Losing Capital vs. Losing Control: The Real Risk in Real Estate Investing

Introduction

Most investors fear losing money. Fewer realize the greater danger: losing control. In real estate, timing the market rarely determines long-term outcomes - rather structure does. When you give up control through bad terms, excessive leverage, or illiquid vehicles, you set the stage for permanent loss even in a good market. True risk isn’t just volatility; it’s being unable to act when conditions change.

What "Control" Really Means

Control is the ability to steer key decisions - i.e., ownership rights, debt terms, and exit flexibility. A minority LP without governance protections has little say if a partner decides to refinance or sell. Over-leverage shifts control to lenders; one covenant breach and the bank decides your fate. Debt amplifies gains and losses, but it also dictates who’s really in charge when things get tough.

Liquidity is another form of control. Public equities can be sold in seconds; private property can’t. Lock-ups or suspended redemptions can trap investors for years. Even at the asset level, concentration risk erodes control - one mis-managed property or single-tenant dependency can derail returns. Studies like Sagi, Berkeley Haas from 2017 show real-estate returns carry large idiosyncratic risk and “non-normal” volatility. Each property behaves like its own micro-economy (i.e., local laws, tenants, lenders) meaning structure and management matter far more than macro timing.

Structural Landmines: When Deals Fail Without a Crash

Plenty of investors have lost money in strong markets due to poor structure. For example: very aggressive acquisition debt, a weak partner, or a rigid financing structure can turn a modest downturn into a disastrous outcome. While we referred to the Stuyvesant Town / Peter Cooper Village deal earlier (2006-onwards) as a case where structure collapsed the investment, broad industry data shows this isn’t an anomaly: many direct real-estate owners were forced into distressed sales when refinancing dried up after 2008.

In the U.S., more than $1 trillion of commercial real-estate debt came due during 2008-09, and for many investors the trigger wasn’t just falling values - it was inflexible debt, poor rights, and lack of exit options. Hence the maxim: not all losses are due to “the market went down”; many derive from lack of structural resilience.

Cyclical vs. Structural Risk

Understanding the difference is critical. Cyclical risk is what most think of - recessions, rate hikes, demand drops. Real estate is indeed cyclical: institutional data show multiple down-turns in the last 20 years.

Structural risk, however, arises from the asset or deal itself (or from durable forces): demographic decline, regulatory shifts (e.g., zoning or rent control), or an asset type becoming obsolete (e.g., certain older office buildings). A recent study of OECD housing markets, Structural and Cyclical Risks in Housing Markets in OECD Countries (Just & Salzberger, 2024), highlights that structural vulnerabilities require different remedies than cyclical ones.

In plain terms: a cyclical dip is scary but usually recoverable; a structural flaw or loss of control can lock in a permanent loss.

How to Keep Control

How can you, as an investor, preserve control and defuse structural risks before they blow up? It starts with structuring your deals defensively from day one. Here are some best practices used by experienced real estate investors and institutions:

• Partner Alignment: Work only with experienced, trustworthy operators who have real skin in the game. Ensure incentives are performance-based - partners should profit after investors do, not regardless of outcome. A strong operator can navigate downturns; a misaligned one can ruin a great asset.

• Governance Rights: Hard-wire control into the deal from day one. Negotiate veto power over major actions (sales, refinancings, capital calls) and include clear exit provisions. If you’re providing capital, insist on oversight or a board seat. It’s far easier to secure control up front than to regain it later (Financier Worldwide).

• Disciplined Underwriting: Don’t overpay. As Morgan Stanley notes, a low cost basis is a structural hedge - it gives you room to lease at lower rents or reinvest through a downturn. Buying right provides flexibility and options when markets tighten.

• Conservative Leverage: Use debt as a tool, not a crutch. Favor moderate loan-to-value ratios, long-term fixed rates, and manageable covenants. Excessive leverage hands control to the lender - keep it modest so you decide when to refinance or sell.

• Liquidity Planning: Real estate is illiquid; act accordingly. Maintain cash reserves and build backup exits (refinance options, partner buyouts, rights of first refusal). Avoid investing capital you might need soon - Bricksave calls liquidity risk “the most underestimated danger in property investing” (Bricksave).

• Diversification: Spread exposure across regions and property types with durable demand drivers. Workforce and affordable housing, for example, remain structurally resilient because supply shortages persist through cycles. Diversification ensures no single structural risk can upend your entire portfolio.

The Barbell Mindset

For high earners, after tax results often matter more than headline returns. Depreciation and cost segregation can offset much or all of operating cash flow in early years. In 2025, bonus depreciation remains available at a reduced rate, which still allows a substantial portion of qualified costs to be expensed in year one. The effect is powerful. A six percent cash yield can show little to no current taxable income, while unused passive losses carry forward to offset future gains.

At Ocean Ridge, we follow a “barbell” approach: most capital in control-oriented, low-risk assets (properties we own outright or with strong terms) producing steady income. With that solid base in place, we allocate a smaller portion of capital to higher-risk ventures (development projects, value-add deals) that carry more structural uncertainty.

Cycles will come and go. Prices will rise and fall. But investors who control their capital structure, partners, and timing rarely face permanent loss. In real estate, value recovers - control doesn’t.
So focus less on trying to predict exactly when the next bounce will happen, and more on ensuring you can act when it comes.

At the end of the day, real-estate wealth is built not just by riding market waves, but by avoiding the wipe-outs. Loss of value can be temporary; loss of control can be terminal. In a world of uncertainty, control is king - and fortunately, that’s one risk factor you can manage.