5 Key Benefits of Becoming a Home Builder for Real Estate Investors

In recent years, an increasing number of investors in the world of real estate investment are acquiring building contractor licenses themselves. Many investors may be considering becoming building contractors themselves after hearing of the various advantages, such as "Raines is available," "property information is easily gathered," and "brokerage commission income can be earned.

However, obtaining a building contractor's license involves a considerable amount of cost, time, and ongoing obligations. Is it really beneficial for real estate investors to become a building contractor?

In this article, we will explain in detail the specific advantages and disadvantages, as well as the cost-effectiveness, of becoming a real estate investor's building contractor, based on our many years of experience in the real estate industry as INA&Associates, Inc. We hope to provide decision-making information for investors who are considering obtaining a building contractor license.

Understanding the difference between a building contractor and a real estate investor

Before discussing the merits of obtaining a building contractor license, it is first necessary to clarify the fundamental difference between a building contract or and areal estate investor.

Definition and Activities of a Real Estate Investor

A real estate investor is an individual or legal entity that derives income primarily through the purchase, holding, sale, or rental of property. Their activities are characterized as follows

The main activity of real estate investors is to acquire income-producing properties using their own funds or loans, and to generate rental income and gains from the sale of such properties. In most cases, the basic strategy is to manage rental properties by holding them for the long term, aiming to build a stable cash flow. Another important source of income is to earn capital gains by selling properties at appropriate times while keeping an eye on market trends.

Since investors' activities are basically conducted as their own asset management, they are not involved in other people's real estate transactions. Therefore, in many cases, a real estate broker license is not required.

Definition and Scope of Real Estate Agents

On the other hand, a real estate transaction contractor is a business operator that repeatedly and continuously engages in the sale and purchase, exchange, brokerage, and representation of real estate based on the Building Lots and Buildings Transaction Business Law (Building Lots and Buildings Transaction Business Law). In order to be recognized as a real estate agent, a license from the Ministry of Land, Infrastructure, Transport and Tourism or the prefectural governor is mandatory.

The scope of a building contractor's business is wide-ranging. In real estate brokerage, they stand between the seller and the buyer to support the conclusion of a contract and receive the statutory brokerage fee. Similarly, in leasing brokerage, they serve as a bridge between the lessor and the lessee. In addition, they also perform seller duties, in which they acquire and sell real estate themselves, and represent others in real estate transactions at their request.

In order to properly carry out these duties, strict legal requirements are imposed on building contractors, such as the obligation toinstall building contractors andthe obligation to provide explanations of important matters.

Relationship between the two and areas of overlap

At first glance, real estate investors and building contractors appear to operate in different areas, but in reality there is overlap between the two.

In particular, if an investor adopts an investment strategy of repeatedly reselling properties over a short period of time, his or her activities may fall under the category of a building contractor. Under the law, the act of repeatedly and continuously buying and selling real estate for profit is considered a building contractor business, and therefore, a building contractor license must be obtained if this investment style is adopted.

In addition, when an investor uses his or her knowledge and experience to assist others in real estate transactions and receives compensation, this is also considered 宅建業. There is a risk of violating the Building Lots and Buildings Transaction Business Law if the appropriate license is not obtained when engaging in such activities.

Thus, the line between a real estate investor and a building contractor is not always clear, and in some cases, depending on the investor's activities, it may be necessary to obtain a building contractor license.

5 Key Advantages of Real Estate Investors Becoming Building Contractors

There are a wide range of benefits that a real estate investor can gain by obtaining a building contractor license. Here we detail five particularly important advantages.

Advantage 1: Information advantage through access to REINS (Raines)

One of the greatest advantages of obtaining a building contractor license is the ability to access REINS (Real EstateInformationNetworkSystem).

Raines is an online system for building contractors nationwide to share property information. This system stores property information and detailed transaction case data that is not available on general real estate portal sites. By using this system, which is accessible only to building contractors, investors can gain the following information advantages.

