It is no secret that the lack of liquidity in real estate is one of the major concerns for real estate investors. In fact, it is often cited as the number one reason why people do not invest in real estate.
While it is true that real estate is an illiquid asset, there are certain strategies you can use to mitigate the risk and make sure you have the cash flow you need when you need it.
Here are 5 strategies to help you do just that.
1. Have a Plan B
The first thing you need to do is have a backup plan. What will you do if you can not find a buyer for your property? What if you can not refinance? Having a plan B will help you weather any storm and avoid making rash decisions out of desperation.
You can avoid these issues by following these approaches:
Sell at a Realistic Price
One of the biggest mistakes investors make is pricing their property too high. If you want to sell quickly, you need to be realistic about your asking price. Look at comparable properties in the area and price your property accordingly.
Keep Your Property in Good Condition
Another mistake investors make is neglecting their property. If you want to sell quickly, you need to keep your property in good condition. This means making any necessary repairs and keeping the property clean and well-maintained.
Offer Seller Financing
If you are having trouble selling your property, one option is to offer seller financing. This means that you would finance the sale of the property yourself. This can be a good option if you are having trouble finding a buyer who is qualified for a traditional mortgage.
2. Diversify Your Portfolio Across the Real Estate Market
Another way to mitigate liquidity risk is to diversify your portfolio. This means having different types of properties in different locations. That way, if one market crashes, you can rely on the others to keep you afloat.
The Benefits of Diversifying Your Portfolio
When it comes to investing in real estate, many people focus on a single property type or location. However, diversifying your portfolio across the real estate market can have numerous benefits. For one thing, it allows you to spread your risk across different asset classes.
For example, if you invest in both commercial and residential properties, you will be less affected by changes in the market for either one. Additionally, diversifying your portfolio can also help to protect against local market conditions. If there is a downturn in the market in one area, you may still be able to generate income from your other properties.
Finally, diversifying your portfolio can also make it easier to obtain financing. Lenders often feel more comfortable lending money to investors who have multiple properties, as it reduces the risk of default. In sum, diversifying your portfolio is an important part of any successful real estate investing strategy.
What to Consider Before Diversifying Your Portfolio
- It is important to have a clear understanding of the real estate market and the various types of properties that are available.
- It is important to have a realistic idea of the potential return on investment for each type of property.
- It is important to consult with a financial advisor to ensure that diversifying one’s portfolio is the right move for their individual situation.
By taking these factors into consideration, investors can maximize their chances of success when diversifying their portfolios across the real estate market.
3. Keep Some Cash on Hand
Many people do not realize that liquidity is just as important in real estate as it is in stocks and bonds. Just like you would not want to tie all of your investment money up in one stock that could tank tomorrow, you do not want to put all of your eggs in one real estate deal either. It is always a good idea to have some cash saved up for a rainy day when you may have to wait longer than expected on real estate transactions.
Having cash on hand will give you the flexibility to act quickly if an opportunity arises or if you need to make repairs. And, just like with stocks, you can always reinvest the cash back into real estate when the market is more favorable. So, the next time you are debating whether or not to keep some cash in reserve, remember that liquidity is key in real estate just as it is elsewhere.
4. Get Creative with Commercial Real Estate Financing Options
There are a lot of different ways to finance a real estate investment, so do not be afraid to get creative. You can get loans from family and friends, lines of credit from banks, or even hard money loans from private lenders. There are also a number of creative financing strategies like seller financing and lease options that can be very helpful in mitigating liquidity risk.
5. Have an Exit Strategy
Before you even buy an investment property or commercial real estate property, you need to have an exit strategy lined up. This will help you avoid getting stuck with a property you can not sell later on down the road. A good exit strategy will include things like having a realistic timeframe for selling the property and having multiple buyers lined up so you can choose the best offer.
These are just a few strategies you can use to mitigate liquidity risk when investing in real estate. Of course, there is always going to be some degree of risk involved any time you invest in something, but by following these tips, you can help minimize that risk and give yourself the best chance for success.
Jose A. Ramirez is an experienced and sought-after tax strategist who helps investors through the process of cost segregation. He specializes in Short-Term Rentals such as AirBNB and VRBO, Landlords, Wholesalers, Rehabbers, Flippers, Real Estate Brokers, and Realtors. Schedule an appointment with Jose A. Ramirez for any additional questions you may have about this recent event. Make sure you are subscribed to the Advanced Tax Advisors email list so you can receive Real Estate Investor tips just like this in the future.