It's just a matter of time. If Dent is right, we still have a few bubbles to burst. He says real estate is one of them. Small-time RE investors would do well to consider what a baby boomer sell-off will mean to their portfolio over the next 10-15 years, especially if you have a mortgage, and especially if your house is not nicely cashflowing. He is worth reading and considering for these things.

If you are interested in capitalizing on changing markets, he has a few subscription services that will help you invest and make money in a declining market. Then you can use those profits to buy more real estate. At least that is what I am doing.