First, it provides early access to information on unlisted properties. Quality investment properties are often traded among building contractors before they hit the market, and by the time the average investor has access to this information, many have already been sold. By having access to Raines, you will be able to quickly identify such quality properties and greatly reduce the risk of missing out on investment opportunities.

Second, you will be able to get an accurate grasp of market prices. Raines contains detailed records of past transactions, allowing for accurate analysis of contract prices and market trends for similar properties. This information is extremely important for investment decisions and directly leads to setting appropriate purchase prices and improving the accuracy of future earnings forecasts.

In addition, it also enables us to understand the trends of our competitors. By analyzing market trends in detail, such as what types of properties have been under contract over what period of time and pricing trends, you can develop more strategic investment activities.

Merit 2: Diversification of revenue sources through brokerage commission income

By obtaining a real estate brokerage license, you can acquire a new revenue source in the form of brokerage commission income, in addition to conventional rental income and profit from the sale of properties.

The Real Estate Brokerage Law sets a maximum commission limit for real estate brokerage commissions. When the sales price exceeds 4 million yen, the upper limit is "sales price x 3% + 60,000 yen + consumption tax. For example, if you act as a sales agent for a 30 million yen property, you can receive a maximum of 1,056,000 yen (including tax) in brokerage commissions.

The attraction of this brokerage commission income is that it provides a reliable revenue stream in a relatively short period of time. While rental management requires earning rental income over a long period of time, brokerage services allow you to earn commission income as soon as a contract is concluded. In addition, since there is no need to invest one's own funds in the acquisition of properties, improved capital efficiency can be expected.

In addition, by utilizing your experience and knowledge as an investor, you can provide high value-added services. By going beyond mere property introductions and providing professional advice such as investment profitability analysis and future market forecasts, you can differentiate yourself from your competitors and earn higher commission income.

Advantage 3: Improved investment decision-making through in-depth understanding of the Important Matters Explanatory Document

By acting as a real estate agent, you will be able to gain a deeper understanding of the contents of the Important Matters Explanatory Statement. This will greatly contribute to improving your judgment as an investor.

The Important Matters Explanation is a document that summarizes the important matters that a buyer should know in a real estate transaction. It contains detailed information directly related to investment decisions, such as the property's rights, legal restrictions, infrastructure, and surrounding environment.

Many investors often proceed with a contract without fully understanding the contents when receiving an explanation of important matters. However, by being in a position to provide an explanation of important matters as a building contractor, one can gain a deeper understanding of the meaning of each item and its impact on the investment.

For example, restrictions under the City Planning Law and the Building Standards Law have a significant impact on the possibility of future rebuilding or expansion and renovation. In addition, the status of infrastructure development is directly related to maintenance and management costs, and predicted changes in the surrounding environment are important factors in setting rents and assessing vacancy risk.

By acquiring such specialized knowledge, early detection of risks andaccurate evaluation of profitability become possible, enabling higher quality investment decisions.

Benefit 4: Enhanced risk aversion through acquisition of legal knowledge

In order to obtain a real estate broker license, it is necessary to acquire knowledge of real estate-related laws and regulations, including the Building Lots and Buildings Transaction Business Law. This legal knowledge will greatly enhance your ability to avoid risk in your investment activities.

There are various legal risks involved in real estate investment. There are many cases where unexpected losses are incurred due to insufficient knowledge of contractual non-conformity liability, liability for defects, restrictions under the Land and House Lease Law, and tax law treatment.

By acquiring the necessary legal knowledge as a licensed real estate agent, you will be able to accurately understand the contents of contracts and detect unfavorable clauses and potential risks in advance. It will also enable you to negotiate appropriate contract terms and increase the likelihood that you will be able to acquire a property under more favorable transaction terms.

In addition, the company will have continuous access to information on legal and institutional changes, enabling it to respond quickly to changes in the legal environment. This allows us to minimize the impact of new regulations and, in some cases, to take advantage of systemic changes as investment opportunities.

Benefit 5: Increased credibility and expanded network within the industry

Obtaining a building contractor license will significantly increase your credibility within the real estate industry. This is an important benefit that can lead to new business opportunities and access to useful information.

