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Liquidity – If you understand this then you NEVER invest in Real Estate

October 9, 2019by Basavaraj Tonagatti

Many of us are fond of Real Estate. We proudly feel RE gives us rental income as well as price appreciation. However, we forget the most important negativity of investment and i.e. LIQUIDITY.

Liquidity

Do remember that here REAL ESTATE is considered as an INVESTMENT. Hence, don’t compare RE as your commodity where you are already living.

Since long for us, RE is always the best investment. We have a firm belief that real estate will never go down. There are many stories about this also.

We consider a 2% to 3% rental yield as the SAFEST income stream during our retirement. Along with this, price appreciation gives us more boost to decide that RE is a real game-changing asset class for us.

There are so many stories attached to it. Those storytellers may be unaware of how to calculate the returns or they may be from the real estate industry.

Let us not go deep into that aspect. Instead, let us consider the main aspect of this post.

What is the meaning of Liquidity?

Any asset or investment is to be called liquid if you can transform it into cash mode with certain cost as and when you wish.

The ideal situation of Liquidity is to be as below.

# There must be at least ONE BUYER

When you are trying to sell an asset, then there must be at least one buyer to be ready at your price. Otherwise, you have to find the buyer and that also you have to lower your selling price to meet the buyer’s expectation but not YOUR’S.

# There must be at least ONE SELLER

It is always not only a buyer but you have to look for a SELLER too. This indicates the probability of liquidity of an asset.

Also, if you are a buyer, then if find more than one seller, then the price realization of an asset is very much at your side.

# Both BUYER and SELLER must be available at the SAME TIME

This is of utmost importance. If you are willing to sell your asset but there are no buyers ready immediately, then you dry up with liquidity crunch.

Hence, whenever you are trying to sell an asset, the buyer must also be ready to buy it.

# Price realization

If there are many buyers and sellers, then for both parties the real price realization is easy. Take for my example, when I started searching a property for my own usage, then I did research for almost 2-3 months by meeting each and every broker of the area and the sellers. This made me to understand the actual price realization.

Some sellers may be eager to dispose of it or some may not be. We may find the middle path of it to understand the demand and supply.

# Cost involved in Liquidating

The cost of liquidating an asset is also important. Take for example of real estate itself. If you are willing to sell it as early as possible, then your broker may ask for more brokerage. At the same time, as it is rampant in the real estate industry, they may offer you more or less cash mode of payment based on their or your needs.

# Secure way of FUND TRANSFER

As I pointed above, in the real estate industry, even though the Government made many strict rules, but still CASH IS KING. There are two reasons for it. One is to reduce their tax liability and the second is to stash their unaccounted cash.

Hence, fund transfer which is illegal may one day trouble you in one way or another way.

Forget about all the above scenarios of what I have explained.

What if your survival of TODAY depends on the LIQUIDITY of your all asset?

We plan in a big way for our future. Invest in many assets or products. But assume a situation where your survival of TODAY depends based on the liquidity of all your assets? Forget about tomorrow, forget about kids education or retirement.

Then how fastly you can liquidate it and make sure that the cash is available for your survival? Is it possible from assets like real estate?

That is the reason, I always used to say, invest in an asset or product where if you need the money, then it should be available at least within a week’s time.

If you still believe RE a great investment with great price appreciation (wealth creator) or a great liquid product, then please go ahead and INVEST. Best of luck 🙂

Category: Investment PlanningTag: Liquidity

About Basavaraj Tonagatti

Basavaraj Tonagatti is the man behind this blog. He is SEBI Registered Investment Adviser who is practicing Fee-Only Financial Planning Process and also an Independent Certified Financial Planner (CFP), engaged in blogging since 7 years. BasuNivesh blog is ranked as one among India's Top 10 Personal Finance Blog. He is not associated with any Financial product/service provider. The purpose of this blog is to "Spread personal finance awareness and make them to take informed financial decisions." Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. These should not be construed as investment advice or legal opinion."

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Reader Interactions

Comments

  1. Laxman Subramanian

    November 9, 2019 at 10:00 AM

    Is RE a good investment for someone, who does not have liquidity worries? In terms of ROI, is RE not beating equity, if we look from a 3-5 year prism? Also considering so many bank frauds, shady corporate governance, does investing in RE sound better than some mid/ small cap stocks? Large cap stocks are over priced and returns may be muted for next few years.

    Reply
    • Basavaraj Tonagatti

      November 11, 2019 at 7:21 AM

      Dear Laxman,
      Is there no scams in RE? Also, comparing one asset class to another for your returns is wrong. Regarding which is best depends on YOU. It is hard for me to guide BLINDLY.

      Reply
  2. Rashi

    October 10, 2019 at 4:16 PM

    Basavaraj it was really a crisp read as ever. You are just awesome

    Reply
    • Basavaraj Tonagatti

      October 10, 2019 at 5:25 PM

      Dear Rashi,
      Pleasure 🙂

      Reply
  3. Ajay

    October 10, 2019 at 3:41 PM

    It’s really an eye-opener for many investors, I loved reading this and it was really a worth read.

    Reply
  4. DR. SUDHEER

    October 9, 2019 at 12:02 PM

    Hi sir, it’s a good article and should be an eye opener for many investors who blindly going by publicity or marketing gimmics. I was shocked to see public investing in ventures which are seen only on papers but not on the ground reality. They r not realizing that d developers are making layouts and developing them with our own money. Thanks once again for educating us and we wish you to come with many more articles like this.

    Reply
    • Basavaraj Tonagatti

      October 9, 2019 at 6:08 PM

      Dear Dr.Sudheer,
      Pleasure and thanks for sharing your views.

      Reply
  5. Ramprasath

    October 9, 2019 at 11:50 AM

    True sir, i am facing this issue.

    Reply
    • Basavaraj Tonagatti

      October 9, 2019 at 6:08 PM

      Dear Ramprasath,
      Sad to know about your status.

      Reply

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