Assessing Liquidity in Real Estate Investment Structures
By Berkano Kleymeyer · July 2, 2024
When contemplating what type of real estate investment structure to take part in, it is important to assess the amount of liquidity the agreement has the potential to produce. This article ranks different partnerships based on generally least to most liquid real estate investment opportunities, as well as, other factors to analyze before investing.
Generally low liquidity
- General Partnerships: All partners share responsibility and control. Exiting the partnership requires finding another investor willing to buy your stake, which can be difficult.
- Limited Partnerships: Limited partners have less control, but also limited liability. LP agreements often restrict selling shares before a set date or require approvals from the general partner. Finding a buyer can be challenging.
- Tenancy-In-Common (TIC): Each partner owns a direct interest in the property. Selling requires finding a buyer for your specific ownership share, which can be time consuming.
Generally higher liquidity
- Funds with Redemption Rights: Some private real estate funds offer limited redemption windows where investors can sell their shares back to the fund at a predetermined price. These windows are infrequent and may have limitations on how much you can redeem
- Privately Traded REITs (Real Estate Investment Trusts): Unlike publicly traded REITs, these are not listed on stock exchanges. They target potential benefits like targeting specific property types or lower fees, but with significantly lower liquidity. Selling shares typically requires going through a redemption program managed by the REITs, which can be restrictive, infrequent, or even non-existent. Minimum investment amounts for private REITs can also be much higher than publicly traded REITs.
Most liquid
- Publicly Traded REITs: These traded on stock exchanges like any other stock, offer high liquidity. Prices can fluctuate based on market conditions, but one can generally buy and sell shares quickly.
Other factors that affect liquidity
- Investment size: Larger investments are generally less liquid as there are fewer potential buyers for a big stake.
- Asset type: Unique or specialized properties may be harder to sell quickly compared to common property types.
- Market conditions: A strong real estate market with high demand can improve liquidity for all types of partnerships.
Additional tips
- Review partnerships agreement carefully: Understand any restrictions on selling your share before investing.
- Look for redemption options: If liquidity is important, prioritize partnerships with redemption rights or clear exit strategies.
- Consider diversification: Spread your investments across different partnership types and asset classes to manage overall liquidity risk.
- Explore alternative liquidity options: Lpshares.com offers a secure and efficient platform for accredited investors and sponsors to trade shares of commercial real estate, multifamily properties, oil and gas, and other assets. This marketplace streamlines the process by bringing together individuals with similar investment interests, facilitating smooth transactions and high liquidity potential. Visit our website for more details and sign up to start enhancing your investment liquidity.