Are said investors not themselves speculators who would be underwater post bubble pop?
If you have a high confidence that "the correction isn't going to be quick, nor is it going to be soon", then sure, it makes sense to lever up and take on more debt - IFF you're similarly confident that you can get out before prices drop!
Re: your situation - I wouldn't call it stupid, but you do now have a ~50% larger share of your assets in your home, and so you're now that much more subject to future shifts in home prices in your area.
Not really? A lot of the institutional money sloshing around is being invested as a de-risked hedge against more volatile returns. They don't really care if the market goes down temporarily, because their other options would have gone down even more. Additionally, there's a significant chunk of money that's being laundered through these home sales, so they don't really care if they lose 20%. They care that they can now show a source for the capital when they want to funnel it into other investments that have AML requirements. Home owners who are underwater have a disincentive to sell, but functionally unless their income is tied to their home valuation, they can just ride out the downturn, like most people do with their other equity holdings. It only sucks if you're forced to sell.
That said, for the actual small to mid sized speculator, the 'being underwater' fears only hurt if you commence your leveraging the year before the bubble pops. You can just sell some of your portfolio to cover the loss and still end up ahead.
The comparison is between owning 20% of 10 properties vs. 85% of 1. Even if your portfolio takes a haircut, the total volume of equity you build dramatically outstrips the more conservative approach.
When prices go bust, you take your hit on your portfolio, but even then you probably made a ton of money in the process even if you lose some equity at the end.
It's a little different for a homeowner since you need a home to live in (if you don't want to sell does it matter if your home drops in value?). However, it will still suck if the housing market bubble pops and that $1.8M house you bought is now worth $1M, but you still have a $1.2M mortgage to pay.
Close, but it's even easier on that. You don't need to sell to extract value from the currently financed properties. Selling incurs transaction fees. You don't want that!
Instead, you just use repaid principal/appreciation to lower the cumulative LTV against the entire portfolio of properties. This means if the market in your area is going up 10% yoy and your down payment is 20% to avoid insurance fees, you basically get .5 house downpayments per year off appreciation, before rent.
Do that for a few years, and suddenly you own a lot of property.