Investing in liquid assets is generally seen as a very safe strategy. The fact that there is little risk of losing the asset itself has made liquid investment the preferred option of many conservative investors. But is liquidity really that important when it comes to investing? Can illiquid assets be just as valuable as their liquid counterparts? And is real estate a liquid investment? Keep reading as we answer these questions and introduce you to the benefits of investing in real estate.
Investing in Real Estate: Is Real Estate a Liquid Investment?
Answering this question is predicated on defining what liquid assets are. In simple terms, an asset is considered liquid if it can easily be converted into cash. Liquid assets can also be described as “cash-like” assets because their value is not significantly impacted when they’re sold. Here are some examples of assets that are classified as liquid:
- Cash equivalents
- Marketable securities
- Accounts receivables
It should be readily apparent that real estate doesn’t meet any of the criteria for liquidity. In fact, real estate is one of the least liquid assets you could invest in. Selling a house can take a considerable amount of time, which makes converting the asset into cash a long process. Having said that, the illiquidity of real estate should not deter you from making an investment. To help you better understand this topic, let’s explore real estate investing in detail.
Why Invest in Real Estate
In light of the information presented above, you might be asking “Is real estate a good investment?” The answer is an emphatic yes. Besides its earning potential, real estate investing is quite flexible. Unlike other ventures, it offers investors a multitude of approaches and strategies to pick from. These strategies vary in terms of how income is generated as well as how long it takes to generate a return on investment. Most of these real estate investment strategies can be extremely lucrative if implemented correctly. Moreover, you can invest in real estate even on a small budget as financing options are widely available.
Generally speaking, there are two main ways of earning profits in real estate: cash flow and property appreciation. Here’s an overview of these two concepts.
Real Estate Cash Flow
Cash flow refers to the profit that a rental property generates each month. This is the rental income that the real estate investor collects minus the expenses that come with owning a rental property. These expenses include insurance, professional property management fees, and mortgage payments. In order to make a profit, the investment property should be able to generate positive cash flow. This means that rental income should be higher than expenses.
Real Estate Appreciation
The concept of appreciation is fairly simple. It is the increase in the value of a property over a period of time. In fact, it is not unusual for investment properties to appreciate by as much as 10% in certain housing markets. This increase in value is due to several macroeconomic factors. The most common ones being shifts in supply and demand and falling mortgage rates. High appreciation rates are the key component of buy and hold real estate strategies.
Related: Natural vs Forced Appreciation in Real Estate Investing
Now that you understand cash flow and real estate appreciation, let’s examine the benefits of incorporating each one into your investment approach.
The Benefits of Cash Flow Investing
Buying an investment property with the aim of generating positive cash flow has many advantages. Let’s go over the main ones.
1 – A positive cash flow provides the investor with consistent income
This is one of the main pros of cash flow investments. The income that is being generated by the rental property can cover several expenses, namely mortgage payments. In addition to this, the extra income can go towards growing the real estate investor’s wealth or financing other ventures.
2 – It’s a low-risk approach
Investing for cash flow eliminates the risk that comes with betting on future market movements. There are many factors that affect the real estate market and growth forecasts are not always accurate. On the other hand, ensuring positive cash flow is significantly easier. Determining an income property’s ability to generate a profit relies on proper investment property analysis rather than predictive market indicators.
Related: Rental Property Management Tips for Landlords
The Benefits of Real Estate Appreciation
Appreciation offers the following pros to real estate investors.
1 – Appreciation can generate a higher return on investment
The biggest advantage of investing for appreciation is the potential of a large return on investment. A long-term buy and hold strategy can yield up to 5% of value increase each year. Naturally, this incremental growth can amount to a sizable profit over a few years. As long as you choose a good place to invest in, you can expect your investment property to steadily appreciate in value.
2 – It is easier to manage
If your investment strategy relies solely on appreciation, then managing the property will be much easier. Not renting out the property saves you the hassle of dealing with tenant-related issues. Furthermore, you won’t have to incur the ongoing costs of managing a rental property or the fees of professional property management.
Which Is the Best Investment Strategy?
In an ideal world, using both investment strategies would be the logical choice. However, this isn’t always feasible. Some housing markets boast high appreciation and low cash flow whereas others offer high cash flow and low appreciation. This makes using both strategies somewhat difficult.
Picking one of the two strategies is ultimately dependent on the level of risk that you’re comfortable with. If you feel confident that you can identify the ideal market, then going for appreciation might be for you. Conversely, if you want consistent income in the short/medium-term without taking on a lot of risks, go for cash flow. Since real estate investing for beginners should not involve high risk, cash flow is the recommended option for new investors.
To get started in real estate, start searching for positive cash flow investment properties right now using Mashvisor’s property finder. Click here to try out this powerful tool.
Related: How to Choose the Best Real Estate Investment Strategy for You
As you can see, the illiquidity of real estate is the last thing you should worry about. Investing in real estate can be one of the most effective ways to ensure financial security and build your wealth.
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