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Discover why illiquidity is a major concern for investors in real estate investment trusts (REITs) and how it affects their investment decisions in the US market.

Investing in real estate has always been an attractive option for investors seeking stability and long-term returns. However, when it comes to real estate investment trusts (REITs), there is a significant concern that often comes into play: illiquidity. Illiquidity refers to the limited ability to convert an investment into cash quickly without incurring substantial losses. In this article, we will explore why illiquidity is a major concern for those investing in REITs in the US market.

Illiquidity and its Impact on REIT Investments

REITs are investment vehicles that pool together funds from various investors to invest in income-generating real estate properties. These properties can include commercial buildings, residential complexes, hotels, and even infrastructure projects. While REITs provide an opportunity for individuals to invest in real estate without the hassle of property management, illiquidity remains a prominent concern. Let's delve into how illiquidity impacts REIT investments.

  1. Difficulty in Selling Shares
An investment in real estate is generally considered a good way to combat inflation but illiquid. The owner of rental property can deduct depreciation expenses when filing a tax return. When money is left over after expenses are paid, a negative cash flow exists. A limited partner organizes a real estate syndicate.

Is a REIT a liquid?

Publicly Traded REITs

They're highly liquid – meaning they can be bought or sold at any time so your money isn't tied up – and are open to all types of investors. You can open a brokerage account with any online trading platform and begin purchasing REITs.

Are investors in alternative assets who seek liquidity most likely to invest in?

Hedge funds

real estate investment trusts. private equity. Investors in alternative assets who seek liquidity are most likely to invest in: hedge funds.

Why is private equity illiquid?

Private equity is an illiquid asset class; investors cannot sell their funds when they want to without potentially facing high losses. However, unlike other illiquid asset classes, private equity is a distributing asset - a cash-flow based asset class that generates liquidity when the underlying investments are sold.

Why illiquidity is a major drawback for real estate investment?

That is due in large part to the fact that real estate is a relatively illiquid investment. High liquidity means an asset can be liquidated into cash very quickly. High illiquidity means that it may take a protracted period to turn that asset into cash. Real estate moves slowly through the liquidation process.

Can you make a profit on a beach house?

Buying a beach house can bring an excellent return on investment, a reliable income stream, and access to a delightful vacation spot. Many beach house investors purchase homes that they subsequently rent out during peak tourism times.

How much profit should you make on a vacation rental property?


Before we jump into the best ways to increase your vacation rental revenue, let's first understand what you should ideally aim for. A 10-20% return on investment from your vacation rental property is considered a good profit margin.

Frequently Asked Questions

Do vacation rentals make money?

On the other hand, the data collected by Airbnb and Vrbo suggests that vacation rental owners can make anything from about $11,000 to as much as $33,000 per year.

Why do people invest more when interest rates are low?

Lowering rates makes borrowing money cheaper. This encourages consumer and business spending and investment and can boost asset prices. Lowering rates, however, can also lead to problems such as inflation and liquidity traps, which undermine the effectiveness of low rates.

Are REITs a good investment during inflation?

As interest rates rise, they can depress the price of these REITs. So while dividends may climb with interest rates, the price of publicly-traded REITs may decline. Historically, REITs are one of the better-performing sectors during inflationary periods.

Is a beach house rental a good investment?

On average, beach property attracts a higher income than those not offering beach amenities or something similar. Naturally, the higher prices you are able to charge per night for your rental home, the more chance you have of turning a profit quickly — provided your expenses are kept under control.

What are the cons of a beach house?

High Cost & Maintenance

Owning a beach house property comes with high costs and maintenance. Real estate costs are always higher for beach properties as compared to other locations. The interest on a mortgage will also be a premium due to demand for beach houses and its location.

Why not to buy a beach house?

Along with the usual risks of a residential property, beach houses have additional security concerns. For example, the ocean is an ever-present threat. It's important to ensure your house is secure against potential flooding or storm damage that could come from hurricane season or even just high tides.

What is the 2% rule in real estate?

