How to Avoid a Major Property Trap

In last week’s article, we explored the concept of liquidity within the property market – why it’s important to consider, and what the risks are for those who don’t.

This week, we’re getting a bit more practical. How should you account for liquidity when purchasing an investment property?

Understanding liquidity and its impact is crucial for making informed investment decisions and optimizing returns, especially in the inherently slow-moving property market.

Assessing Liquidity Before Investment

1. Evaluate Key Liquidity Metrics: Prior to investing, closely examine trends within key liquidity metrics such as Days on Market (DOM) and sales volumes. This information can provide valuable insights into how quickly a property might be sold in the current market, and where market liquidity levels seem to be heading.
2. Economic Diversity: Markets sustained by a diverse range of industries are generally more resilient and less susceptible to economic downturns, which can positively influence property liquidity. Analysing economic factors such as job growth rates, industry health, and new business development can provide critical insights into the long-term viability and liquidity of real estate investments in each area. Fortunately, this information is also crucial for understanding general market risks and capital growth potential.
3. Diversification: If you have the capacity, plan to diversify your real estate portfolio across different types of properties and locations to mitigate liquidity risks. If one asset becomes difficult to liquidate, others are less likely to be affected if they are in another location or are of a different type or price point.

When Selling

1. Timing the Market: Understanding the best times to sell based on liquidity data and economic conditions can maximise your returns. Sometimes, waiting a few months can significantly affect the liquidity and selling price.
2. Pricing Strategies: Are you in a sellers’ market, or a buyers’ market? Set a price that reflects both the current market conditions and the inherent value of your property.

Long-Term Considerations

1. Long-Term Growth Areas: Invest in areas where long-term growth is anticipated. Properties in such areas tend to remain liquid due to ongoing demand.
2. Flexibility in Plans: Consider flexible exit strategies. Market conditions can change, and having flexibility in your strategy can help you to adapt and still achieve favourable outcomes.
3. Continuous Learning: Stay updated with the latest trends and shifts in the real estate market. Understanding new factors influencing liquidity, like changes in government policies or the introduction of new technology, can provide a competitive edge.

Future expectations of market liquidity should always be a consideration! By actively considering liquidity from the outset through to the point of sale, you can minimise illiquidity risks and enhance the profitability of your investments.

Want to discuss this further?

For expert guidance in property strategy, and what it could mean for you as a property investor, book in for a free consultation to make informed decisions, tailored to your investment goals. Don’t let affordability challenges hinder your success. Act now with Search Party Property!