Property Investing And The Advantages of an Illiquid Asset

Property Investing And The Advantages of an Illiquid Asset

Real estate is a great way to build wealth, and owning property has made a lot of people a lot of money over the years. However, equity investing has yielded similar, if not better results over the years (although this varies from market to market and depends on which benchmark you use.)

The one primary difference between real estate investing and equity investing, however, is liquidity.

The liquidity issue

It is very well known that investors are their own worst enemy. Instead of buying low and selling high, investors generally tend to follow the heard and buy high, when everyone is talking about an investment, and sell low, when they can’t take the losses anymore.

Equity markets are happy to facilitate this frenzied trading. Global equity markets are highly liquid and provide second-by-second updates of the value of your investment so you can see how much you’re losing (or making) at any time of the day and jump out of the position in a fraction of a second (if you’re willing to pay the price offered).

Real estate markets, on the other hand, don’t have anywhere near the same level of liquidity. While some companies are trying to speed up the process, in many regions around the world, just completing the paperwork to buy or sell a property takes several weeks.

In London, which is arguably one of the world’s most liquid and sought after property markets, a recent study reported that it takes an average of 126 days to sell a property. In Manhatten, it currently takes around 93 days.

Of course, it can take much longer. London’s most expensive property, which was acquired by hedge fund manager Ken Griffin for over $100 million at the beginning of 2019 was on the market for 18 months in total. In other words, real estate markets are nowhere near as liquid or efficient as equity markets.

This is actually a great benefit to the individual investor. Because there’s no constant price update, or facility to sell a property just because the price has fallen 1%, it is much easier to buy and hold. Even if the property market crashes and prices fall 20%, if it takes nearly two years to sell the property, in this time, the market could have turned around, saving the investor from themselves.

The bottom line

The key lesson from this is that equity investors can learn a lot from the real estate market. Over the past 100 years, the S&P 500 has produced an average annual return of around 10% for investors, at this rate of return, you could double your money every 7.2 years.

Unfortunately, most investors struggle to achieve the same profits because they buy and sell at the wrong times; there’s no mechanism to protect them from themselves. The real estate market has that mechanism, which is why many property owners have accumulated a considerable amount of property wealth just by buying and holding.

Without constant price updates, there’s no temptation to sell at a weak price, helping real estate investors ride out market declines.

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