By being recognized as a building contractor, you can establish equal business relationships with other real estate companies, financial institutions, and construction companies. By being treated as a peer rather than merely a customer, you can exchange information and collaborate on a deeper level.

It also allows for participation in industry associations such as the Building Contractors Association and the Real Estate Association of Japan. These organizations regularly hold training sessions and information exchange meetings, providing ample opportunities to learn about the latest market trends, information on legal revisions, and best practices.

In addition, they can expect to improve their credibility with financial institutions. Doing business as a building contractor proves that you have expertise and experience in real estate, which may work to your advantage in the loan approval process. This increased level of trust is especially beneficial when considering business loans.

Expanded networking within the industry also increases opportunities forearly access to quality property information andfavorable terms. Providing information based on a relationship of trust often leads to valuable investment opportunities that cannot be obtained through general sales activities, and this can greatly contribute to improved long-term investment results.

Requirements and Costs for Obtaining a Building Builder's License

Now that you understand the benefits of obtaining a building contractor license, let's take a closer look at the requirements and costs required to actually obtain the license.

Obtaining a Licensed Real Estate Builder License

In order to obtain a real estate agent license, you must first obtain a real estate agent license. The Building Lots and Buildings Business Law requires that each business office have at least one licensed real estate agent for every five employees.

The real estate exam is held once a year, usually on the third Sunday in October. There are no restrictions on eligibility, and anyone can take the exam regardless of education, age, or work experience. The exam is administered in a mark-sensitive format, and the pass rate is usually around 15%.

After passing the examination, applicants must have at least two years of work experience or complete a registered practical training course. If you do not have work experience, you can fulfill the requirement by taking a registered practical training course (about one month) conducted by a designated organization. After that, you can apply for and receive a registered real estate contractor certificate to start your activities as a registered real estate contractor.

Requirements for Establishing an Office

In order to operate a real estate business, an appropriate office must be established. The following requirements are stipulated for an office

The office must be a facility that is capable of conducting business on a continuous basis. A portion of a residence may be used as an office, but it must be an independent space that does not interfere with business operations. In addition, the office is required to post the building contractor's certificate, a list of fees, and keep books of account.

In addition, the office must have a full-time licensed real estate agent.

Joining a Guarantee Association

Building contractors are required to deposit abusiness security deposit or join a surety association to ensure the safety of transactions.

When depositing the business security deposit, 10 million yen for the main office and 5 million yen for each other office must be deposited with the Legal Affairs Bureau. On the other hand, when joining a guarantee association, a 600,000 yen deposit for the main office and a 300,000 yen deposit for each of the other offices must be paid.

Many building contractors choose to join a guarantee association to reduce their financial burden. Guarantee associations include the National Federation of Building Lots and Buildings Transaction Associations (ZENYAKUREN) and the All Japan Real Estate Association (ZENJAPAN), each of which offers different services and benefits.

Details of Acquisition Fees

The following table summarizes the fees required to obtain a building contractor license.

The fees shown in this table are estimates for the first year, and actual costs will vary depending on the region, the guarantee association selected, and the conditions of the office. It should also be taken into consideration that there will be ongoing costs such as annual fees and renewal fees after the license is obtained.

Time required to obtain a license

A reasonable period of time is required to obtain a license as a real estate agent. In the case of a prefectural governor's license, it takes about 30 to 40 days from application to issuance of the license. In the case of a license from the Minister of Land, Infrastructure, Transport and Tourism, it takes about 3 to 4 months.

In addition, including the procedures for joining a guarantee association, it takes about 60 days for a governor's license and about 4 to 5 months for a minister's license before you can actually start business.

If you are not a licensed real estate agent, you will need to start by taking the exam, which will take even longer. Considering that the exam is given once a year, systematic preparation is important.

Understand the disadvantages and precautions.

While there are many advantages to obtaining a home builder's license, there are also disadvantages and caveats. In order to make the appropriate decision, these points must also be fully understood.

