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Real estate investment is an excellent way to generate passive income, but many people who have tried it know it is not without risk. One of the most significant risks of investing in real estate is the danger of real estate liquidity. Commercial real estate transactions involve finding several participants and substantial documentation. But, they may now be readily liquidated by the co-owner thanks to the advent of fractional ownership. It enables you to sell and transfer your share of the property to others.
Real estate investment is an excellent way to generate passive income, but many people who have tried it know it is not without risk. The money at stake is substantial; the rewards are higher, but so are the risks. Real estate presents a challenge as a long-term investment because it is an illiquid asset.
Because the real estate market is not always going to get favorable, any investor must comprehend the liquidity risk that comes with investing in real estate. Investors must also understand the techniques they can use to minimize these risks and decrease the negative impact on property investment.
What Is Liquidity?
The liquidity of an asset is the ease with which it can get swapped for cash without impacting its market price. Cash is the most liquid asset available. Stocks, fine art, and collectibles are examples of liquid assets.
There is a spectrum of liquidity, with some assets nearer to liquidity, or easy to sell at their current value, and others nearer to illiquidity, or challenging to sell. This spectrum describes “liquidity risk,” which is an important consideration when making investments.
What Is Liquidity Risk?
Liquidity risk refers to the risk that a company or individual will not have enough cash flow and/or working capital to cover ongoing costs, pay creditors and lenders, keep capital facilities in good working order, and so on. It occurs in real estate investment when owners are unable to properly maintain their properties due to a shortage of financing, arising in tenants relocating. Some other scenario is when the investment itself – the property – becomes hard to sell rapidly enough that investors will keep it for a longer period than expected or sell it at a lower price just to attract buyers.
Real estate liquidity is an intriguing phrase because real estate assets are among the most illiquid investments. Real estate illiquidity could be a better moniker. However, in the realm of property investment, each asset class and investment strategy has its place on the liquidity risk spectrum.
What Exactly Is Real Estate Liquidity Risk?
One of the most significant risks of investing in real estate is the danger of real estate liquidity. Whether in residential or commercial property, In real estate, liquidity risk refers to the time it takes to advertise a property for sale, as opposed to stock or bonds, which may get sold whenever the exchange is open for business. Every year, the market sees trillions of dollars in commercial and residential real estate transactions, making it one of the world’s largest markets. To close a real estate deal, takes time, a connection between a buyer and seller, and direct negotiations between the seller and other parties.
Real estate is an illiquid asset compared to other investments for reasons unique to this industry and market.
Unlike most shares, many real estate transactions occur in private marketplaces, whereas shares get openly exchanged on web platforms. Private markets are priced as needed and lack transparency; public markets, on the other hand, offer consistent pricing and thorough client knowledge. Private marketplaces are sometimes more difficult to enter since they need a particular degree of recognition or status. It implies that before investing, buyers and investors must frequently do a proper market assessment, undertake due research, visit the property in person, and locate and contact brokers and real estate agents. It might be time-consuming.
Real estate transactions, as you may be aware, involve several participants and a substantial quantity of documentation. The process of arranging a bid, organizing funds, and executing the necessary due diligence might take weeks, further complicating the difficulty to turn real estate into cash rapidly. Furthermore, there is no doubt that real estate is expensive and necessitates a large amount of cash when investing. When a substantial volume of money is involved, transactions often take longer to execute.
How Exactly Does Fractional Ownership Solve Real Estate Liquidity Risk?
Real estate has a liquidity issue as seen above. So, it is understandable why you would prefer not to invest. But wait for a minute. If you have already started investing, you do not have to pull your money out from real estate. There’s still hope for you. How so? Fractional ownership to the rescue. Typical real estate investments have lesser liquidity than fractional property assets. Of course, you’d need to double-check your contract, but it’s unique to be able to sell your investment at any time, perhaps making trading less risky. Fractional ownership enables you to sell and transfer your share of the property to others.
Commercial Real Estate may now be readily liquidated by the co-owner thanks to the advent of fractional ownership. If a person with a fractional property investment wishes to sell their piece of the property, they may rapidly transfer their portion of the property to another interested investor. Also, remember that exclusive property ownership does not provide the investor with the same flexibility in switching between ventures.
So, what is this fractional ownership?
Fractional ownership is an investment technique in which a bunch of people each owns a section of a property, distributing the expenses of care and acquisitions plus the profit. Rather than buying a complete building and putting up all of the money, fractional ownership investing allows investors to purchase a proportional share of assets. Fractional ownership provides a low barrier to entry for new investors with minimal market understanding. A fractional ownership investor should begin investing in luxury properties in large cities without spending too much money.
Commercial renting spaces are expensive and entail having or investing crores, don’t they? The absence of crores, however, does not stop you from investing in financial structures. You can go forward even if you just have lakhs. With fractional ownership, anything is conceivable. A person can invest in fractional ownership of the commercial property through Assetmonk for Rs. 10 lacs.
Consider the value of a Rs 50 crore office space adjacent to your home. A decade ago, only REITs or affluent individuals will make such a significant investment. However, with fractional ownership, a person can contribute as little as Rs 10 lakh, become an owner, and share ownership of a property while earning rental income.
Are you excited to start investing in real estate now that you know it is easily liquid? Assetmonk is the premier site to invest in fractional ownership properties. It provides smart real estate investment alternatives such as Growth, Growth Plus, and Yield models to help you increase your investment with an estimated IRR of 21% each year. Visit our website today to get started in the right way with real estate investment!
Real Estate Is Stable Yet Illiquid: How Fractional Ownership Fixes This For An Aspiring Investor FAQs
Is fractional ownership in real estate a good investment?
Small investors can own physical real estate through fractional ownership as an alternative investment route. Online platforms like Assetmonk, enable people to invest ₹25 lakh or above in pre-leased Grade A commercial properties and obtain a good rental yield.
How do you invest in fractional ownership?
You can invest in fractional ownership via online platforms like Assetmonk. These platforms enable you to invest ₹25 lakh or above in pre-leased Grade A commercial properties and obtain a good rental yield.
