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Liquidity of Real Estate and What You Should Consider

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It is very important for an investor to consider expected yield and liquidity before investing in a real estate asset (land, buildings and estates). Any asset that can be ex-changed for money has a certain level of liquidity. During your ownership of real estate, the yield (rent) creates revenue and cash flow. However, your ability to sell your real estate at a reasonable price and in a timely manner is determined by liquidity.

So what is liquidity? Liquidity describes the ease at which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. Money or cash is considered the most liquid asset because of the ease of exchanging it for other goods or services, while real estate, securities, fine art and collectibles are all relatively illiquid.

Typical order of asset liquidity are currency, securities (stocks, bonds and treasury bills),Precious metals (Gold, Silver, Palladium, platinum etc.), real estate and Art or collectors’ items (celebrity paraphernalia, coins, stamps). How important is liquidity in real estate investment?
-       It determines whether your real estate asset will be sold quickly or not.
-       It significantly affects if you will likely sell at, above or below the fair market value.
Liquid real estate asset: is easy to sell in a timely manner (<6 months) and at market value while illiquid (non-liquid) real estate asset: takes longer (>6 months) to sell and likely to be sold at a discount, that is, at less than fair market value.

Real estate asset liquidity in general is affected by the following:
-       Need higher capital to buy it than securities or precious metals (huge sum of money).
-       It generally takes longer time to exchange real estate for money (buy/sell) compared to precious metals or securities.
-       Real estate property is limited to its current location (immobile) and affected by changes to the local market, economy and security situations.
-       It is also common for buyers to request discount in exchange for a faster real estate transaction.

Factors that increase real estate liquidity are
1.   Location    
a.    Closeness to good transportation hubs, places of employment, health/education/retail/commercial centers.
b.   Good infrastructures like roads, electricity, social amenities, low crime rate and good reputation.
c.    Low unemployment in the locality.
2.   Market      
a.    Demand for the property is greater than available similar properties in the target area.
b.   Affordability (prime or luxury property is more expensive and difficult to sell).
c.    Good appreciation rate for properties in the area, when property value appreciates at a faster rate than inflation rate, potential buyers are more convinced to buy.
d.   The lower the cost of the property, the more potential buyers with the means tend to consider paying for the property.
3.   Property Condition
a.    Newer buildings or recently remodeled or renovated properties sell better than old outdated design buildings.
b.   Design and architecture:  good-looking, functional and convenient design with sufficient parking space and playgrounds will sell faster.
c.    Property advertisement and information brings more awareness to potential buyers, thus property will be sold faster.
d.   Make necessary property information available to potential buyers to do an easy and fast due diligence checks (debts or liens on property, authentic property titles) before deciding to buy the property.
4.   Property type (commercial or residential) and size
a.    Residential properties are generally less affected by economic situations. However, an office complex or shopping mall might have more vacant spaces during economic downturns but people always need somewhere to live.
b.   Large and expensive properties are less liquid because it is only available to few buyers with the capable means. This is why apartment units are easier to sell than a whole residential estate and an office space or shop is easier to sell than an office blocks and shopping malls.

In conclusion, a lot of factors come to play in determining liquidity in real estate. The ability to quickly convert an investment portfolio to cash with little or no loss in value can be best achieved with the right approach considering the facts above.

 Real Estate as a Store of Value
 What I Wish I Knew Before Investing In Rental Properties

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