Tighter Regulations under the Building Lots and Buildings Business Law

By becoming a licensed real estate agent, you will be subject to strict regulations under the Building Lots and Buildings Transaction Business Law. This places certain restrictions on the freedom of your business.

First, there are advertising regulations. Building contractors are prohibited from using exaggerated or misleading expressions in real estate advertisements. In addition, advertising itself may be restricted for properties that have not yet received development permits or building permits. These regulations require careful attention in marketing activities.

Next, there is an obligation to prepare contract documents. Building contractors are obligated to prepare and deliver to buyers and tenants the legally required contract documents for sales contracts and lease contracts. In addition, they are required to prepare and explain important matters, and these tasks require expertise and a reasonable amount of time.

In addition, it is necessary to deal with the cooling-off system. When the builder is the seller, the buyer has the right to cancel the contract under certain conditions. Due to these consumer protection provisions, risks may remain even after the contract is signed.

Ongoing Maintenance Costs

There is an ongoing cost burden to maintain a home builder's license.

The annual membership fee for a surety association generally ranges from several tens of thousands of yen to several hundred thousand yen per year, depending on the association and region. In addition, the building contractor license must be renewed every five years, and the fee must be paid again at the time of renewal.

Office maintenance costs also arise on an ongoing basis. In addition to basic operating expenses such as rent, utilities, and communications, you must also consider the cost of maintaining the facilities and equipment required for a building contractor.

These maintenance costs can be a factor that can put pressure on your earnings as an investor if you do not generate sufficient revenue as a building contractor.

Statutory Training Obligations

Building contractors are obligated to take a statutory training course every five years. This course is required to renew the validity period of the Real Estate Builder Certificate, and failure to attend the course will result in the inability to act as a Real Estate Builder.

The legal training usually lasts one day and costs approximately 10,000 yen. In addition, the cost of transportation to the course venue and the time required to attend the course must also be taken into consideration.

In addition, continuous study is required to keep up with revisions to the Real Estate Trader Law and related regulations. These learning costs are factors to be considered as time and financial burdens.

Limitations on Scope of Work

When acting as a real estate agent, there may be certain restrictions on the scope of work.

For example, if a builder acts as a seller and sells real estate on its own, it will be liable for defect warranties and contractual nonconformity. These responsibilities may be more serious than if he acts as a simple investor.

In addition, if you are involved in another person's real estate transaction as a building contractor, you will have a duty of care and a duty of loyalty. If you breach these obligations, you risk liability for damages.

Changes in Tax Treatment

If you conduct business as a building contractor, your tax treatment may change.

When acting as a real estate investor, you will report your income as real estate income, but when acting as a building contractor, you will need to report your income as business income. This may result in changes in how expenses are recorded and the tax rate.

It also increases the likelihood that you will be a taxable business for consumption tax purposes. If your annual sales exceed 10 million yen, you will be obligated to pay consumption tax, which will complicate tax treatment.

These changes in taxation may not necessarily be disadvantages, but they may require the acquisition of knowledge and the cost of consulting a tax accountant to ensure proper tax treatment.

Cases in which a building contractor license is required and cases in which it is not required

When real estate investors consider obtaining a building contractor license, it is important to accurately determine whether or not their investment activities fall under the category of building construction business. Here, we will explain with specific examples.

Specific Business Activities Requiring a License

The Building Lots and Building Transaction Business Law defines the following activities as building lots and building lot construction business, and a license is required to engage in these activities as a business.

Repetitive and continuous buying and selling over a short period of time

Buying and selling real estate on a repetitive and continuous basis for profit falls under the category of 宅建業. Specifically, the following cases may fall under this category

If you purchase multiple properties within a year and continuously engage in activities to sell them after remodeling or renovating them, this is more likely to be considered a 宅建 business. Particular attention should be paid to cases where the property is intended to be sold at the time of purchase or where resale of the property in a short period of time is the primary source of income.