2% Rule. The 2% rule is the same as the 1% rule – it just uses a different number. The 2% rule states that the monthly rent for an investment property should be equal to or no less than 2% of the purchase price. Here's an example of the 2% rule for a home with the purchase price of $150,000: $150,000 x 0.02 = $3,000.

Why are REITs doing so poorly?

Since REITs typically employ heavy leverage to develop and manage properties, high interest rates tend to increase borrowing costs and at the same time slow down property appreciation. That could leave some REITs with less revenue to dish out to shareholders, making them slightly less attractive this year.

Why are REITs underperformed?

Bhagat said, “When interest rates go up, the value of the REIT is subdued, when interest rates go down, the value of the REIT goes up. So, the interest rate has been one of the biggest reasons for REITs not performing to the expectation of the investor.”

Why are REITs not performing?

The cost of borrowing money rises as interest rates rise, making it more difficult for REITs to finance their operations. REITs' share prices may fall as a result of this, which may result in lower income. There are a few factors contributing to the decline in Indian REITs. The rising interest rates are one reason.


Why I don't invest in REITs?

Nine Reasons Not to Invest in REITs

But, REITs are not risk free. They may have highly variable returns, are sensitive to changes in interest rates, have income tax implications, may not be liquid, and fees can impact total returns.

Do REITs do well in a recession?
REITs historically perform well during and after recessions | Pensions & Investments.

What is an acceptable fee for a fund to charge?

Fee structures are usually based on a percentage of assets under management (AUM). Fees tend to range from 0.10% to more than 2% of AUM.

How are fund fees calculated?

To calculate expense ratio fees, multiply the expense ratio as a decimal by the value of your investment. For instance, if you select a fund with an expense ratio of 0.65%, you will annually be charged $65 in fees for every $10,000 you invest in the fund.

What is a typical acquisition fee?

Between 1% and 2%

The typical acquisition fee for commercial property is between 1% and 2%. The higher end of this spectrum often contains smaller real estate transactions, while the lower end typically contains bigger transactions.

Do real estate funds charge acquisition fees?

When a fund closes on the acquisition of a new property, the sponsor will often charge an acquisition fee. This fee is charged to cover the cost of the investment team's time and expense in sourcing, diligencing, and closing on an asset.

Is a 1% management fee high?

Many financial advisers charge based on how much money they manage on your behalf, and 1% of your total assets under management is a pretty standard fee.

Is beachfront property a good investment?

On average, beach property attracts a higher income than those not offering beach amenities or something similar. Naturally, the higher prices you are able to charge per night for your rental home, the more chance you have of turning a profit quickly — provided your expenses are kept under control.

Why do people buy beach homes?

A beach home could be your escape from the busyness of your daily life, or it could be a real estate investment, complete with rental income. Regardless of whether you're looking at a beach home for pleasure or income, you should weigh the benefits and concerns before purchasing your slice of beach property.

What is the risk of buying beachfront property?

One of the biggest risks involved in buying an oceanfront property is coastal erosion, which can lead to flooding. Make sure you are aware of the potential risks and have a plan in place for what you'll do if this happens. Another major risk factor when buying an oceanfront property is hurricanes.

Illiquidity is most likely a major concern when investing in real estate investment trusts

Why is oceanfront property so expensive?

There's a reason why “waterfront property is phenomenally expensive,” he says: there's a finite supply of coastal property, and people like to live on the water. Buyers may also, not unreasonably, view sea level rise as a long-term issue and believe mitigation efforts will successfully hold back the rising tides.

What state has the cheapest oceanfront property? Top 10 list of most affordable US beach towns for homebuyers in...
  • Gulfport, Mississippi. Median price within 1 mile of a beach: $224,900.
  • Newport News, Virginia.
  • New London, Connecticut.
  • Grand Isle, Louisiana.
  • Corpus Christi, Texas.
  • Atlantic City, New Jersey.
  • Navarre, FL.
  • Crescent City, California.
What is live water on ranch?

Ranch water can be from the underground aquifer by well or pump, or it can be accessed directly from the land, in streams, or ponds. Having open water is referred to as live water.

