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.
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 🙂