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Understanding Liquidity is the Key to Understanding Real Estate Profit

Understanding Liquidity is the Key to Understanding Real Estate Profit
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Liquidity is a term that comes up often when talking about investing. For the most part, this term is used to describe how efficiently your assets can be turned into cash if need be. Assets with more liquidity can be turned into cash or sold without much change to its market value. This why cash is considered the most liquid asset. Other types of assets with high liquidity include art, gold, platinum, antiques, stocks, bonds, diamonds and more.

Table of Contents - Understanding Liquidity is the Key to Understanding Real Estate Profit

Another term that goes hand-in-hand with liquidity is yields. Yields are used to describe the amount of profit one receives while owning a certain asset. For the most part, if an asset has higher liquidity then the yields will be lower. It’s good to know the importance of both yields and liquidity when it comes to real estate as this could help you make the right investing decisions.

Why real estate has low liquidity

Real estate has an extremely low liquidity compared to other types of assets. This is because property takes time to sell, so it can’t be converted to cash quickly. Even if you quickly garner interest in your property, it can take a while to actually close a sale. Additionally, real estate will sometimes depreciate over time, so if you’ve owned the property for many years, you might have to sell it for much less than you paid.

There are several reasons one might want to quickly turn their investment property into cash, including tenants suddenly moving out or the need for expensive repairs. 

The real estate market is constantly changing, which makes it hard to determine how well a property will sell in the future. This can pose a risk to those hoping to sell off their property one day. If you do proper research, however, you should be able to invest in a property that will generate a profit. Look at closely factors like the property’s location, condition and interest rates before buying.

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The importance of liquidity in real estate

Determining the liquidity of an asset is always important when it comes to investing. With real estate, it’s sometimes a good idea to base your purchases on how liquid they are. This is especially true if you think there may be a need to sell your real estate investment in the future.

If you aren’t making as much money off your investment as you’d hoped, for example, then you might want to sell. You’ll usually be much better off trying to sell a property with high liquidity as this will keep you from losing too much money.

Determining a real estate property’s liquidity

While all forms of real estate are considered illiquid, there are certain factors that give some properties a higher liquidity. Lower selling expenses, for example, will mean that you aren’t spending a ton of money when trying to sell your property. These expenses could include maintenance and renovations done to the property to prepare it for sale.

Properties in a better location will be much easier to sell as well. If your rental property is in a good neighbourhood, then it will usually look better to potential buyers. Nearby amenities like schools, parks and grocery stores can also make a property easier to sell.

It’s hard to predict the housing market, but as long as you do plenty of research on a property before purchasing, then you should be able to make the right investment. Be sure to have a good real estate professional on your side. They can help you determine how quickly and easily a property could be resold.

Should you invest in real estate?

Despite the low liquidity of real estate, it’s still a good investment. Real estate will usually yield much higher profits than many assets with more liquidity. With real estate, you’re getting a monthly income from tenants. In many cases, you could quickly and easily pay off the money you invested in the property with this monthly income. Owning real estate also looks great in an investment portfolio and might help you get financing for future investments.

If you’re thinking about investing in real estate, then it’s a good idea to do it locally. You’ll have a better understanding of your home town or city than any out-of-state investors. This usually means that you’ll look better to local financing companies. Knowing the area also means that you know where all the best neighbourhoods are. You know where people want to live and can easily determine how much tenants are willing to pay.

Pro tip: have a nest egg available

To avoid the need to sell your property, it’s a good idea to have a significant amount of money saved before investing. While it might be tempting to spend all your money on a down payment, saving some will help you avoid future issues. If there’s the need for a major repair on your property, for example, having saved money will allow you to take care of these expenses without having to scramble.

In a pinch, trying to sell your property for funds might seem like a good idea, but you could end up losing out on years of income. You’ve likely put a lot of time and effort into investing in your property, and selling due to an immediate financial need could negate all that. Avoiding this is easy as long as you know what you’re getting yourself into. You can’t predict certain expenses, so it’s always smart to have some money set aside.

Bottom line

If you’re prepared for the responsibilities of owning a property and making tenants happy, then liquidity shouldn’t be a major concern. Since good property investments come with a constant income, you probably won’t find yourself wanting to sell. Even if you do need to sell later on down the line, you’ll have had time to plan a strategy that doesn’t involve the need for an immediate resale. Making the right investment will be easy as long as you do plenty of research—and remember the principles of liquidity.

How Liquidity in the Market Affects Real Estate Prices


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