When discussing real estate investments, the phrase “Real Estate Liquidity” frequently comes up.
We have had to answer so many questions about this subject, with more concern on how it affects real estate investments and investors.
Bearing in mind that real estate liquidity index is not set in stone and can be based on a number of factors, we will find out what Real Estate Liquidity means and how it affects investors.
What is Liquidity?
Liquidity measures the rate at which an asset can be purchased or sold on the market at a price that reflects its current value.
It basically refers to how quickly your assets can be converted into cash if necessary with little to no change in market value.
Relating this definition to real estate, this simply means how quickly a real estate property, whether land, buildings, etc, can be sold or purchased at a price reflecting its current market value.
For example, cash is considered the asset with the highest degree of liquidity.
Art, gold, platinum, antiques, equities, bonds, diamonds, and many more are also examples of assets with high liquidity but in most cases, low yields.
What are Yields?
Another term that goes hand-in-hand with liquidity is yield.
Yields are used to describe the amount of profit one receives while owning a certain asset.
While Real Estate may be considered as illiquid, it has the most significant yield – that is, profit.
So, it is important to note that with high liquidity, comes lesser yield, as stated above.
Why is Real estate considered illiquid?
Real estate is often considered an illiquid asset due to its long transaction time. Because let’s face it, it isn’t so easy to sell a property.
Even if you quickly garner substantial interest in your property, it can take a while to actually close a sale.
However, this does not mean that real estate is an inherently illiquid asset. Instead, real estate liquidity depends on various factors such as market demand, property type, location, etc.
One of the essential factors that affect real estate liquidity is market demand.
Properties located in high-demand areas such as city centers and suburbs with growth and development potential have higher liquidity.
Another critical factor that affects real estate liquidity is the type of property, the renovation or maintenance work that has been done on said property.
Furthermore, the type of real estate investment determines the liquidity of a property, while wholesaling is considerably liquid, it has lower yield than buying to hold.
In light of this information, real estate investors should be aware that each real estate asset type carries a different level of liquidity risk and yield dependent on a number of factors.
It is however, important to be aware of this, so as to make informed and smart choices. The choice between high liquidity and high yields ultimately rests on the investor.
Since, the condition and value of real estate can substantially impact its liquidity, investing in undeveloped land in locations that offer a highly considerable value increase rate and substantial growth potential will beat the illiquidity of real estate investments.
Buying these properties at low prices guarantee significant yield and high liquidity because of the increased demands for such properties, should you decide to turn your investment to cash.
These undeveloped lands do not have any repairs, maintenance or improvements to make as such, selling expenses will be low, giving these properties high liquidity and while waiting, these properties will yield quickly and substantially through rent payment, a double win.
It is worthy to note that properties that require significant repairs or improvements often have lower liquidity than those that are well-maintained or don’t need any maintenance, hence the liquidity of raw lands.
In conclusion, while real estate is not necessarily considered a liquid asset, we should have it in mind that liquidity risk is not an inherent property of real estate but rather a function of various factors and can be quite liquid if leveraged properly.
Leveraging by focusing on high-demand areas and high demand properties, is one of the multiple ways real estate investors and homeowners can take measures to increase liquidity.
Understanding the factors that impact real estate liquidity is essential for making informed real estate investment and management decisions further confirms the need to have a good real estate professional on your side.
These professionals can help you determine how quickly and easily a property could be resold, based on several factors that they are privy to, in the course of their on-the-job experience.
