WSJ Says a Housing Bust is Coming For Small-Time Investors—Here’s Why They Might Be Right | BiggerPockets Blog

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several days ago Wall Street Journal He published an article about Applesway Investment Group (owned by real estate tycoon Jay Jagaveli), which has lost more than 3,000 apartments in four rental complexes that have closed.

What triggered the biggest boom in the commercial real estate sector since the 2008 financial crisis? In short, Gajavelli held variable rate loans as payments inflated. Inflation drove up expenses, but rental income couldn’t make up the difference. Thus, the bills became delinquent, which eventually led to foreclosures on this property. Thousands of individual investors looking to generate passive income (without being an owner) are now left empty-handed.

Should individual investors worry about a potential housing depression?

Between 2020 and 2022, distributors have raised a staggering $115 billion. In addition, there were more than 300,000 investors who participated in syndicated loans in 2021, according to Financial Samurai.

As much as I’d like to believe this is a one-time scenario, I’m inclined that this could have a ripple effect that could affect the industry.

Assuming that other major syndicates carry floating rate loans (without an interest rate cap), they will feel the financial pressure to increase payments. This is due to the Fed aggressively raise interest rates For the tenth consecutive time since March 2022. Distributors likely won’t be able to escape renewal at higher rates in the near future.

Aside from that, there are a variety of factors where things can go downhill. For example, poor property management, understated operating expenses, and lack of rental income to keep it afloat may weaken the business model. It wouldn’t be as devastating as the housing market crash of 2008, but I wouldn’t be surprised if we saw a handful of unionists rise this year.

What should be done to protect small investors?

Personally, I believe all of this could have been prevented had the government – both at the state and federal levels – taken on more responsibility to protect individual investors.

I will give Congress the benefit of the doubt that they have good intentions to pass Jobs law in 2012, allowing aggregators to advertise real estate investment opportunities online. This made it easier for American families to invest. On the surface, this seemed like a great idea. In fact, the cracks in the system led to this devastating outcome.

It is a complex problem that will not be solved overnight. However, there must be accountability for all stakeholders involved. For example, I believe that aggregators should take responsibility by being transparent to their investors about their financial performance. Regular reporting to all investors would go a long way in building trust between the two parties.

Moreover, there should be more legal protections offered to retail investors. If I were in their shoes, I’d want to know how my investment was doing and not be surprised until it was too late.

Also, shouldn’t subscribers have a say in the game? If they ask investors to pay large sums of money, shouldn’t they do the same?

These victims are hardworking citizens trying to realize their “American Dream”. Right now thousands of lives (maybe more) are in shambles because of this flawed system. It’s a tough lesson for those small investors who have to rebuild their financial nest.

How can you protect yourself as an individual investor?

If you want to become a passive investor with a AssociationHere are some ways to be proactive and protect yourself.

1. Connect with other investors To find a reputable real estate distributor who can demonstrate they have a proven track record of success. the BiggerPockets Forum Great place to start.
2. Company search and examination to make sure they are trustworthy.
3. Understand your risk tolerance Before handing over large sums of money. With real estate, there are always risks involved.
4. Don’t put all your eggs in one basket—or you might be the one left holding the bag.
5. If it sounds too good to be true, it probably is. Don’t give in to FOMO. The company should not over-promise or guarantee unrealistic returns in a short time frame.

Hopefully, with these tips in mind, you can make informed decisions about the real estate investments that are right for you. Again, we cannot predict what the repercussions of this event will be. can be isolated. But I am in favor that if foreclosure can happen to one of the undertakers (and unless others are more diligent), we may see more on the horizon.

Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.