If a corporation purchases real estate and sells it on an ongoing basis, it tends to be more likely to be recognized as a building contractor than an individual. However, even an individual may qualify as a building contractor if the business is recognized as repetitive and continuous.

Brokerage and representation of others in real estate transactions

Brokering and representing others in real estate transactions and leasing, and receiving remuneration for doing so, clearly falls under the category of 宅建 業 (宅建業).

For example, a real estate investor who uses his/her knowledge and experience to assist acquaintances or customers in buying or selling real estate and receives a contingency fee or commission is required to obtain a license as a real estate agent. The same applies when a real estate investor is asked to recruit tenants for a property owned by another person and receives a fee for doing so.

Real Estate Specified Joint Enterprise

In addition to a license under the Real Estate Specified Joint Enterprise Act, a building contractor's license may also be required for businesses that collect funds from multiple investors, invest in real estate, and distribute the proceeds.

Real Estate Investment Activities Possible without a License

On the other hand, the following activities do not fall under the category of building construction business and can be conducted without a license.

Rental management through long-term ownership

Activities that generate rental income by holding a self-owned property for a long period of time do not fall under the category of 宅建 業. This is the most common form of real estate investment, and many investors use this method to build assets.

The act of purchasing an apartment or condominium and renting it to tenants to earn rental income is "leasing" of real estate and does not fall under the category of "sales, purchase, exchange, brokerage, or agency," which is regulated under the Building Lots and Buildings Transaction Business Law.

Sale of self-owned property

The act of selling real estate held as one's own assets does not fall under the 宅建 business unless there is a repetitive and continuous nature.

The act of selling owned properties once every few years to earn capital gains is considered within the scope of general asset management. However, repeated resales within a short period of time may be considered repetitive and continuous, and may fall under the category of 宅建業.

Self-managed property management

Management of self-owned properties does not fall under the category of 宅建業. Entering into lease agreements with tenants, collecting rent, and maintaining the building are considered to be within the natural rights and duties of an owner.

However, when undertaking the management of properties owned by others as a business, registration as a rental property management business may be required.

Criteria for determining the gray zone

In actual investment activities, there are cases in which it is difficult to determine whether or not the business falls under the category of a real estate management business. The following factors will be used as criteria for judgment.

Judgment of Repeated Continuity

Repeated continuity is one of the most important factors in determining whether a transaction falls under the category of building construction business. However, there is no clear standard as to how many times or more a transaction must be repeated to be considered repetitive and continuous.

Generally speaking, caution is required if the transactions are continuous more than two to three times per year. However, since the size, duration, and motive of the transaction are comprehensively considered, careful judgment is required in each individual case.

Determination of Commercial Purpose

The existence of a commercial purpose is another important factor to be considered. Sales for non-profit purposes, such as when disposing of real estate acquired through inheritance or when changing one's residence due to a change in living conditions, do not fall under the category of real estate sales.

On the other hand, if the purpose is to obtain a profit from resale at the time of purchase, or if the real estate transaction is conducted as a business, there is a high possibility that it will be judged as a commercial purpose.

Actual condition as a business

Whether or not there is an actual business status is also a factor in determining whether or not the real estate transaction is for profit. If the company has a continuous office and conducts real estate transactions, or advertises and recruits customers, it is likely to be judged as a business.

Since these criteria are considered in a composite manner, we recommend that you consult with a specialist beforehand if there is a possibility that you fall into a gray zone. Violations of the Building Lots and Buildings Transaction Law may result in criminal penalties, so careful attention should be paid.

In summary, carefully consider cost-effectiveness and make a decision.

There are certainly many advantages to a real estate investor becoming a building contractor. The following is a reiteration of the five main benefits described in this article.

Access to Raines allows early access to information on quality properties not available to the general public, which can be expected to expand investment opportunities. By acquiring a new source of revenue in the form of brokerage commission income, diversification of income and improvement of capital efficiency become possible. In-depth understanding of Important Information Manuals improves the accuracy of investment decisions and enhances risk aversion. Legal knowledge will enable proper understanding of contracts and negotiation of favorable terms and conditions. And, through increased credibility and expanded networking within the industry, long-term investment results can be expected to improve.

