Real Estate Investing Education Center

Is Real Estate a Liquid Investment?

By Michelle Clardie on 06/09/2022
Real estate has not historically been viewed as a liquid investment. But with so many different ways to invest in real estate (including multiple methods of investing in real estate without buying property), today’s real estate investors have more options with increased liquidity.

Let’s examine liquidity in investments in general, as well as liquidity in real estate in particular. Then we’ll offer tips on how to make your real estate investments more liquid.




Defining Liquidity


Before we can discuss liquid and illiquid assets, we need to define liquidity. Liquidity is a measurement of how easily your investment can be converted into cash. Assets that you can easily exchange for cash are highly liquid. Assets that are difficult to convert into cash are called illiquid. 

Liquidity is important because investors like to know when their invested funds can be accessible again. For example, let’s say you have $10,000 to invest now, but you plan to use that $10,000 to help with your child’s college expenses next year. In this case, you would want to invest in a liquid investment type so that you could access your capital when you need it next year. Whenever you’re investing for the short-term, liquid investments are your best options. 

But investments don’t need to be liquid to be valuable investments. As long as you are comfortable keeping your funds in the investment for a while, you can earn exceptional returns from illiquid investments. 

Traditional real estate holdings are a prime example of an illiquid investment. Traditional real estate investments are long-term. It can take several weeks, or even months, to sell a property and collect the proceeds from the sale. But savvy investors continue to invest in long-term real estate because property ownership has consistently shown to be one of the best ways to become a millionaire through real estate investing!

What are the Most Liquid Assets?


Cash equivalents are as liquid as it gets. You can exchange them within days for cash in your pocket. Cash equivalents include:

  • Savings accounts
  • US Treasury notes and bonds
  • Money market accounts

Additionally, investments with short-term maturities (around 90 days or less) are considered highly liquid. Short-term CDs, for example, can have a period of just three months. This allows you to convert your assets into cash comparatively quickly. 

Which Assets are Fairly Liquid? 


Many assets fall in the middle of the liquidity scale. They aren’t considered fully liquid, but they’re not illiquid either. These include:

  • Stocks
  • ETFs (Exchange Traded Funds)
  • Foreign Currencies
  • Mutual Funds

What are Illiquid Assets?


On the far end of the liquidity scale, we have illiquid investments. These are the most difficult assets to convert to cash because the buying process takes longer (due to a limited buyer pool, complex transfer process, or both). 

Investors still put capital into illiquid assets because of the yield potential, but they do so with the knowledge that their funds will be tied up in the investment for the long term. Illiquid investments include:

  • Private equity and venture capital
  • Collectibles
  • Traditional real estate holdings





Liquidity and Real Estate


With so many different ways to invest in real estate, real estate is no longer considered to be simply illiquid. Different real estate investing strategies offer different levels of liquidity. 

Here are several of the most popular options for investing in real estate, ranked from most liquid to least liquid.

  • Most liquid: REITs (Real Estate Investment Trusts). What is a REIT? In simple terms, a REIT is a company that invests in income-producing real estate. Individual investors can buy shares of the REIT which will entitle them to dividends based on the profitability of the portfolio. The ability to buy and sell shares on the securities market makes REITs highly liquid. 

  • Semi-liquid: Crowdfunding and Syndication. Real estate crowdfunding and real estate syndication can be fairly liquid. Both forms of investing allow you to pool funds with like-minded investors to fund a real estate project for a specified period of time. These highly flexible investment projects can range from just a few months for a quick house flip or several years for a long-term rental. And because you’re able to invest with comparatively low minimum investment amounts, you have the option of splitting your funds among multiple projects of different time frames, building a real estate portfolio instantly!

  • Less-liquid: Traditional Fix-and-Flipping. Traditional flips are typically less liquid than crowdfunded or syndicated flips because most solo flippers don’t have a team of experts in place to keep the project on track and ensure a quick sale. Another consideration is that solo flippers have to tie up so much of their money in the project, while members of a crowdfunded or syndicated project can tie up much less. 

  • Least-liquid: Traditional Rental Property. Traditional rental properties are correctly considered illiquid. To liquidate the investment, you would need to find a qualified, willing buyer, and then spend 30-60 days navigating the escrow process. The cash flows, appreciation, inflation hedge, and tax benefits often make long-term rentals worth the investment (whether done solo or as part of a crowdfund or syndication). After all, long-term rentals allow you to earn passive income from rents even as your property grows in value. But you should only invest in long-term rentals with money that you don’t need access to.






Implement Your Real Estate Investing Strategies with Gatsby Investment


With short-term real estate investment options through REITs, crowdfunding, and syndication, you can keep some liquidity in your portfolio while still enjoying solid returns. 

Do you want to learn more about these real estate investing options with greater liquidity? Check out Gatsby Investment, a Los Angeles-based real estate investment syndication firm that offers projects with time frames as short as six months. 

Our most recent house flip (as of the date of this article) took only 6.4 months and provided investors with an annualized return of 19.04%! It can be difficult to find short-term investments with ROIs this high, but the expert real estate syndication team at Gatsby Investments has a solid track record of success.

And, if you’re in a position to lock in some of your investment capital for a longer term in exchange for potential cash flows, appreciation, and tax benefits, Gatsby has long-term rental projects with five-year terms to meet your needs. 

Whether you have $10,000 or $100,000 to invest, and six months or five years to hold your investments, Gatsby has professionally managed real estate opportunities to support your goals. Sign up for a free account with Gatsby Investment and choose your properties today! 

 

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