As INA&Associates Inc., we have supported real estate investment for many ultra-wealthy clients. Real estate investment is not just a means of asset management, but an important method to achieve sustainable asset building from a long-term perspective. This article provides a systematic explanation of real estate investment, from basic concepts to practical know-how, in a way that is easy for beginners to understand.
With the right knowledge and strategy, real estate investment is an excellent investment technique that can be expected to increase asset value while generating stable rental income. However, since there are various risks including vacancy risk, sufficient understanding and preparation are essential.
Real estate investment is an investment technique in which real estate such as condominiums, apartments, detached houses, and office buildings are purchased and income is earned from the real estate. There are two main ways to earn income.
The first is income gain. This is the rental income you receive from renting your real estate holdings to third parties. Income gains are the core source of income in real estate investment and can be earned continuously as long as you own the property. With proper property selection and management, it is possible to secure stable rental income over the long term.
Second, there is capital gain. This is the gain that can be earned by selling the purchased property at a higher price than the purchase price. Although large profits can be expected during periods of rising real estate prices, it is a more uncertain source of income than income gains because it is subject to market conditions.
The concept of yield is important to understand how real estate investment works. Yield is the annual rental income divided by the property price, and is an important measure of investment efficiency. For example, if a property purchased for 30 million yen yields 1.8 million yen in annual rental income, the yield is 6%.
In many cases, real estate investment involves financing from financial institutions. This allows the investor to invest more than his or her own funds and enjoy the leverage effect. However, when financing is used, group credit life insurance is generally required, which has the effect of substituting life insurance.
Real estate investment offers a number of unique advantages not found in other investment options. By properly understanding these advantages, you can maximize the true value of real estate investment.
The greatest advantage of real estate investment is the ability to generate stable rental income over a long period of time. As with investing in stocks, there is no need to be concerned about daily price fluctuations, and as long as there are tenants, a fixed amount of income can be secured every month. Especially for properties in good locations or in areas with high demand, you can expect stable rental contracts over a long period of time.
Rental income is relatively unaffected by economic fluctuations. Even if the economy slips into a recession, people's demand for housing will continue, and with the right property, a significant decrease in rental income tends to be avoided.
Real estate investment offers excellent tax benefits. Tax savings are achieved mainly in three tax brackets.
For income and inhabitant taxes, losses incurred from real estate investment can be aggregated with other income, such as employment income. Especially in the first year of investment, losses are likely to occur due to initial expenses such as registration fees and brokerage commissions, and as a result, income and inhabitant taxes can be expected to be reduced.
Tax savings from depreciation is also important. The building portion is treated as a depreciable asset that decreases in value over time and can be recorded as an expense without actual expenditure. This can reduce taxable income and lower the tax burden.
Real estate investment is also an effective measure against inheritance taxes. Since the inheritance tax assessed value of real estate is approximately 70-80% of its market value, the inheritance tax burden can be reduced compared to holding cash. In particular, in the case of real estate for lease, the assessed value is further reduced according to the percentage of leasehold and land leasehold, and thus greater tax savings can be expected.
Real estate investment has an excellent inflation hedge function. As inflation rises, prices rise and the relative value of cash declines, but since real estate is a real asset, its value tends to increase as prices rise.
As for rental income, rent levels can be expected to rise when inflation rises, thus maintaining real earning power. The inflation hedge function of real estate investment is becoming more important as Japan has emerged from a prolonged deflationary period and is entering a gradual inflationary phase.
When financing a real estate investment, it is common to purchase group credit life insurance. Group credit life insurance pays off the remaining debt with insurance proceeds in the event of the policyholder's death or severe disability.
This mechanism ensures that in the event of an emergency, the survivors are left with a debt-free income-producing real estate and continuous rental income. While ordinary life insurance policies provide a lump-sum payment, real estate investments provide a more practical protection effect by leaving a continuous source of income.
Real estate investment allows investors to invest more than their own capital by taking advantage of loans from financial institutions. This is called the leverage effect. For example, if you purchase a 30 million yen property with 10 million yen of your own capital, you are leveraging three times.
Appropriate use of leverage can significantly increase the rate of return on one's own capital. However, while leverage increases earnings, it also increases risk, so careful financial planning is required.
Real estate investment can also function as a private pension plan. In the current situation where it is difficult to cover living expenses in retirement with only the public pension, rental income fromreal estate investment can be an important source of income.
