Since it is necessary to prepare a large amount of funds at the beginning to start real estate investment, it takes time to recover the amount and there is a liquidity risk.Liquidity risk means that there are few buyers and sellers and it is difficult to sell when you want to sell.In real estate investment, the price of real estate tends to be high, so it can be said that the liquidity is low because the sale is not completed immediately compared to other investments.
Real estate investment is an investment that can earn stable income in the long term, but you need to be careful if you need a large amount of cash on the way.
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What is liquidity risk in real estate investment?
The liquidity risk in real estate investment is that it cannot be immediately converted into cash at the time of sale.As a period, it generally takes about 3 to XNUMX months to sell an investment property and convert it to cash.Moreover, this is the case when it sells smoothly, and in most cases, it may not sell immediately even if it is put up for sale.It can be said that the liquidity risk is high because it cannot be sold immediately when cash is urgently needed.
Even if a buyer is found immediately, it may not always be possible to sell at the desired price, and if you are in a hurry to cash, you must accept the other party's arguments to some extent, sell at a discount from the selling price, and renovate. In some cases, it may be necessary to set conditions, such as selling the property after doing so.
If you try to sell it forcibly like that, even if you find a buyer, if you can't sell it at the price you want, it will be a disappointing result.Many people who start real estate investment think that they are using loans, so if the selling price is lower than the remaining bonds, they will not be able to make a profit.In the worst case, only the loan may remain.
If you want to sell, first get a real estate agent to give you an estimate, and if you are satisfied with the price, you will sign a sales contract.Some real estate agents only mediate the sale and pay a commission, while others purchase the property themselves.In many cases, you will have to ask for an intermediary, and if there is no buyer, the sale will not be completed.If a real estate agent buys the property directly, it is a risk for the real estate company, so the purchase price is often set low in most cases, and direct purchases are often used only when you really want to sell it immediately. .
What can be done to mitigate liquidity risk?
First of all, at the time of purchase, it is important to check the characteristics of easy-to-sell real estate, such as "low vacancy rate" and "well managed", and select a property that will not fail.Popular properties with low vacancy rates are easy for buyers to find.Specifically, properties close to stations and properties where demand can be expected, such as in central Tokyo.With the declining birthrate and aging population, the area is polarized into areas where the population is decreasing and areas where the population is increasing.It is clear that liquidity risk can be mitigated by choosing Tokyo and its suburbs rather than rural areas as the population is increasing in central Tokyo.In addition, especially popular areas, areas with many students, and locations such as large-scale factories nearby are also conditions that make it easy to sell and mitigate liquidity risk.
Even in a popular area, it is meaningless if the property is worn out and no one wants to live there.The condition is that it is well managed, looks good and is in good condition inside.In the case of second-hand properties, it is easy to be influenced by the appearance, and in the case of condominiums, the exterior walls have been properly repaired.In addition, properties that have elements that distinguish them from other properties tend to sell quickly.There are clear needs such as the layout being devised, the luxurious building materials being used for the interior, and pets being allowed.The competition rate with other properties is reduced, and if there are people who catch the eye with specialized conditions, it will be easier to sell.
Ultimately, the most important thing is to have a proper business plan in place.If you are planning to sell your real estate investment and regularly switch to a new property, or if you are thinking of selling and liquidating when it becomes old, there are various cases, but is the property easy to sell? You have to think about it.In some cases, if the property is difficult to sell, new renovations are added to sell it, and there is almost no cash left after all.
Related article:What is an advantageous business plan to make a loan in real estate investment?From creation method to agency request
Low liquidity can also be an advantage
Strategically, a situation where real estate liquidity is low not only presents the risk of not being able to sell immediately at the time of sale, but also an opportunity to buy at a low price.If the owner who is thinking about selling has a reason to sell immediately, but it is not possible to sell it, they will get impatient and sell it cheaply.There is also a paradoxical way of thinking such as aiming at the property and getting real estate and starting real estate investment.
There are several reasons for the low liquidity of real estate.It is difficult to put a fair price on real estate, so we ask an expert to appraise it and then sell it.The price of one property is also high, so there are few buyers.It is also the reason that there is no trading market and it is a one-to-one transaction between buyers and sellers.
The lack of a fair price means that you can sell at the seller's asking price.If the seller is in a hurry and wants to cash in immediately, it may be possible to buy at a much lower price than the market.Some sellers do not know the market price itself, so you may find a very good property.
The low liquidity of real estate is a disadvantage for the side trying to sell, but it is also an opportunity to start real estate investment at a low price.As explained above, it is important to correctly understand that there is liquidity risk in real estate, and to invest systematically before purchasing.
Summary
- Liquidity risk in real estate investment cannot be immediately converted into cash at the time of sale
- Generally, it takes about 3 to XNUMX months to sell assets and convert them into cash.
- Features of easy-to-sell real estate, such as "low vacancy rate" and "well-managed"
- Opportunity to buy cheaply in situations where real estate liquidity is low
- It is important to correctly understand that liquidity risk exists in real estate and to invest systematically before purchasing.
At Rich Road Co., Ltd., we will consistently support all aspects of investment real estate, from complete beginners to experienced people, from a wide range of real estate selection, loan consultations, post-purchase management, and renovations.
