One of the main factors that investors consider is how liquid an asset is. This refers to how easily it can be converted into cash with little to no change to its value. And although investments are generally designed for income generation, there may be times when you need to liquidate them.
Real estate may not be a highly liquid investment, but that doesn’t mean it’s bound to fail. In this post, we discuss why real estate is considered illiquid. Plus, we list ways to mitigate these challenges, helping you find success even in the face of risk.
Why does real estate have low liquidity?
Compared to most investments, real estate assets are quite illiquid. This is mainly due to the time it takes to sell them, whether residential or commercial. In some cases, it can take months—even years—to close a sale, whereas you could convert stocks, bonds, etc. into cash.
What’s more, real estate can depreciate. You may have no choice but to sell it for less than the purchase price, losing money in the process. Fortunately, professional property management firms can identify properties in optimal markets so this doesn’t happen.
Why does liquidity matter in real estate?
When investing in real estate, it’s crucial to consider how liquid a particular property is. Here’s why:
You may come across other investment opportunities
As a real estate investor, it’s only natural that you would want to expand your portfolio. So if the opportunity to buy another property—one that might be more profitable—arises, wouldn’t you want to grab it?
If you don’t have money on hand, your only option would be to liquidate your current property. Unfortunately, if it has low liquidy, you won’t be able to sell it in time. That means you may miss out on the opportunity to buy the new property.
You may suddenly need cash
What if one of your properties needs extensive repairs and you don’t have extra cash on hand? Or, let’s say your tenants suddenly leave, and you were relying on their rent to offset some of your property management costs. It’s always an advantage when you can easily liquidate an asset, as it lets you get cash when faced with difficulties.
How to manage the liquidity risk in real estate investing
Real estate may be an illiquid asset (which is often why many people feel discouraged to invest), but you can mitigate this challenge. Here are some strategies you can consider:
Conduct a market analysis
Consulting a professional property management firm is a crucial first step in mitigating liquidity risk. These experts can conduct an extensive market analysis, allowing you to assess a property’s marketability, as well as identify areas that are poised for long-term growth. Through this proactive step, you can make informed choices and invest in properties that are less prone to illiquidity.
Maintain a cash reserve
When investing in real estate, never pour all your money into properties. As we’ve mentioned, real estate is illiquid, so it will take time to “convert” it into cash if the need arises. Maintaining a cash reserve is vital, making sure you’re always prepared for unexpected costs.
Consider tapping into the expertise of a property management company. They can help you with financial planning, making sure you maintain a sufficient reserve at all times.
Keep your property in excellent condition
While real estate may have low liquidity, you can boost its marketability by keeping it in tip-top condition. Staying proactive with maintenance, promptly conducting repairs, and performing routine inspections all help in keeping your property well-maintained.
If you find yourself short on time, it would be a wise move to collaborate with a skilled property management service. They’ll handle all maintenance-related tasks for you, while making sure your property is always in its best shape. That way, you can increase its potential to sell faster in case you need to liquidate it ASAP.
Be realistic about your asking price
Want to sell your property fast? Make sure you aren’t setting an unrealistic price for it. To check whether your price is appropriate and can compete against others, check comparable properties within the area. If similar properties are going for $600,000, it would be reasonable to charge somewhere near that amount.
If you don’t have access to this data, it would be beneficial to consult a local property management company. They can study the market and set a price that aligns with current market conditions, allowing you to increase your chances of a swift and successful sale.
Diversify your portfolio
Diversification remains one of the most effective ways to mitigate the risks that come with real estate investments. Maintaining a diverse portfolio can help you “spread out” your risk across various property types, as well as protect yourself from market fluctuations.
For example, if commercial real estate isn’t doing so well, you won’t be as impacted because you’ve diversified into residential assets. Furthermore, if you need to liquidate your assets to recover your losses from commercial real estate, you’ll still have residential properties to sell. You can think of diversification as having plenty of backup plans in place.
Property insurance protects your asset from various threats, such as natural disasters, accidents, and damage done by tenants. In the event of such incidents, insurance can cover repair or replacement costs. That way, you won’t have to liquidate your assets to cover the bill. Furthermore, some policies cover lost rental income, helping you avoid the need to liquidate your property.
Manage liquidity challenges with a property management company
At Luxury Property Care, we understand that circumstances may arise where you need to sell your assets. That’s why, when you choose us as your partner in property management, we’ll take proactive measures to safeguard your investment against liquidity risks. Not only will we make sure your property is situated in a promising market, but we’ll also create a tailored plan to ensure it remains marketable year-round.