What are the water terms in real estate? Riparian rights allow a property owner to use water from a water course such as a river, stream, or creek. Littoral rights concern properties abutting an ocean, sea, or lake rather than a river or stream. Littoral rights are usually concerned with the use and enjoyment of the shore.

Do property owners who live on or next to water have certain rights?

Littoral rights refers to the right to use of the shore on your property. Traditionally, owners of riparian and littoral land have the right to the reasonable use of the water. Under reasonable use, a landowner may use the water only to the extent that they can make beneficial use of it upon their land.

Who owns the land under a body of water?

The low-water mark is used to determine who owns the land under a body of water. In most cases, the owner of the land owns the land up to the low-water mark. States generally own the bed of navigable water below the low-water mark.

Why is it called Ranch Water?

Folklore and myth say this potion's moniker came from a feral rancher who, charmed by the Ranch Water's spirits, embarked on a journey following the West Texas stars that would take him from Fort Davis to Marathon, where he concluded his odyssey with a nap beneath a Pinon tree.

Can you make money renting out a beach house? On average, beach property attracts a higher income than those not offering beach amenities or something similar. Naturally, the higher prices you are able to charge per night for your rental home, the more chance you have of turning a profit quickly — provided your expenses are kept under control.

How to stock a beach house rental? What to Stock Your Beach Home Rental With:
  1. Clean linens (10)
  2. Antibacterial wipes (8)
  3. Hand sanitizer (9)
  4. Febreze/Air fresheners (6)
  5. Appliances in good working condition (10)
Is it worth it to buy a vacation rental property?

One of the massive advantages is the consistent cash flow. Platforms for renting homes like Airbnb and VRBO are excellent ways to enjoy a consistent cash flow when starting an Airbnb business. According to research, when you buy a vacation rental property, you can earn an average of $900 every month.

  • Why are REITs not doing well?
    • A high interest rate environment and bearish investor sentiments have made it a tough year for REIT companies. In general, REITs are underperforming the real estate sector, which isn't exactly having the best year of its life either.

  • Can you lose money on REITs?
    • Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.

  • Does a REIT pass through losses?
    • Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors. Consider consulting your tax adviser before investing in REITs.

  • Will REITs recover in 2023?
    • REITs are entering this period of slower economic growth with strong operational performance and are well-positioned for economic uncertainty in 2023. Our analysis of CRE and REITs notes that REITs had impressive operational results with record high earnings during 2022, despite their lower stock market valuations.

  • What is the best month to buy a beach house?
    • Hear this out loudPauseThe best deals on vacation homes tend to be at the very end of peak season. For beach homes this falls right around Labor Day. Many time sellers will be locking up their properties for months knowing there won't be many renters and might be looking to get it off of their own hands.

  • What are the steps of buying a house in Florida?
    • 8 Steps for Buying a House in Florida
      1. Know how much house you can afford.
      2. Save up a down payment.
      3. Budget for closing costs and moving expenses.
      4. Get preapproved for a mortgage.
      5. Find your dream Florida home.
      6. Make a competitive offer.
      7. Finalize your financing.
      8. Close on your Florida house—woo-hoo!
  • What do I need to know before buying a house in Florida?
    • Tips For Buying A House In Florida
      1. Know The Real Estate Market.
      2. Use A Trusted Florida Real Estate Agent.
      3. Explore Available Financing Options.
      4. Understand Florida Property Taxes.
      5. Factor Weather Into Insurance Projections.
      6. Learn The Laws For Ocean Front Property.
      7. Ask About Deed Restrictions.
      8. Prepare To Pay Higher Closing Costs.
  • Why are coastal properties expensive?
    • Hear this out loudPause“An ocean view and proximity to the beach continue to make these properties more expensive and attractive to buyers despite warnings of danger.” In California's coastal home market, Yu finds some 66,600 homes housing about 155,600 people likely to drop in value under moderate scenarios for sea level rise.

  • Are coastal homes a good investment?
    • Hear this out loudPauseOn average, beach property attracts a higher income than those not offering beach amenities or something similar. Naturally, the higher prices you are able to charge per night for your rental home, the more chance you have of turning a profit quickly — provided your expenses are kept under control.

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