Illiquidity Can Be Your Friend in Real Estate Investments

Liquidity Versus Illiquidity

One of the best things about real estate investing is also one of the worst things about real estate investing. Illiquidity. Cash is liquid. Stocks are liquid. Real estate, not so much. 

Almost everyone likes cash in the bank. Cash in the bank is extremely liquid and whenever you want, you can just go get it by making a simple withdraw. The only problem with cash in the bank is that it does not go to work for you. 

Next, there are so many who are comfortable owning stocks because stocks are relatively liquid, too.  If you need a little money, you can always cash out stock and within a few days and the transaction is settled, you get your cash. Investments in real estate are very different. Investments in real estate assets are extremely illiquid, and paradoxically, that can be to your advantage. I have seen this first hand in my life and in the life of my father as he was investing in real estate.

Advantage of Illiquidity – Forced Savings

Why is illiquidity an advantage? Like it or not, owning real estate with recurring revenue becomes a forced savings plan and it keeps you from, quite frankly, spending the money if you could cash it out with ease. Many people admit, that when it comes to savings and investing, most of the time, we are our own worst enemy. 

Almost 15 years ago we invested in a commercial real estate property that we built from the ground up. Over the years, it has stayed leased up; and, even when we had vacancies, they have leased up with relative ease.

Even with the success of the asset, I still have to tell you that something about the property bugs me. What could bug anyone about an asset that is leased and on its way to being paid off? Illiquidity. I can’t get at the equity to deploy it elsewhere. As an investor, I have to keep reminding myself that illiquidity is a good thing. 

Human Nature Versus Forced Savings

So, my human nature wants to take out the equity and make it cash. But that is precisely the benefit of having the loan on the property. The property is effectively a forced savings plan for all of us involved with the asset.

It is important to recognize that there is a higher and more disciplined level of investor that understands that by paying off the loan in a relatively short period of time, that there will be a day that is not too far off in the future where we will have 100% free cash flow from a paid off asset. And when that day comes, the financial impact will be significant. 

Aggressive Payment of Debt

When we structure the payment of real estate pay off aggressively it requires one thing: patience. Patience is something that the post-modern world is not known for. But if you can force yourself to live without pulling out the equity now, you create an asset that is going to impact your cash flow later in life, when your peak income years are behind you and when you are likely going to need income the most.  

From time to time paying off a loan fast or paying off the loan aggressively forces investors to keep the money tied up in that real estate asset, instead of cash. And not having the cash to spend forces us to save even more and more, even if we can't spend what we are saving. I learned from my dad at a very early age that the very nature of real estate investment causes us to save and forces the disciplined investor to build equity. When I was young, my family lived humbly during the years that the assets were paying off, and that turned out to be the best path to achieve wealth. For my mom, who is almost 90 and living with long term care needs, the reward during her later years is significant. I have learned first-hand that illiquidity can be your friend.

Chris Hotze is the Founder and CEO of Cresecere Capital in Houston, Texas. Chris believes that everyone should understand the importance of having recurring revenue from real estate. Crescere is a firm that brings like minded real estate investors together with a goal of recurring revenue. For more information go to www.crescerecapital.com.