Is Commercial Real Estate Investing Risky? Yes It Is! But It’s Not What You Think


Greetings from the metropolis of Cedar Crest, NM.! I just got back from taking my youth group to The Red Letter Rock Fest in Snyder, TX. A whole lot of driving, a whole lot of rockin’ and a whole lot of wind. Nothing stops the wind in West Texas. Never the less…..the kids had a blast and I lost my hearing. Wow….I am still recovering from the trip. Two hour naps in the middle of the day are part of my rehab….and possibly a part of my every day routine from now on.


Like most real estate investors, I began with “no money down” residential deals. After a year or so of investing in houses, a few commercial investment opportunities came up and I made the jump. Although I still have several residential investment properties, commercial real estate is my preference.

There are several reasons why I like to invest in commercial real estate but the risk level is not one of them. There is a lot of risk involved in commercial real estate investing that goes beyond the asset and how the markets are doing. The “real” risk in commercial real estate investing is the fact that a large commercial deal will entail a lot of money and a lot of people. Money and people can be a lethal mix in any business transaction…especially large commercial transactions.

Before you run to the hills, understand that risk is just part of doing business and not a good reason not to invest in commercial real estate. The pros definitely out weight the cons (my opinion of course).

The bad news is there is no way to get around the risks when it comes to mixing money and people but the good news is there are actions you can take to minimize them.

So….what can you do to minimize the risks (mixing money and people)?

  1. R.E.S.P.E.C.T.

    Before you do anything….have a healthy respect for your deal. Respect for your investment with regards to risk will drive you to take the precautions necessary to protect yourself and your investors (if you are recruiting investors).

  2. Pay for good Advisors

    Your advisors are an important part of your team. DO NOT BE CHEAP! Good advisors (real estate attorney, asset protection attorney, CPA, mortgage broker, real estate agent/broker, insurance broker, property manager, mentor, etc.) are worth their weight in gold. Be willing to pay for it. Don’t cut commissions, don’t use prepaid legal, and don’t take short cuts when it comes to your advisors. Don’t ask your uncle Vincent because he had a year of law school.

  3. Accept the advice from your advisors

    Okay….I know what you are thinking….but many people will listen and ignore their advisor’s advice. If you are going to pay your attorney $400 an hour….make sure you use the advice you are given. If you do not agree, get a second opinion but never ignore professional advice. Sure…question the advice and seek alternatives but ignoring advice will hurt you.

  4. Partnerships

    I can go on and on about partnerships. I have had horrible partnerships as well as great ones. The problem is that horrible partnerships linger like garlic. Partnerships are like parenthood. It is easy to be a parent but difficult to be a good one. Time and time again, I have counseled many of my students on partnerships. The key thing I have learned is to prepare for the worst by having an operating agreement in place (done by an attorney). If things fall apart, your operating agreement will help soften the breakup. If your operating agreement is not done well, it could get ugly.

Obviously the list is much longer but I think you get the point. Being prepared for the worst will allow you to expect the best from your investment. Once you protect yourself on the “mixing people and money” side of the transaction, you can focus on the risks associated with the property. Market conditions, due diligence, real estate cycles, and all the other fun stuff.

Until next time……rob

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  1. Dike Drummond on

    You call them Advisors above and I refer to them as my Investing Team. One thing I have learned – and we teach – is that Commercial Property Investing is most definitely a team sport. What is really cool is that you can find highly qualified and experienced professionals in all aspects of a Commercial Property Transaction
    Real Estate Broker
    Mortgage Broker
    Property Manager
    Commercial Property Attorney
    Commercial Insurance Agent
    and more.

    Combined, these people might have over 100 years of niche specific, market specific knowledge you can tap into. So I most strongly agreed. Find them, interview them, check their reference and bring them on board. Then you Lead the Team … don’t try and do all the work.

    Here is how I view your “Respect the Deal” with a mathematical observation.
    CAP Rate cuts both ways.
    When you increase the Net Operating Income(NOI) … the CAP Rate is the multiplier that shows you the increase in Market Value. AND it cuts both ways.

    If you don’t do a good job and your NOI drops, the CAP Rate is a multiplier that shows you how much value you just lost. It cuts both ways and magnifies the changes in NOI in both directions. When you win, you win big. When you lose you lose big. The key is to set yourself up to win … every time.

    So a healthy respect for the deal and careful research to take the risk of underperformance off the table is key.

    My 2 cents,


  2. As a beginner I think we must learn from the experts. That’s way I agree with you that advisor and partnership are the ways to minimize risk. Listen to advisor and learn from senior businessman’s experience.

  3. Louis & Joel Kestenbaum/Fortis Property Group Behind $880M Sale in Boston

    Fortis Property Group is leading the “Northeast-based private real estate investment group” that has agreed to acquire the 1 million-square-foot State Street Financial Center at 1 Lincoln Street in Boston for more than $880 million, or $880 per square foot, according to sources familiar with the sale.

    The Brooklyn, NY-based Fortis and a group of other New York investors are expected to close on the 36-story office tower from a joint venture led by American Financial Realty Trust (NYSE:AFR) and an affiliate of IPC US Income REIT by the end of this year or early 2007.

    Fortis apparently set its sights on Boston following several high-profile Dallas deals where it agreed to pay about $280 million for the three-building, 1.4 million-square-foot office complex known as Galleria Office Towers in Dallas.

    Earlier in the year, Fortis teamed with Trimarchi Management, also from New York, on the nearly $100 million acquisition of two other Dallas office properties, Harwood Center and Saint Paul Place. It also invested in the $282.5 million purchase of JPMorgan International Plaza in Dallas.

    The addition of State Street Financial Center will build out Fortis’ portfolio considerably. The privately held firm headed by CEO Jonathan Landau is controlled by the Kestenbaum family. Joel Kestenbaum is the son of Louis Kestenbaum. Fortis manages some 3 million square feet in commercial properties and about 454 residential units.

    The group of investors joining Fortis in the Boston deal could not be learned. American Financial announced the pending sale last week, but did not identify the buyer.

    American Financial, a Jenkintown, PA, REIT decided to formally shop the 36-story tower in the last couple of months. The company is pruning its portfolio and repositioning itself. The REIT paid $705.4 million or $688.84 per square foot in February 2004 to acquire the property. Later that year, it sold a 30% stake to an affiliate of Canadian REIT IPC US Real Estate Investment Trust, for $60.3 million.

    The building is fully leased with triple A credit tenant State Street Corp. occupying most of the building under a lease that runs until 2023. State Street also leases the property’s 900-space garage on a 20-year triple-net lease.

  4. A Sordid Lawsuit Shakes the Satmar Chasidic world .

    Brooklyn N.Y. Lezer ( Louis ) Kestenbaum chairman of the ODA in Williamsburg Brooklyn NY resigned from the ODA soon after settling a lawsuit filed in May in U.S. District Court for the District of Florida for an undisclosed sum alleging he had a sexual relationship with a minor, Joel Kestnbaum the son of Louis kestenbaum will become chairman of the ODA.

  5. I’m glad you brought up the point about not being stingy when you hire someone to help you with your real estate purchases. I bought a condo several years back and decided to go with the ‘less expensive’ attorney, boy that was a mistake.

  6. I personally believe that investing in people is the most important aspect of successfully closed deals. Investing in commercial real estate is like investing in a giant machine full of human recourses. If one mechanism stops working, the whole machine will break down very soon. Don’t be cheap! If you invest in every single mechanism, the whole machine will run smoothly forever.

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