However, in order to enjoy these benefits, an initial investment of approximately 1 million yen or more is required, along with ongoing maintenance costs and legal obligations. In addition, the regulations imposed by the Building Lots and Buildings Transaction Business Law may place certain restrictions on the degree of freedom of the business.

Criteria according to investment style

The decision to obtain a building contractor license varies greatly depending on the investment style and business scale of individual investors.

For investors seeking to aggressively expand their business, a building contractor license can be a powerful tool. The benefits of obtaining a license will likely outweigh the costs, especially if the annual real estate transaction value reaches several hundred million yen or if the investor wants to secure multiple sources of income.

On the other hand, for investors who engagein small-scale investment activities orwhose basic strategy is to hold properties for the long term, the cost-effectiveness of obtaining a license may be limited. In such cases, establishing a partnership with a reputable building contractor may provide the same benefits as obtaining a license.

Next Action Proposed

We recommend that investors considering obtaining a building contractor license consider the following steps.

First, identify the size of your current investment activity and your future business plans. By specifically quantifying the annual transaction volume, frequency of transactions, and direction of business expansion, the need for a license can be more objectively determined.

Next, conduct a detailed cost-benefit analysis. It is important to accurately calculate the initial and maintenance costs and compare them to the expected increase in revenue.

We then recommend that you consult with an expert. It is wise to seek advice from specialists such as administrative scriveners and tax accountants on matters that require professional judgment, such as the interpretation of the Building Lots and Building Transaction Law and tax treatment.

Frequently Asked Questions (FAQ)

Q1:How long does it take to obtain a building contractor license?

A:For a prefectural governor's license, it takes about 30 to 40 days from application to issuance of the license. For a license from the Minister of Land, Infrastructure, Transport and Tourism, it takes about 3 to 4 months. However, if you are not a licensed real estate agent, you must first pass the real estate agent exam, which will take even longer considering the annual exam schedule. Including the procedures for joining a surety association, you should expect about 2 months for a governor's license and about 4-5 months for a minister's license before you can actually start business.

Q2:Can an individual obtain a building contractor's license?

A: Yes, it is possible for an individual to obtain a building contractor's license. However, individuals must meet the same requirements as corporations. Specifically, the individual must obtain a real estate agent license, establish an appropriate office, and deposit a business bond or join a surety association. In addition, if you operate a building construction business as a sole proprietor, you must file a tax return as business income.

Q3:Are there any tax advantages to obtaining a real estate business license?

A: Obtaining a building contractor license may result in a change in tax treatment. The change from real estate income to business income may expand the scope of expenses that can be recorded. In addition, you may be able to take advantage of tax benefits such as a special blue tax deduction and depreciation of business assets. However, the possibility of becoming a taxable business for consumption tax purposes also increases, so comprehensive consideration is required. We recommend that you consult with a tax accountant for more details.

Q4:How much does it cost to use Raines?

A: The fee for using Raines is included in the membership fee of the Guarantee Association you are a member of, and there is no need to pay a separate fee. You can use Raines free of charge by joining a guarantee association such as the National Federation of Real Estate Transaction Associations (ZENYAKUREN) or the All Japan Real Estate Association (ZENJI). However, there is an ongoing fee of several tens of thousands to several hundred thousand yen as an annual membership fee for the Guarantee Association.

Q5:Is there any risk in continuing to invest in real estate without obtaining a building contractor license?

A: If you engage in activities that fall under the building construction business without a license, you will be in violation of the Building Lots and Buildings Transaction Business Law and may be subject to imprisonment for up to three years or a fine of up to 3 million yen. In addition, you may be required to return any remuneration earned through unlicensed business. On the other hand, there is no legal problem without a license if the investment activity does not fall under the category of 宅建 business, such as rental management by long-term holding or sale of self-owned properties without recurring business. The key is to accurately determine whether or not your investment activities fall under the category of home building business.