Common problems in real estate investment and countermeasures

Real estate investment is an attractive investment method that offers the potential for stable rental income and asset accumulation. However, it also carries various risks. Especially for beginners, lack of knowledge can lead to unexpected problems. However, by understanding the risks in advance and preparing accordingly, you can significantly reduce the likelihood of such failures. This article provides a detailed explanation of common issues and their solutions to help beginners feel confident taking their first steps in real estate investment. By properly understanding the risks and taking appropriate measures, you can pave the way for a solid investment.

Common Troubles

The following are common troubles that beginners often encounter in real estate investment. Let's examine each case in detail, identify the causes, and confirm the points to watch out for.

Defects in the property discovered after purchase

If pre-purchase investigations are insufficient, serious defects may be discovered after the property is purchased. For example, in one case, an investor was attracted by the high yield of an older property and purchased it without proper due diligence. Shortly after the contract was signed, all tenants moved out, and hidden defects such as roof leaks and termite damage were discovered. Such defects may require major repairs, leading to unexpected costs and prolonged vacancies. Additionally, if major defects (such as serious structural issues, roof leaks, or termite damage) that were not disclosed by the seller are discovered, disputes may arise regarding the seller's contractual liability for defects (formerly known as the warranty of quality).

Important note: It is crucial to thoroughly inspect the condition of the property before purchase. For older properties or areas that are not visible to the naked eye (such as attics or crawl spaces), utilize a professional inspection (home inspection) to check for issues such as roof leaks, termite damage, and seismic resistance. During contract negotiations, confirm the presence of physical defects in the property condition report and important matters explanation, and ask questions until you are fully satisfied with the answers.

Lower-than-expected rental income (including misunderstandings about subleasing)

In real estate investment, cases where rental income falls below expectations are also common. In the case of new condominiums, rent tends to decrease over time, with data indicating that rent may drop by approximately 10% within 10 years of construction. For example, even if the initial rent is as expected, each time a tenant moves out, the rent may need to be lowered during the re-rental process, leading to a gradual decrease in income. As a result, after deducting loan repayments and maintenance costs, little to no net income may remain, potentially requiring additional out-of-pocket expenses.

Additionally, misunderstandings regarding “sublease agreements (rent guarantee through bulk leasing)” require caution. While sublease agreements may sound appealing as they guarantee rent for a certain period, many contracts allow for rent reviews (reductions) every few years. In fact, disputes have arisen in various regions where companies promoting subleases have reduced the guaranteed rent mid-contract, leading to deteriorated cash flow. Do not blindly trust advertisements that claim “30-year lease-up guarantees peace of mind.” It is crucial to thoroughly verify the terms of the contract, including conditions for rent reductions and the presence of liquidated damages.

Important note: Always estimate income conservatively. Factor in the possibility of future rent decreases and conduct simulations that account for a certain degree of rent decline or vacancies, rather than assuming full occupancy. If you use a sublease contract, make sure you understand its advantages and disadvantages before signing. Before signing, ensure the agent thoroughly explains the risks of rent reductions and termination conditions, and have the courage to refuse the contract if you are not satisfied with the terms. If you have any questions, refer to the guidelines published by the Consumer Affairs Agency or the Ministry of Land, Infrastructure, Transport and Tourism, or consult a professional.

Underestimating vacancy risk

Vacancy risk is an unavoidable aspect of rental property management, but some beginners tend to underestimate it. Assuming that “the property will always have tenants” or “if it becomes vacant, we'll find a new tenant quickly” can lead to unexpected losses.

For example, if you invest in a single room in a one-room apartment building, losing that one room means your income drops to zero. Meanwhile, expenses such as loan repayments, management fees, and property taxes continue, leading to a rapid deterioration in cash flow. In fact, it is not uncommon for investors to purchase inexpensive properties in rural areas focusing solely on high yields, only to find that rental demand is insufficient, vacancies persist, and loan repayment plans collapse. Even if rural properties appear to offer high surface yields, there is a risk that vacancies may persist due to population decline or insufficient demand, resulting in increased expenses rather than income.

