Liquidity

Liquidity is the ease and ability that an asset or security has to be converted into cash. Liquidity is measured as a ratio of assets to liabilities. Beyond knowing that there is enough Liquid assets to pay current liabilities, a real estate investor’s focus should be on generating cash to grow the number and size of total investment holdings. For example, a real estate investor purchased a relatively new income-producing property that the previous owners had not managed well. The property had originally cost $1,400,000 to build, but was valued at $1,000,000 using the income method of appraisal. The investor put a $200,000 down payment on the property and took an $800,000 mortgage to make the purchase. Within a few years the investor had improved the performance of the investment. Securities were purchased as surplus income was generated to pay back the original down payment. The property was later sold for $1,400,000. The higher price was substantiated as the new appraisal increased the income established by the investment’s improved performance. The securities were sold within days to form the Liquid capital necessary to take the next big step in real estate investment. The investor now had $600,000 net from the sale of the property and the original $200,000 in cash. With $800,000 cash the investor was then able to buy four $1,000,000 properties with $200,000 down on each. By saving the incremental income earned and selling the property to unleash the equity built into the original investment, this investor grew the total investment from $1,000,000 to $4,000,000. The equity grew from $200,000 to $800,000 using this strategy.