real estate investment liquidity

What Factors Influence Real Estate Investment Liquidity?

Posted on Posted in Alternative Investments

When compared with other types of investments, real estate investing involves a relatively favorable risk versus reward. The only challenge for investors is the relatively low liquidity.

To determine where these investments fit in your portfolio and reduce (and in some instances eliminate) any difficulty exiting a real estate investment, investors should carefully consider these 5 influential factors:

1. Location. The old adage “Location, Location, Location” remains an influential factor when determining profitability in a real estate investment. Proximity to markets, warehouses, transport hubs, freeways, tax-exempt areas, etc. play an important role in understanding commercial property values.

2. Valuation. Financing during purchase, listing price during sale, investment analysis, insurance premium and taxation, all depend heavily on the value of the real estate. A property valuation can be determined by applying 3 methodologies: Sales Comparison, Cost, and Income (exiting/potential).

3. Purpose and Horizon. Identify which of the following investment approaches accommodates your investing goals:

  • Buy and Self-Utilization
  • Buy and Lease or Rent
  • Buy and Sell in the Short-Term
  • Buy and Sell in the Long-Term

4. Cash Flow and Profitable Opportunities. Make educated projections for expected cash flow and increases in property value, as well as the benefits of depreciation, renovations, and mortgage rate versus appreciation.

5. New Versus Existing. Often, new construction properties provide investors with attractive pricing, customization options, clearly documented amenities and discernible titles. On the other hand, resale investments (generally speaking) do not enjoy these benefits and therefore may require thorough research to establish ownership, procure documents and settle legal matters.

Summary:

Real estate has proven that it can offer a great, high value investment opportunity, especially if investors can mitigate the challenges associated with the five factors named above. Paying close attention to a real estate investment’s location, value, purpose and profitability will help to identify the most appealing opportunities for real estate investors.