In particular, after the loan is fully repaid, the rent income will be almost directly used as take-home pay, so if the loan can be fully repaid before the start of pension benefits, a stable source of income can be secured in retirement.
| Investment Method | Stability | Liquidity | Tax-saving effect | Inflation hedge | Leverage |
|---|---|---|---|---|---|
| Real Estate Investment | High | Low | High | High | Possible |
| Equity Investment | Medium | High | Low | Medium | Limited |
| Fixed Income Investment | High | Medium | Low | Low | Not available |
| Deposits and Savings | High | High | None | None | None |
There are a variety of real estate investment techniques, each with different characteristics and risk/return profiles. It is important to select the most appropriate method based on the investor's financial resources, experience, and investment goals.
Condominium unit investment is an investment technique in which a single condominium unit is purchased and leased. It is chosen by many beginners as an entry-level real estate investment.
The biggest advantage of condominium unit investment is that it can be started with relatively small initial capital. For an existing studio condominium in the central Tokyo area, the investment can be started from as low as 10 million yen. In addition, the management of common areas by the management association reduces the burden of individual management.
Investors in condominiums in good locations can expect stable demand from singles and young adults. In particular, properties near train stations or in central Tokyo tend to maintain high occupancy rates.
On the other hand, there are some restrictions to investing in condominium units. Since you own only one unit, vacancy risk is high, and if a vacancy occurs, your rental income will be completely cut off. In addition, there is the burden of management fees and reserve funds for repairs, and these costs may vary depending on the decisions of the management association.
Single building investment is an investment technique in which an entire apartment or condominium building is purchased. Compared to condominium unit investment, a larger investment size and profitability can be expected.
The biggest advantage of investing in a single building is the diversification of vacancy risk. Since you own multiple units, even if some units become vacant, you can maintain profitability by receiving rental income from other units. Also, since the total rental income is large, efficient management is possible by taking advantage of economies of scale.
Since you own the entire building in a single building investment, you have a high degree of freedom to renovate and update facilities, a characteristic that makes it easy to improve the value of the property. Appropriate renovations can increase yields and improve occupancy rates.
However, investing in a single building requires a high initial investment. Even a used apartment in a rural area requires an investment of tens of millions of yen, while a newly built condominium in an urban area requires an investment of several hundred million yen. In addition, since you are responsible for repairing the entire building, you will incur a large cost burden during major repairs.
Detached house investment is an investment strategy in which single-family homes are purchased and leased. This investment strategy targets families.
The characteristic feature of single-family home investment is the long tenancy period. Families tend to want to stay in their homes for a long period of time due to their children's schooling and their relationship with the local community. This allows for stable rental income and low tenant turnover costs.
In addition, since single-family homes are owned as both land and building, the asset value of the land is maintained even as the building depreciates. A well-located detached house can expect to have a certain asset value when it is sold in the future.
The challenge with investing in single-family homes is the concentration of vacancy risk. Because you own only one unit, a vacancy will result in a complete loss of rental income. In addition, since you are responsible for repairing the entire building, a large amount of money will be required at the time of major repairs to the roof, exterior walls, etc.
Commercial real estate investment is a method of investing in commercial real estate such as office buildings, stores, and warehouses. Compared to residential real estate, commercial real estate offers higher yields, but requires a higher level of expertise.
Commercial real estate is characterized by long-term contracts with tenants. Businesses tend to avoid frequent relocations as they invest in location and facilities, and can expect stable rental income. In addition, yields tend to be higher than those of residential real estate.
However, commercial real estate is susceptible to economic fluctuations and is at risk of tenants withdrawing or demanding rent reductions during recessions. In addition, profitability is greatly affected by the type of industry and creditworthiness of tenants, so careful tenant selection is necessary.
| Investment Method | Initial Investment | Approximate Yield | Vacancy Risk | Management Burden | Liquidity |
|---|---|---|---|---|---|
| Condominiums | From 10 million yen | 4-6% of total | High | Low | Medium |
| One-unit apartment | 30 million yen and up | 6-8% of the total | Medium | Medium | Low |
| Condominiums | 100 million yen and up | 5-7% (in the case of a single building) | Low | High | Low |
| Detached house | 20 million yen and up | 5-7% (in the case of a house with a high occupancy rate) | High | Medium | Medium |
| Commercial Real Estate | 50 million yen and up | 7-10% of the total | Medium | High | Low |
Real estate investment is an investment method that offers stable returns, but there are also various risks. The key to success is to properly understand these risks and take appropriate countermeasures.
Vacancy risk is one of the most important risks in real estate investment. It has a direct impact on profitability because rental income is lost during the period when tenants move out and no new tenants are found.
The most effective measure to reduce vacancy risk is thorough location selection. It is important to select a location with high rental demand, such as within a 10-minute walk from a train station, in an area with excellent commercial and medical facilities, or in an area where population growth is expected.
