Liquidity in Investments and its Importance
Understand why liquidity is a very important factor when considering investing in anything.
Liquidation - One of the most important factors in RE Investments
Investments are important. Be it saving in a bank account or keeping track of the stock market or holding investments in commercial real estate – the goal is the same. To have a corpus of wealth that can act as a support in times of need. While it is important to start investing as soon as you can, pay heed to the liquidity offered in your investments. In crucial times, this factor weighs in a lot.
Without affecting the market price, the ease of converting an asset into cash is called liquidity. That makes cash the most liquid asset you own. Currency in the form of cash can be used in direct transactions and conversely, every other asset in investment is compared to this. Thus, begins the scale of comparison where rare metals are supposedly the easiest to convert and fixed assets like commercial property, plant, production floor are harder to liquidate.
The Importance of Liquidity in Investments
Liquidity is important for companies and equally important for investors. Easy liquidity means that an investment can quickly release funds at any given point in time. When speaking of investment in CRE (commercial real estate), we are speaking of making a rather illiquid asset easier to liquidate.
Using fractional ownership, when a group of investors gains rights to percentages of the property, they can easily transfer ownership to another investor if they want to move on from a particular investment. Buying a property does not allow the same kind of freedom.
Solving the Real Estate Liquidation Problem
Most Liquid Assets
Everything worth investing in is compared to cash, which is the most liquid asset you can own. If you are dealing in small amounts, rare metals, gemstones are the easiest to convert, but on a larger investment scale, non-cash assets like stocks and bonds are also easy to convert to cash. A higher trade volume for a stock or bond will make it more liquid.
When it comes to commercial real estate, liquidity is considered for the long term. But the ease of liquidity comes from the aspect if an asset is in demand or not and how accessible is the value of the investment.
Least Liquid Assets
Items that are considered collectibles are considered illiquid. One would need to hunt around for the proper buyer who appreciates the value of the asset to get an appropriate cash value in lieu of the asset. Obviously, finding such a buyer on an immediate basis is out of the question.
Plant, property, and equipment come under CRE and are also rather difficult to liquidate. This is where specific investment firms employing REIT and fractional ownership come into play. While equipment remains rather illiquid, plants and properties can be accommodated in investment strategies, and ownerships be distributed across a group of investors. This makes it easier to liquidate.
The highly illiquid assets are businesses themselves owned by companies. The complexity of selling them makes them so.
Investing Strategy with Liquidity as Priority
Liquidity lets convert an asset into cash easily and without losing money against the market price. The ease of converting an asset into cash defines its degree of liquidity. Investments are made with a goal to achieve wealth creation in the long term or to fulfill short term financial goals. Strata’s fractional ownership model helps investors realize their long- and short-term goals via CRE investments while offering the best liquidity options in the real estate investment market.