Many people look to investments as a way to cement their financial stability in the future. When investors begin to look for ways to utilize their money to do this, they often are guided by professionals to choose these investments through two factors – yields and liquidity.
Of the two factors, liquidity is probably the most important factor when looking at real estate. You can choose to do the research on your own to figure out whether a piece of real estate is a liquid investment. Or you can always reach out and utilize expert knowledge from places like Capitalist Exploits.
If you’re someone who likes to do their research, then just keep reading. We’re going to discuss this question that everyone always asks: “is real estate a liquid investment?” So without further ado, let’s take a look at the answer to this question (and more important information you need to consider).
Real Estate Liquidity: What Is It?
As we said above, liquidity when it comes to real estate may be the most important investment factor to look at. This is because this factor determines how quickly these assets can be sold and if that property will end up being sold for above or below the market value.
No matter what type of assets you are looking to purchase, there is a level of liquidity. For many years many felt that real estate was an illiquid asset. But there is some liquidity; it just happens to be less than other options when it comes to investment.
Like any other type of investment, real estate can be diverse and actually has a lot of strategies when it comes to investment. So depending on the strategy an investor chooses to purchase real estate and the type of real estate chosen, the liquidity risk is variable.
What Types of Real Estate Is Liquid?
The biggest factor when it comes to a piece of property’s liquidity is the type of property itself. When you’re looking at the types of property, residential property will always have a better liquidity than commercial property for several different reasons. The first is that residential property requires less paperwork and fewer fees to complete the transaction.
On top of that, most residential property is protected against fluctuations in the market. Simply put, someone always needs someplace to live. When it comes to property types, you’re also looking at the size of the property and the expense. A larger and more expensive property will be less liquid than a smaller piece of property. But there are other real estate liquidity factors to consider as well.
Real Estate Liquidity Factors
There are, of course, many different factors other than the type of real estate and the options chosen to purchase the asset. Here are the four main factors to consider that will affect a piece of property’s liquidity level.
- Location – Factors like closeness to transportation and other essential requirements can affect the liquidity of a piece of real estate. On top of this, issues like crime rate and reputation as well as green spaces play a role.
- Market – Is there excess demand? Things like good market capacity and activity, as well as affordability and stable value, play a part in whether a piece of property is a liquid investment or not.
- Property – Has there been any renovation or recent construction on a property? Do the design and location offer things like high ceilings or a good view? These are all things that can affect the property as well as the liquidity.
- Other – Things like how many buyers are on the market and transaction expenses can affect liquidity. Time of sale and the quickness of the due diligence also play a part.
Strategies To Lower the Risk
With an understanding of some of the factors that play a role in the liquidity level of a piece of real estate, we can now take a look at the strategies you can utilize to lower that risk. So here are a few of those strategies that we think you might be able to utilize when investing in real estate.
Stepping away from residential real estate, commercial properties have the potential of being flipped. That means that you will be investing in a building or space that needs to be renovated, or you can sell it. This option offers moderate liquidity, and the only risk is that perhaps the buyers might not like the renovations you have completed.
This strategy allows you to have a steady stream of cash flow coming in, which will mitigate the money you expended during the initial purchasing process. The only problem with this buy-and-lease rental property model is that you have to wait for the property to increase in value if you’re looking to sell it eventually.
This means that you are locked into whatever the market is doing or any other external features that might make the selling of this property challenging. With this type of investment, you may have a steady stream of cash coming in, but because of the above reasons, it is probably the most illiquid type of real estate investment.
Basically, this is the process of finding a property to invest in that is undervalued at the moment and then reselling it to people at market value. This type of strategy is moderately illiquid and can be risky. Still, if you have the right network and buyers already lined up, it is an excellent way to get a good return on your investment.
REITs are real estate investment trusts. These are basically companies that are publicly traded that have finance investment properties. This is possibly the highest liquidity level of real estate investment you can make. You can buy and sell shares of these at any time, which means that they are treated more like stocks than actual physical real estate assets.
There are many developers out there that lack the capital to finance their projects. At times like this, many have begun reaching out, utilizing crowdfunding as a way to gather that money. In other words, you will basically be an investor in a project that will yield returns for you without actually owning the property.
Of course, there are some factors that might reduce the liquidity of this type of strategy. For instance, many times during these crowdfunding campaigns, there is a period of time when you are not allowed to pull out any investments. This is why most investment professionals look at this as a strategy that offers a moderate liquidity level.
So, depending on what type of real estate you are looking at purchasing, there could be varying levels of liquidity. The market, though, is ever-changing, and having a way to really keep track of it ensures that you are investing at the right time.
There are tons of resources available on the internet, from blogs to weekly newsletters like Insider Newsletter, that you can utilize to make an educated decision when it comes to investing in a piece of real estate. We certainly hope we have helped you a little in this decision-making process.