Key points: To mitigate vacancy risk, it is essential to select properties in areas with high demand. Specifically, investigate factors that drive demand, such as proximity to the nearest station, surrounding environment, and proximity to universities or businesses, and assess whether stable tenant demand can be expected. Additionally, it is important to factor an annual vacancy rate into the cash flow plan. For example, it is important to plan based on a 90% occupancy rate (10% vacancy rate) rather than assuming full occupancy. Rent guarantees (subleasing) can be an option, but as mentioned earlier, be cautious about the level of guaranteed rent and contract terms, and ensure you have the financial flexibility to withstand vacancies.

Issues with property management companies (delayed reporting/response, lack of transparency in maintenance costs, etc.)

Even when property management is entrusted to a specialized management company, issues may arise between the management company and the property owner. Common cases stem from inadequate responses by the management company. For example, if a tenant contacts the management company about equipment malfunctions or complaints, delays in the management company's response may lead to tenant dissatisfaction and ultimately tenant turnover. Additionally, delays in regular reports or emergency communications can result in property owners being unable to monitor the property's condition.

Furthermore, lack of transparency regarding repair costs and management fees can also be a source of trouble. For example, there have been cases where owners agreed to expensive repairs as instructed by the management company, resulting in a disruption of their income and expenditure plan. There have also been reports of cases where owners chose a management company without careful consideration and were later notified of significant increases in fees. As such, the choice of management company and the terms of the outsourcing contract can lead to unexpected burdens and deteriorating business conditions for property owners.

Key Points: First, prioritize experience and reliability when selecting a management company. Check whether they have expertise in vacancy prevention strategies, respond promptly to tenant inquiries, and have a transparent fee structure. Carefully review the contract terms, including reporting frequency, emergency response procedures, and the scope of owner approval for repair estimates. If you are dissatisfied with the management company's performance, do not hesitate to request improvements. If improvements are not made, consider switching to another management company (be sure to confirm the termination conditions of the management contract in advance). Finally, property owners should also acquire basic knowledge, such as the average costs of repairs and the practical aspects of rental property management, to better identify unfair charges or delays in response.

Lack of understanding of the contract and important terms and conditions

Real estate transactions involve specialized contract documents and legal terminology, but some beginners sign contracts without fully understanding the contents of the contract or important explanations. As a result, discrepancies such as “This is different from what I was told” or “I didn't know that” often arise, leading to disputes after the contract is signed.

For example, failing to notice special terms in the contract may lead to unexpected restrictions being discovered later, or misunderstanding the property rights or defects in the facilities explained in the important matters explanation may result in disputes later on, such as “I wasn't informed about that.” Even if the explanation was provided but the buyer did not understand it, differences in understanding can lead to arguments over who said what.

Important note: Before signing a contract, it is essential to thoroughly read the contract and the important matters explanation document and clarify any unclear points. The important matters explanation is conducted by a real estate broker in person or online, but it may contain technical terms that are difficult to understand. In such cases, do not hesitate to ask questions on the spot and request a thorough explanation. In particular, be sure to thoroughly understand the special provisions and penalty clauses in the contract, as well as any restrictions on the property, as these can significantly impact future operations. Additionally, take notes or keep copies of the items listed in the Important Matters Explanation Document (such as legal restrictions, the presence or absence of boundaries or private road burdens, and the condition of facilities) so that you can review them later.

If you have any concerns about the contract terms, it is advisable to consult a third-party expert (such as a real estate consultant or lawyer). While this will incur costs, it is a significant real estate transaction, so it is worth considering as a necessary expense. Above all, avoid signing the contract without fully understanding the terms. Ensure you feel confident and satisfied before proceeding.

Issues related to financing (loans)

In real estate investment, financing from financial institutions (loans) is almost always used, but failures due to inadequate loan planning are common. Specifically, there are cases where borrowers optimistically take on high-interest loans thinking, “I'll manage to pay it back somehow,” only to find that monthly repayments strain their income, and if the property becomes vacant, repayments fall behind. Additionally, mistakes in setting interest rates or repayment periods can lead to an overly burdensome total payment structure that makes it difficult to generate profits. For example, setting a repayment period that is too short can result in overly heavy monthly repayment burdens, or borrowing at variable interest rates without considering future interest rate hike risks can lead to a sudden deterioration in cash flow once interest rates rise.

