Illiquidity Premium

The additional return investors expect as compensation for the cost and inconvenience of investing into assets that are not readily tradeable. The illiquidity premium is calculated by measuring the excess return of a less tradeable investment vs. a comparable tradeable investment.

Liquidity refers to how easily an asset can be converted to cash. Illiquid assets such as apartments do not have a readily available market price and incur high transaction costs when buying or selling. As a result, investors demand a higher return for holding these types of investments.