Have you ever been in a situation where you desperately needed to pay a large, unexpected fine? Or perhaps, you might have been in a situation where you suddenly wanted to go on a spontaneous cruise across the Mediterranean. While one was an expense that made you upset and the other was an expense that brought you joy, in both situations, you urgently needed cash.
But what does any of this have to do with real estate liquidity?
What is Real Estate Liquidity?
To really understand what real estate liquidity is, it is first important to understand what ‘liquidity’ means on its own. According to Investopedia, liquidity refers to how easily an asset can be traded for money without affecting its market price.
Cash is the most liquid asset you can own as it can be traded for other assets the quickest. On the other hand, real estate tends to be more illiquid (compared to stocks, bonds and ETFs), meaning property assets tend to be more difficult to exchange for cash.
Factors that Determine Real Estate Liquidity
Real estate is often considered an illiquid asset in comparison to other kinds of assets due to many factors that are specific to this asset class. Here are three of the main reasons why real estate and property assets are comparatively less liquid compared to other asset classes…
1. Private Markets in Real Estate
Unlike most stocks, bonds and ETFs, real estate transactions are often private. Public markets keep investors up to date on prices and other relevant information about the market. For example, you have continuous access to a traded business’ stock price, annual returns, company reports, etc. Meanwhile, private markets share information on a “need to know” basis and tend to lack transparency. Therefore, buyers in private real estate markets have to do their own market research, personally get in touch with real estate professionals such as realtors and brokers, inspect the property in person, and perform all sorts of due diligence. All of this makes the real estate purchasing process incredibly time consuming.
2. Complicated Transactions
The process of finalizing a sale in real estate involves many different parties – buyers, sellers, lawyers, real estate agents, brokers, accountants, property inspectors, and others. These parties go through a large amount of paperwork. From putting in a bid, through to organizing a mortgage loan from the bank, to performing all needed due diligence, and registering the property rights with the relevant registrars, it could take weeks to months to actually sell a property. The liquidation of real estate often involves a significant amount of capital that buyers need to secure and transfer… in addition to the massive transaction costs to complete the sale. All of this only adds to the difficulty of converting property assets into cash quickly.
3. Market Fluctuations and Property Asset Classes
Even within the real estate asset class itself, different property assets, i.e., commercial and residential, can vary in price quite considerably. A real estate asset class’ price can heavily depend on market fluctuations, i.e., if it is a seller’s or buyer’s market. Therefore, many investors may be concerned that their real estate asset cannot quickly be made liquid (turned into cash).
So Why is Liquidity Important to Real Estate Investors?
Nobody wants to be left in a situation where they need cash, but don’t have the means to get it! This is why, when it comes to real estate investing, the liquidity of a property is something to consider before signing the deal! The reason why real estate investors could be looking into having more liquid assets can vary. However, here are two of the most common reasons why liquidity is important to real estate investors.
A. Other Investment Opportunities
If a good investment opportunity comes by, wouldn’t it be wonderful if you had cash on the sidelines to take advantage of it? If you don’t have reserves, you might need to liquidate one investment (i.e., a real estate property) in order to make another, perhaps better, investment. When great investing opportunities come by, you want to have the capital needed to go in and take them as they arise!
B. Unexpected Expenses
It is a good, general rule of thumb to keep some reserves for a rainy day. You never know what kind of expenses or unforeseen circumstances you might face, and you want to be prepared to weather the storm. Having the ability to get liquidity from your assets and investment is therefore important when preparing financially for difficulties that may arise.
Traditional Real Estate Markets Offer Little Liquidity
While in the stock market, there is constant liquidity as people can always sell back their stocks at market price. This is quite different from real estate investing. Typically, real estate investorsmake an investment in a real estate project, and they can’t sell their holdings for years. It is only the sponsor, the investment project’s managers who gets to determine whether the asset(s) will be sold, and it is only through these investment project managers that investors can get profits and liquidity. However, that is where SecondRE comes in. Second RE makes liquidity possible in the real estate market. Continue reading below to find out more on how they can help real estate investors!
SecondRE and Real Estate Liquidity
SecondRE provides real estate investors a new way to meet their money, anytime. SecondRE’s marketplace enables investors to buy and sell holdings in cash-generating residential and commercial real estate properties, with the sponsors’ blessing. By enabling liquidity, sponsors find it easier to attract new investors. Investors who know they can get out easily are more likely to get in. SecondRE Inc. is an American company led by seasoned technology and real-estate entrepreneurs, who have scaled operations all the way to NASDAQ before. We build trusted relationships with reputable sponsors across the nation to list vetted properties for secondary trade on our platform.