In recent years, the possibility of interest rate hikes has been discussed in Japan as well, so those with variable-rate loans cannot ignore the risk of interest rate fluctuations. Furthermore, real estate investment loans often have higher interest rates than residential mortgages and involve larger loan amounts, so even small interest rate changes can have a significant impact over the long term. Even if a loan is approved, it is essential to rigorously verify whether the borrower can sustain the loan under the given terms.

Important note: When applying for a loan, first create a detailed repayment plan. In your cash flow simulation, prepare multiple scenarios that factor in interest rate hikes and vacancy rates, and confirm that repayments can be made even in the worst-case scenario. For example, calculate cash flow for scenarios such as “if interest rates rise by 1% from the current level” or “if the vacancy rate worsens beyond expectations,” and aim to maintain an annual cash flow that does not turn negative. Additionally, maintain sufficient equity and set aside contingency funds (funds for emergency prepayments or repairs) to ensure mental stability.

Regarding loan terms, if possible, consult multiple financial institutions to explore options for lower interest rates or more flexible repayment conditions. Choosing between fixed and variable interest rates is also a challenging decision. If you plan to hold the property long-term and want to avoid interest rate hikes, opt for a fixed rate. If you prefer to monitor interest rate trends while enjoying a lower rate, consider a variable rate. In any case, it is crucial not to base your plan solely on optimistic scenarios.

Measures to avoid problems

Advance measures and preparation are essential to avoid the problems mentioned above and ensure stable real estate investment. The following is a summary of key points that beginners should keep in mind.

Checkpoints when selecting a property (location, age, inspection, etc.)

The extent to which you can eliminate risks at the property selection stage will greatly affect the performance of your investment. Let's take a look at the main points to check.

• Assessing location conditions: Focus on whether the area has high rental demand. Investigate the distance from the nearest station, the presence of nearby universities, companies, and commercial facilities, as well as safety and environmental conditions, to determine whether the location is likely to attract stable tenants. Considering the future development potential and demographic trends of the area is also recommended. On the other hand, even if the property price is low and the yield seems high, it is meaningless if there is no demand. Therefore, the basic principle is to choose an area where demand exceeds supply.
• Age and condition of the building: Estimate potential maintenance risks based on the age of the building. Newer buildings have lower risks of equipment failures, but they are also more expensive. Older buildings may require major repairs shortly after purchase, so check the condition of key areas such as the roof, exterior walls, plumbing, and waterproofing. Additionally, buildings constructed before 1981 were built under the old seismic standards, so seismic safety is also a concern. Consider the possibility of seismic retrofitting if necessary.
• Utilizing inspections (building condition surveys): By commissioning an inspection by a professional architect, you can identify defects and deterioration that may not be apparent to the untrained eye. An inspection can objectively diagnose issues such as signs of roof leaks, termite damage, and the structural integrity of the building. It may also uncover defects that the seller is unaware of, so it is particularly recommended for properties that are a certain age or older. If the inspection results are satisfactory, you may be eligible for existing home sale defect insurance, which can cover defects for a certain period after purchase.
• Legal restrictions and rights: It is also important to check legal matters such as whether the property is a “non-rebuildable property,” whether it meets zoning regulations, and whether it complies with road access requirements. Non-rebuildable properties cannot be rebuilt in the future and are unlikely to increase in value, while properties with illegal construction or boundary issues are often avoided when selling. Be sure to confirm these points in the important matters explanation document, and beginners should avoid properties with high risks.

Efforts to understand the contract and important matters explanation

To prevent misunderstandings or lack of understanding during the contract stage, it is essential to take an active approach to understanding the terms.

• Review the documents in advance: The sales contract and important matters explanation document can be overwhelming when seen for the first time on the day of signing. If possible, obtain copies of the documents in advance and review them beforehand. Making a list of questions in advance will make it easier to ask during the explanation.
• Look up technical terms: If you come across unfamiliar terms (e.g., defects (kashi), Article ○ of the Urban Planning Act, etc.), you should ask about them on the spot, but it will be easier to understand if you look up their basic meanings in advance on the internet or in books. Recently, there are many books and websites for beginners that explain the process of real estate transactions, so it is a good idea to read them before signing a contract.
• Recording important explanations is OK: When receiving important explanations, it is a good idea to ask for permission to record them. This will provide peace of mind in case you later forget what was explained or miss something. Under the Real Estate Brokerage Act, important matters must be explained both in writing and verbally, so recording is permitted (though it is polite to inform the responsible party in advance). Review the recording at home to ensure you have understood everything.
• Seek assistance from a third party: As mentioned earlier, if you lack confidence, it is effective to seek a second opinion from a real estate consultant or lawyer. Especially for investment properties, real estate agents may advance the discussion from the seller's perspective, so having an expert who can provide advice from the buyer's perspective can be reassuring. While considering cost-effectiveness, it is essential to avoid signing a contract without full understanding.

