The first step for ultra-high-net-worth individuals to start investing in real estate

Real estate investment is a popular investment strategy among ultra-high-net-worth individuals, serving various purposes such as asset accumulation, tax planning, and estate planning. In fact, investment targets range widely from single-building apartments in urban areas to condominium units. However, when first venturing into real estate investment, it is essential to correctly understand the basic process and conduct thorough preparation that takes into account the unique perspectives of high-net-worth individuals. This article covers the basic steps for starting real estate investment, as well as tax and inheritance strategies unique to the ultra-wealthy, the use of corporations, and the positioning of assets in a portfolio. It also provides a professional perspective, including specific preparation items and decision criteria, as well as common mistakes made by beginners and tips for success. Please use this article as a reference for taking your first steps.

1. Setting investment objectives – Clarify your strategy

The first step is to clearly define the purpose of your real estate investment. The objectives of ultra-high-net-worth individuals vary greatly. For example, is the goal to “build stable assets through long-term rental income,” “pursue returns through short-term capital gains,” or “reduce tax burdens” or “plan for asset succession for the next generation”? The appropriate investment methods and property types vary depending on your objectives, so making a mistake here could lead to a flawed strategy and potential failure.

• If you want to actively generate high returns: Properties such as used single-family apartments or newly constructed single-family apartments, which offer relatively high yields, are good candidates. By selecting properties with a balanced purchase price and rental income, you can aim for high returns.
• If you want to secure stable income (rental income): Strategies such as owning multiple condominium units in areas with stable rental demand, such as downtown areas, or owning a single-building property can be considered. Properties in prime locations have lower vacancy risks and tend to generate stable income over the long term.
• If you want to target capital gains (capital gains): Utilize networks among high-net-worth individuals to obtain information on properties priced below market value, then sell them after their value has increased. Through acquiring high-quality properties off-market or increasing their value through renovations, you can aim for significant capital gains.
• If you prioritize income tax planning: Older properties (such as used condominium units) that allow for significant depreciation expenses are suitable. The goal is to reduce the heavy tax burden associated with high income by leveraging depreciation due to the age of the building. However, as mentioned later, tax planning benefits are greater for high-income individuals, so tax reform risks should also be considered.
• For inheritance tax planning: The key is to select properties with high asset value that are unlikely to decline in value in the future. Land in urban areas with stable land prices or properties with high scarcity value are less prone to decreases in appraised value and are suitable for long-term holding. As mentioned later, real estate is advantageous for inheritance tax planning because its assessed value for inheritance tax purposes is lower than its market value, making it more favorable than cash.

As such, the optimal investment targets and strategies vary depending on the purpose. First, prioritize what you aim to achieve through real estate investment and clarify your goals. Once your objectives are clear, you can proceed with area selection and property selection without deviating from your guidelines.

2. Area Selection – Assessing the Market and Location

“Which area to invest in” is a crucial factor in the success or failure of real estate investment. This is especially true for ultra-high-net-worth individuals, who have a wide range of investment options both domestically and internationally, making careful area selection even more important. As a general rule, it is best to target markets with stable demand and potential for asset value maintenance or appreciation.

Within Japan, major metropolitan areas such as Tokyo, Osaka, and Nagoya, as well as other major cities, have concentrated populations and economies, resulting in stable real estate demand. Real estate in these areas tends to be less susceptible to significant declines in asset value and is also more stable in terms of appraisal value from an inheritance planning perspective. On the other hand, while properties in regional cities or suburban areas may appear to offer high surface yields, they carry relatively higher risks such as vacancy risks due to population decline or insufficient demand, as well as risks of asset value depreciation. Given the scale of ultra-high-net-worth individuals' assets, there is no need to aggressively pursue high-risk markets. Instead, a strategy focused on achieving steady results in reliable areas is more appropriate.

The main criteria to consider when selecting an area are as follows.

• Demographic trends and demand trends: Investigate population growth and decline trends, changes in the number of households, and rental demand in the area. Areas with continued population inflows and regions with a concentration of universities and companies have strong rental demand. Conversely, areas with population outflows and aging populations face the risk of long-term demand decline.
• Rent levels and vacancy rates: Understand the average rent levels and vacancy rates in the area. Areas with stable, high rent levels are advantageous for securing income, and low vacancy rates make it easier to secure tenants. For example, popular areas in the city center tend to attract tenants even if the rent is slightly higher.
• Future asset value potential: Consider future development factors such as the presence of redevelopment plans, scheduled new station openings, and infrastructure improvements. Real estate in areas with high future potential tends to increase in asset value over time, offering the potential for capital gains.
• