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If you want to be as informed as possible with your investment, you need to understand what liquidity is and how it relates to real estate investing.

Liquidity is the ability to turn any asset into cash.

The easier it is to turn an asset into cash, the more of a liquid asset it is.

Is real estate a liquid investment?

The short answer is no. Real estate is not a liquid asset class. But there's a catch – that's actually a good thing.

Common sense says people want to have liquid investments. You want to be able to convert things into cash if you need to, right?

That's one reason why people have been in the stock market for so long. With the stock market, you can press the sell button, someone sells your ownership in a company, and you convert it to cash.

The reality, though (there is some data to back this up) it’s not such a good thing. The reason is, we have emotions. We’re emotional creatures, and our emotions often drive us to do things that don't make a lot of sense.

People tend to buy at the high points in asset cycles, and they tend to sell at the low point.

If you want proof, just look at the housing crash in 2008. In the years building up to it, when there was a giant bubble building, things were super expensive, yet people were buying left and right.

Right after the crash, every single home, every single apartment building was effectively on sale, people were scared, and they didn't want to buy. They were acting with their emotions. They were buying it high, and they were selling it low.

So the illiquidity in real estate is actually a benefit because it prevents you from making emotional decisions that in the long term can hurt your financial well-being.

Back in September of 2021, there was some great data about the 20 year average of the S&P 500, which is a mixture of stocks. The average return in the S&P 500, If you bought it for January 1, and then 20 years later, you sold on December 31, was 7.7%.

But what type of financial performance did the average investor experience? The average investor got 4.8%. Why is that? Because they bought when it was high, and they sold when it was low.

So even though the market performed at a certain rate, the average investor experienced about 50% or 60% of that rate, because their emotions got in the way.

So, our advice is to stick with illiquid assets that don't allow your emotions to influence your investments.

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