How to create a cash flow plan

A detailed income and expense plan is a critical factor in the success or failure of real estate investment. The following steps are recommended for creating such a plan.

1. List income and expense items: First, list all the income (rent, parking fees, key money, renewal fees, etc.) that can be expected from the property and all the expenses (loan repayments, management fees, repair reserves, property taxes, fire insurance, etc.) that are likely to occur. Items that are often overlooked include property taxes and real estate acquisition taxes at the time of purchase, as well as various expenses incurred at the time of purchase. In the first year, consider these acquisition costs, and for long-term management, anticipate future major repair costs.
2. Conservative number setting: Apply as conservative numbers as possible to each item identified. On the income side, use rental income based on a 20–30% vacancy rate rather than full occupancy, and consider future rental rate declines (approximately 1–2% per year as a guideline). On the expense side, maintenance costs are not necessarily incurred every year, but we assume an average of ○% of rental income and set aside funds accordingly. Management fees and taxes are also set slightly higher to account for potential future increases. While business plans submitted to financial institutions may be written optimistically, it is appropriate to assume a more realistic scenario in your own calculations.
3. Long-term simulation: Conduct annual cash flow simulations for at least the loan repayment period, and preferably for the entire planned holding period. Calculate income, expenses, and outstanding loan balances for each year, and track changes in equity. If the loan has a variable interest rate, include scenarios with interest rate increases and verify multiple patterns. Do not forget to include increased expenses for major repairs in the future (e.g., after a certain number of years since construction).
4. Verify the income and expense plan: Objectively verify whether the completed income and expense simulation is realistic. Check whether the presented simulation is unnaturally optimistic or whether the real estate company is using numbers that are convenient for them. Specifically, check whether the rent is set too high compared to the surrounding market, whether the expense ratio is too low (plans with zero expenses should be suspicious), or whether the cash flow improvement after loan repayment is overly relied upon. Even if you create your own plan, having it reviewed by a trusted third party may reveal unexpected oversights.
5. Preparing risk mitigation strategies: If the simulation shows years with negative results, consider countermeasures in advance. For example, “If a major renovation is expected to result in a loss in year X, set aside X million yen for renovation reserves by the previous year” or “If the loan becomes difficult to repay due to prolonged vacancies, reduce the repayment amount through partial prepayment or injection of cash on hand.” By preparing these precautionary measures in advance, you can respond calmly in an emergency even if the plan does not go as expected.

How to identify reliable partners (property management companies, brokerage firms, tax accountants, etc.)

Real estate investment relies on the cooperation of various stakeholders, so selecting reliable partners is extremely important. Let's examine what types of experts and professionals you should align yourself with.

• Property management company: As mentioned earlier, the capabilities of the property management company can significantly impact the effort required and results achieved in rental operations. To avoid failure, it is essential to select a property management company with a proven track record, swift response times, and reasonable fees. Specifically, check their ability to fill vacancies (advertising network and collaboration with brokerage firms), tenant screening criteria (directly related to tenant quality), complaint and dispute resolution system (24-hour support availability), transparency of repair cost estimates and market awareness, and more. Comparing proposals from multiple companies before signing a contract reduces the risk of failure.
• Real Estate Brokerage Companies (Sellers): When selecting a brokerage company or seller to introduce properties, it is important to assess their reliability. Unfortunately, some companies prioritize their own sales profits over transparency, failing to adequately explain risks, or use aggressive sales tactics to rush contracts. A trustworthy company will clearly explain both the advantages and disadvantages of a property and will not pressure you into signing a contract if you are undecided. Additionally, the real estate brokerage license number and past customer reviews can also be helpful references. Choose a company with extensive transaction experience, local knowledge, and a representative who understands your investment objectives and can provide appropriate advice. Consulting multiple brokerage companies and comparing their responses and proposals is also effective.
• Tax Accountant/Certified Public Accountant: Tax optimization is essential for successful real estate investment. It is necessary to properly handle rent income, expense deductions, depreciation, and other tax-related matters while implementing tax strategies and ensuring accurate tax filings. A tax accountant with expertise in real estate can provide guidance on blue-form tax filings, expense deductions, and future considerations such as the optimal timing for property sale (calculating capital gains tax) and inheritance planning. While monthly advisory fees will apply, engaging a tax accountant can help reduce tax risks and achieve long-term tax savings. Consider seeking professional assistance as the number of properties increases.
• Other experts: In addition, the advice of a real estate consultant or financial planner can be useful when purchasing a property. They can provide objective income and expenditure plans and risk analysis. It is also helpful to have a network of architects and construction companies for renovations or remodeling. In short, creating a network of partners who can fill in the gaps in your knowledge in areas related to real estate investment is the key to avoiding problems and achieving success.

