Investors choose profitable real estate according to two main criteria: good profitability and high liquidity. And if the profitability allows you to earn in owning an asset, then liquidity determines how successful the exit from the investment project will be. In this text, we will consider the concept of liquidity of a real estate object. And we will try to answer in simple words how to evaluate it!
What is liquidity in real estate
Liquidity is a characteristic of assets that determines how quickly they can be sold at close to market price. The less time it takes to sell, the higher the liquidity. At the same time, assets sold at a discount are not considered liquid. For example, in Detroit, abandoned houses are offered for $500. Such properties can be sold at this price in a short time, but they will not be considered liquid because the offer price is much lower than the market price. At the same time, if sellers put up for sale the same objects for 30-40 thousand, they will wait too long for buyers.
The following rule is also true: the higher the liquidity, the lower the profitability of the object. Most investors prefer not highly profitable, but highly liquid assets: the latter can be quickly turned into ‘live’ money quickly and without loss.
Factors affecting the liquidity of real estate
Real estate liquidity is calculated using complex formulas by professional appraisers. Therefore, investors wishing to find out the liquidity of the acquired object, we advise you to contact specialized firms.
When measuring liquidity, the following are considered:
- the speed of the transaction and the time required to close it
- transaction costs (including taxes on purchase and sale, as well as due diligence costs)
- uncertainty associated with the ability to sell or buy an object at a price not lower than the price of similar objects on the market
Also, liquidity is influenced by various factors, among which are the location of the object, the dynamics of the local market and the state of real estate.
The main factors that increase the liquidity in real estate
Location
- proximity to transport hubs, social institutions and infrastructure facilities
- low crime rate and good reputation of the area
- low unemployment
- good ecology (proximity to parks, lack of industrial facilities in the nearby area)
Market situation
- excess of demand over supply
- high activity and good market capacity (the more objects are sold, the more liquid the market)
- accessibility (economy class properties are more liquid than luxury real estate)
- resistance to price declines (decrease in value reduces liquidity)
Object characteristics
- small age and low degree of deterioration of the object (new buildings and renovated objects are sold better than old buildings)
- convenience of the facility (good view from the window, comfortable layout, high ceilings, floor above the first floor)
- landscaping (parking, playground)
Other factors
- information support: the more buyers know about the object, the faster it can be sold and the higher the liquidity
- terms of due diligence (depending on the type of property, the deal may take longer)
- related costs for the transaction (the higher the costs, the lower the liquidity)
- sale season (there are more objects on the market in spring and autumn than in winter and summer)
Liquidity of different types of real estate
The liquidity of an object also depends on what type of real estate it belongs to.
Residential real estate is always more liquid than commercial real estate, because:
- Requires less financial, legal, and technical expertise than commercial properties. Because of what, respectively, less money and time is spent on processing the transaction
- Less dependent on fluctuations in the economy of a country or state: people need housing even in a crisis is in demand among a larger circle of buyers
Among residential properties, the most liquid are one-room apartments and economy-class studios on any floor except the first floor, located in the center of large cities and within walking distance of public transport stops.
What is liquid — an apartment or a house?
Apartments are the most liquid, as there are more potential buyers in this market segment. This is at least all those who want to buy housing for life, plus those who want to buy an object for rent.
In general, the larger and more expensive the object, the lower its liquidity. For example, individual apartments are easier to sell than a whole apartment building, offices are sold faster than office buildings, and freestanding small shops are sold faster than shopping centers.
Of all the listed types of real estate, shopping centers and large hotels are less liquid, since such objects are rare, and the time and resource-intensive due diligence procedure increases the costs of legal support for the transaction.
Usually the main negative factor of highly profitable objects is their low liquidity. If an investor wants to sell such an object, they will have to significantly reduce the price, which in the end will ‘eat up’ the profitability that they were promised to pay. We recommend buying high-quality and highly liquid properties — they are most in demand among both local and international investors. In addition, it is precisely such assets that can be quickly and profitably sold in the future.
How to calculate the liquidity of a residential property
The easiest and most reliable way is to contact an appraisal company. Such organizations have the necessary tools, and employees have the expertise to conduct a home appraisal. Their services, of course, are paid and are mandatory in litigation, mortgage, pledge, as well as in the sale and exchange of real estate.
Summary and Conclusion
Under the liquidity of a house or any other residential premises understand its profitability — the ability to sell in the shortest possible time at the highest price. That is, property that is in demand among buyers and is capable of bringing a good income to the owner in the short term can be called liquid. Of course, it’s great when you fall in love with a house at first sight. But also, it is worth looking at this question soberly and assessing the liquidity of this purchase. So that it brings you not only pleasure, but also income.
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