The Importance of Liquidity in Real Estate
Since the beginning of time the wise use of leverage has made people very rich throughout the world. Leverage has had two major components throughout my real estate career:
- Leverage of people
- Leverage of finance for real estate purchases
In real estate we hire realtors, contractors, property managers, bookkeepers, marketers… the list continues. The main idea here is to do what you do best and hire the rest of the people to help bring you closer to your goals. It’s the unwise use of financial leverage that gets many well-intended investors in trouble and I’d like to take you a little deeper on why liquidity is so important with real estate. In 2006, the real estate bubble in Florida was in full force. At that time, the market was ignited by low interest rates and easy credit which was fueled by investors throughout the country especially buyers from California. At that time I was wholesaling properties primarily in Florida with an emphasis on the Tampa and Sarasota Bay areas. In an average month we would wholesale 8-22 houses, this would occur every single month. The buying frenzy was on and like today’s market, our biggest challenge was obtaining quality inventory.
The point here is that most of these buyers had no equity at the time of purchase that translates to no liquidity. Buyers from California would buy anything in Florida they could if they could get financing with zero concern for liquidity, and no thought of shortfalls or depressed values. This was a disaster for investors and most of them lost the properties at foreclosure.
Single Family Houses are the Most Liquid of All Real Estate Investments
Let’s say you can buy a 10 unit apartment buildingfor $1,000,000 or 10 houses at $100,000 each all cash without financing. What would be better for you? Some people might say the apartment building would be better because all your tenants are centralized and under one roof. I’ve had both and I would have to say the SFH would be best for the following reason: Liquidity! If I ever needed say $150,000 I could raise the funds easily in a number of ways:
- I could sell a house or two.
- I could borrow on a house or two conventionally or with private funding.
- I could sell a partial interest in a few houses to another investor.
- I could sell an option to purchase to tenants.
You can’t do that with an apartment building or an office building! Another reason I would chose single family homes is: Different Locations. More locations allow you to diversify your portfolio. With SFH’s, you can sell to an end user/homeowner and these types of buyers will pay more if you have a well-located house because end-users/homeowners buy for emotional reasons!
This article was originall featured in: South African Real Estate Investor Magazine