How to develop an exit strategy that incorporates risk

Real estate investment requires an “exit strategy.” An exit strategy is a plan for when and how to dispose of the property (sell or continue to hold) in the end. Without this strategy, you may face the risk of being unable to sell when you want to. Below are some key points for developing an exit strategy that incorporates risk.

• Determine the target holding period: First, roughly decide how many years you plan to hold the property. Strategies vary depending on whether you aim to pay off the loan, anticipate market trends in a few years to target capital gains, or other factors. However, the mindset of “I plan to hold it forever, so I don't need to consider an exit strategy” is risky. If you do not consider your exit strategy, you may find yourself unable to sell due to changes in market conditions or your own circumstances (such as a decrease in income or illness), leaving you unable to move forward. Therefore, it is important to not rule out the option of selling from the start.
• Assess the property's liquidity: When considering an exit strategy, it is important to assess how liquid the property is in the market (how easy it is to sell). Generally, properties in urban areas with high demand, such as family-type apartments, are relatively easy to sell. However, properties in rural areas, such as one-room apartments or those that cannot be rebuilt, have limited buyers and low liquidity. The lower the liquidity of a property, the more likely you will have to lower the price or spend more time selling it, so you need to be prepared for this risk. If you are concerned about liquidity, consider selling early and reallocating the funds to other assets.
• Calculating sale profits and break-even points: Calculate the break-even point (the sale price at which you break even) at the time of investment. Add purchase price, various expenses, and sale-related fees and taxes, and factor in any remaining loan balances to determine the minimum sale price required to avoid a loss. This will clarify your target, such as “I want to sell for at least △△ dollars by the end of ○ years.” If market prices are likely to fall below this threshold, you can make informed decisions such as switching to long-term holding based on the situation.
• Prepare multiple scenarios: Do not limit yourself to a single exit strategy; consider multiple scenarios. For example, if the first scenario is to “sell in 10 years to target capital gains,” the second scenario could be to “continue receiving rental income if it seems unlikely that a profit can be made from the sale,” and the third scenario could be to “sell early to settle the remaining debt if rent declines or vacancies persist.” Calculating the costs that would arise in each scenario (such as prepayment fees or transfer taxes) in advance will give you a solid foundation for decision-making.
• Monitoring market trends: Once you have established an exit strategy, it is important to constantly monitor market movements and revise the strategy as necessary. Real estate market conditions are influenced by the economy and financial situation. In a rising market, you may want to accelerate your sale strategy, while in a downturn, you may want to shift your focus to income gains rather than forcing a sale. Stay informed about real estate news and local redevelopment information on a daily basis to gather information that will help you determine the right timing for exit.

Summary

We have looked at examples of problems in real estate investment and measures to address them. While some of this may seem daunting for beginners, most problems can be prevented with the right knowledge and preparation. The key is to face risks head-on and plan for both optimistic and pessimistic scenarios.

Successful real estate investors are not those who act blindly, but those who identify risks in advance and take sufficient countermeasures. Careful property selection, understanding contract terms, detailed cash flow planning, collaboration with reliable experts, and a future-oriented exit strategy—by firmly grasping these points, even beginners can steadily build their assets.

Finally, there is no need to be paralyzed by fear of trouble. Learning and preparation are your greatest assets. By continuing to study real estate investment and gradually gaining experience, I hope you will achieve a secure and stable rental business. I sincerely wish for the success of your real estate investment and a prosperous future.