Your investments: Liquidity versus buying an apartment - opinion

Often when we are younger and we start to accumulate wealth, one aspect that we tend to neglect is the need for liquidity.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
Recently, I had back-to-back Zoom meetings with a few divorced women and a widower. In each meeting we discussed their financial situation – each one had come into cash and needed to make some investment decisions – as well as their goals and needs.
In each case it appeared that supplementary income was going to be needed to make ends meet on a monthly basis, and the money would need to be invested to generate the missing income.
In all three cases, there appeared to be a good chance that some principal would be needed to be withdrawn as well, as it would be difficult to generate all the required income from investments. In each case the first issue raised was whether they should use all their available cash to buy an apartment and rent it out for extra income. They each said that was what their friends were telling them to do. I tell you at one point I thought it was a practical joke that someone was playing on me. What were the odds that within such a short time period I would have three similar meetings and that each one knew which button to press to get my blood pressure to spike.
As I have written before, it’s a pet peeve of mine when people volunteer advice to their friends without knowing anything about their specific financial situation.
Often when we are younger and we start to accumulate wealth, one aspect that we tend to neglect is the need for liquidity.
I have met with numerous individuals over the years that have invested everything they have in either their business or, more commonly, in real estate. I have spent many columns writing about the need to save in any way possible. The more you can save and invest the better. But there is another very important aspect that needs to be paid attention to and that’s liquidity.
What is liquidity?
Liquidity is the ability to quickly convert an investment into cash. For example, a savings account is highly liquid. In contrast, real estate is considered to have low liquidity because of the time it takes to sell the property and the fact that if you need to sell quickly, like a fire sale, you will end up paying the piper as the price of your property will drop. Let’s say that one of the people discussed above went ahead and put almost of their cash into a rental apartment.
One day, heaven forbid, they have a health crisis that requires them to both hire a foreign worker and make a renovation to their home to make it wheelchair accessible, and that cost comes to $50,000. How will that be paid for? You can’t take a saw and cut off a room and say, “Take a bedroom, it’s worth $50,000.” It just does not work that way.
I’m not even going to mention whether you really want to become a landlord when you get older and deal with broken pipes and tenants that don’t pay rent. For many, that’s a big reason to avoid an investment apartment.
What to do?
So you’ve come into some money, but due to your situation you need more income than you are currently receiving. What should you do? With real estate in Israel generating between 2% and 3% from rental income, the name of the game here is capital appreciation.
Meaning that most of the total return gained in Israeli real estate comes from buying a place for NIS 1.5 million and selling it for NIS 2.5m. That might not be such a big help if you are lacking current income. It may pay to invest the money in a stock and fixed income portfolio.
You will be able to achieve the same level if not more income than in a rental property, with potential for capital appreciation, and most importantly, you will preserve your liquidity which is so important. Whatever you decide to do please consult with a professional. Your friends may mean well but chances are they don’t have all the facts to advise you to make such an important decision.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
The writer is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.; [email protected]