screen: Lets look at Frankies investment as an example.

Level 21: Commercial and Investment Property II - Chapter 2: Liquidity and Investment Property Flashcards Real Estate: Rock SolidQuestion: How does real estate's illiquid characteristic

impact investors?Answer: A real estate investor must be

willing to be patient with a real estate investment. If an investor does not have a sufficient savings account for a rainy day, then they probably shouldn't invest money in real estate as they may be put into a bad position due to real estate's illiquid characteristic.Transition into the next

screen: Let's look at Frankie's investment as an example.

Real Estate Characteristic #2: Low Liquidity Liquidity refers to ease and speed with which an asset can be bought or sold without significantly diminishing the asset's value. Regardless of the asset class, liquidity requires a marketplace where buyers and sellers are ready,

willing, and able to trade.Example: If you had four boxes of

pizza in a college dormitory, you'd probably be able to quickly find some buyers willing to give you cash in exchange for some 'za - the liquidity for the pizza is very high in a dorm.Real Estate: Low Marketability, Low Liquidity Real estate investments do not have a strong attribute of marketability or liquidity. Finding a buyer of real estate property takes time, and it is time-consuming to find someone willing to purchase a real estate property at its

value.Recap: Real estate investors should not invest

capital they'll need to access quickly. In general, real estate investments are illiquid, non-marketable investments.Liquidity and Investment Property Types: Some HighlightsLet's discuss how liquidity impacts investment property types differently.Office buildings have lower liquidity in comparison to other real estate property types. Real estate properties are generally illiquid, but office buildings are even more illiquid. It takes a significant amount of time for an office building investor to find a potential buyer willing to purchase their property for its market value. This is due to the large size and complicated nature of office building transactions.The larger and more complicated the deal, the less liquidity the investment has. Finding sellers for a shopping center is much harder than finding a buyer for a single-family home. Investors should not invest capital into large real estate transactions if they need easy access to the capital.Less complicated real estate properties are relatively more liquid than more complicated transactions.Logically, the inverse to the point we discussed on the

previous screen is true. A single-family home is much easier to sell than a large apartment building or an office

building.Note: Real estate is generally illiquid in comparison

to other investment vehicles (stocks, bonds). No matter the type of real estate investment, real estate investors should realize the illiquid nature of their investment property.Frankie's Liquidity ExampleTimes are good for Frankie. He recently purchased his first real estate investment, a single-family home in the Bronx.Feeling good about his investment ways, Frankie decided to purchase another single-family home in the Bronx. He used the majority of the remaining funds in his emergency savings account in order to make the down payment.After all, things were going well! His rental income covered his mortgage payments and his houses were increasing in value every year.Unfortunately for Frankie, times took a downturn. The Bronx neighborhood where his two homes were located was in the local news for a string of burglaries. Suddenly, the demand for housing in that neighborhood decreased (space market risk!).Based off this news, one of Frankie's tenants decided not to renew their lease. Frankie struggled to find a new tenant willing to

pay the same rent amount as the previous tenant, so one of his investment properties remained vacant for a few months.Frankie began to struggle to pay his mortgage as his rental income was now cut in half.In order to avoid potential foreclosure, Frankie decided to try to sell his home. However, he found that not many people wanted to buy his home at his desired price.Frankie was now caught in an awkward time period where he was forced to decided whether to sell his home at a lower price or risk defaulting on his mortgage. Eventually, he sold the home to a buyer

willing to pay 20% less than his asking price.Recap:

Frankie lost money on his real estate investment because he wasn't prepared for the illiquid nature of real estate.Liquidity Investment ExamplesThe most liquid of investments would be cash. A briefcase of $100 bills is... already currency! Not too hard to transform cash into cash. Perhaps a better example of a

liquid investment is the following:A gas station owner. He

purchases oil from the gas company regularly, and regularly the gas station customers pay the owner for their investment (gas). It's a very liquid investment.A stock owner. After seeing their stocks increase to an acceptable amount of value, a stock owner can use an online trading website or their broker to almost immediately cash in their stocks for their current market value. Very, very liquid.Liquidity vs MarketabilityIn investments, there is another principle that is commonly

confused with liquidity: marketability. Let's break both terms

down.Liquidity: the ability to sell an asset at any time

without losing valueMarketability: the ability to sell an asset

at any timeConfusing these two terms could lead to a loss of a significant amount of money. (I'll show why on the upcoming screen.) Savings Account: LiquiditySay you decided to put $1,000 in a savings account. Three years later, you decided to withdraw your $1,000. You