Improving the attractiveness of the property is also an effective measure against vacancy risk. Regular maintenance, facility upgrades, and interior remodeling can help differentiate your property from competing properties. Installing facilities that meet the needs of modern tenants, such as Internet facilities and home delivery boxes, is particularly effective.
Cooperation with rental management companies is another important factor. A good management company has an extensive tenant network and can quickly recruit tenants. In addition, improving tenant satisfaction can promote long-term occupancy and reduce vacancy risk.
When financing is used for real estate investment, there is a risk that the repayment burden will increase due to rising interest rates. In particular, if you have loans with floating interest rates, you are directly affected by rising interest rates.
A possible countermeasure to the risk of rising interest rates is to use fixed-rate financing. Fixed interest rates are not affected by rising interest rates and allow for a stable income and expenditure plan. However, fixed interest rates tend to be higher than variable interest rates, so it is necessary to compare the fixed interest rate with the total repayment amount.
Principal reduction through early repayment is also an effective measure. By allocating a portion of rent income to early repayment, you can reduce the interest rate burden and mitigate the risk of interest rate hikes. It is also expected to reduce the total repayment amount by shortening the loan term.
Real estate deteriorates over time and requires periodic repairs. If repair costs exceed expectations, profitability may be significantly affected.
As a countermeasure against repair cost risk, it is important to diagnose the building prior to purchase. A detailed survey by an expert can determine in advance the need for and cost of future repairs. Especially in the case of used properties, unexpected repair costs can be avoided by discovering hidden defects.
It is also important to systematically set aside a reserve fund for repairs. By setting aside a certain percentage of rent income for repairs, you can reduce the financial burden at the time of major repairs. Generally, it is recommended that 5-10% of rent income be set aside as repair expenses.
Real estate is less liquid than stocks and bonds, and it may take time to sell. There is a risk of not being able to respond to sudden demand for funds.
Diversification of the investment portfolio is important as a countermeasure to liquidity risk. Instead of concentrating all assets in real estate investments, overall liquidity can be ensured by combining them with more liquid assets such as stocks and bonds.
It is also important to select properties that are easy to sell. Properties in good locations, with standard floor plans, and at reasonable prices tend to be more liquid when sold.
There is a risk that properties may be damaged by natural disasters such as earthquakes, fires, and floods. Damage caused by disasters can have a significant impact on profitability.
As a countermeasure against disaster risk, it is essential to purchase fire and earthquake insurance. Appropriate insurance can compensate for damage caused by disasters. In addition, earthquake risk can be mitigated by selecting properties that comply with the new earthquake resistance standards.
It is also important to consider disaster risk when selecting a location. By checking hazard maps, you can select an area with low risk of flood and landslide disasters.
| Risk Type | Degree of Impact | Importance of countermeasures | Main countermeasures |
|---|---|---|---|
| Vacancy risk | High | High | Selection of location, improvement of property attractiveness, selection of management company |
| Risk of rising interest rates | Medium | Medium | Use of fixed interest rate, early repayment |
| Repair cost risk | Medium | High | Building diagnosis, reserve for repairs |
| Liquidity risk | Low | Medium | Portfolio diversification, selection of properties that are easy to sell |
| Disaster risk | High | High | Insurance, selection of properties with new earthquake resistance standards |
Successful real estate investment requires a systematic approach and adequate preparation. The following is a practical guide to the steps involved in getting started in real estate investment.
Before you begin investing in real estate, it is important to set clear investment goals. Specifically defining your target yield, investment period, investment size, and risk tolerance will help you formulate an appropriate investment strategy.
For example, if your goal is to supplement your pension in retirement, it is appropriate to emphasize stable rental income and prioritize location and property stability over yield. On the other hand, if the goal is to aggressively expand assets, investing in high-yielding properties by utilizing leverage is effective.
Real estate investment requires an initial capital requirement of 20-30% of the property price. This includes a down payment, various expenses (registration fees, brokerage fees, fire insurance premiums, etc.), and working capital.
If financing is to be utilized, it is important to check the financing conditions of the financial institution in advance. Since loan conditions are determined by factors such as annual income, length of employment, and other borrowing conditions, it is necessary to develop a financial plan according to one's own attributes.
Property selection is the most important factor in determining the success or failure of a real estate investment. It is necessary to comprehensively evaluate the location, condition of the property, yield, and future potential of the property.
For location, detailed research should be conducted on the distance from the station, the surrounding environment, demographics, and future development plans. Particular attention should be paid to areas where the population is declining, as there is a risk of a future decline in rental demand.
Regarding the condition of the property, we will check the building's structure, age, condition of facilities, and repair history. For existing properties, it is important to have a building diagnosis conducted by a specialist to ensure that there are no hidden defects.
Real estate investment can enjoy a leveraged effect by utilizing loans from financial institutions. Since loan terms vary from financial institution to financial institution, it is important to obtain terms from multiple financial institutions and compare them.
Loan screening evaluates the collateral value of the property and the borrower's ability to repay the loan. Stable income, sufficient personal funds, and good credit history will lead to favorable loan terms.
Group credit life insurance can also provide coverage in the event of an emergency, so it is necessary to thoroughly check the insurance coverage as well.
Working with an excellent management company is essential for a successful real estate investment. The management company is responsible for tenant recruitment, rental contracts, rent collection, and property maintenance.
When selecting a management company, we evaluate management performance, occupancy rates, management costs, and speed of response. In particular, to reduce the risk of vacancy, it is important to select a management company that has an extensive tenant network and can recruit tenants quickly.
To succeed in real estate investment, it is important to keep the following points in mind.
Location is the most important factor in real estate investment. Properties in prime locations can expect long-term rental demand and reduce vacancy risk. It is important to select a location based on a comprehensive evaluation of factors such as proximity to train stations, commercial facilities, public safety, and future development potential.
Accurate income and expenditure calculations are essential for real estate investment. It is necessary to accurately estimate not only rental income, but also management fees, repair expenses, taxes, loan repayments, and other expenses to evaluate the real profitability of the property. It is important to keep conservative estimates in mind, as optimistic income/expense calculations can lead to failure.
Real estate investment is not an investment technique that pursues short-term profits. The basic strategy is to hold properties from a long-term perspective and generate stable rental income. It is important to maintain a long-term investment policy without being distracted by short-term market fluctuations.
Real estate investment requires a variety of expertise in areas such as law, taxation, and construction. Working with real estate companies, tax accountants, judicial scriveners, architects, and other professionals and receiving appropriate advice can reduce risk and improve profitability.
With proper knowledge and strategy, real estate investment is an excellent investment technique that can provide long-term asset building and stable rental income. It has unique advantages not found in other investment methods, such as tax-saving effects, inflation hedging features, and the effect of substituting life insurance.
However, since various risks, including vacancy risk, exist, adequate preparation and proper knowledge are essential. The key to success is to carefully consider each factor such as location selection, property selection, financial planning, and risk management, and to invest from a long-term perspective.
As a "Human Capital Investment Company," INA & Associates, Inc. provides optimal real estate investment solutions tailored to the investment goals of each individual client. Utilizing our three offices in Osaka, Tokyo, and Kanagawa, we support our clients' asset building by providing expert advice based on our extensive experience and information on prime properties throughout Japan.
Real estate investment is one of the most important ways to enrich your life. We hope that with the right knowledge and in collaboration with the right partners, you will be able to achieve sustainable asset building.
The initial capital required for real estate investment varies greatly depending on the property price and investment approach. In the case of a condominium investment, you will need about 20-30% of the property price as personal funds, which is approximately 2-3 million yen for a 10 million yen property. This includes the down payment, expenses (registration fee, brokerage fee, fire insurance premiums, etc.), and working capital. For an investment in a single building, a larger initial capital will be required, but this will vary depending on the financing conditions of the financial institution and the collateral value of the property.
Salaried workers are well suited for real estate investment. Their stable income makes it easier for them to obtain loans from financial institutions, and they can also expect to be covered by group credit life insurance. In addition, they can also save taxes by aggregating their salary income and losses from real estate investments. However, it is important to work with a reliable management company so as not to interfere with your core business.
The first step in dealing with the risk of vacancy is to review the rent setting. By setting rents that are appropriate in comparison with the surrounding market rate, it will be easier to secure tenants. Remodeling and updating facilities to improve the attractiveness of the property is also effective. It is also important to collaborate with the management company to quickly recruit tenants and implement an effective advertising strategy.
Yields vary greatly depending on the location, property type, and age of the property. A general rule of thumb is to invest in condominiums in central Tokyo at around 4-6%, and in single-family homes in rural areas at around 6-8%. However, high-yielding properties come with corresponding risks, so it is important to evaluate not only the yield but also the location and stability of the property in a comprehensive manner.
The use of a management company is strongly recommended in real estate investment. By outsourcing professional services such as tenant recruitment, rental contracts, rent collection, property maintenance, and trouble-shooting, efficient property management becomes possible. Especially for salaried investors, cooperation with a management company is essential for balancing work with their main job. Management fees are generally around 5% of rent income, but an excellent management company will provide more value than the cost.
Please feel free to contact INA & Associates, Inc. if you have any questions about real estate investment. With our extensive experience and expertise, we can help you build your assets.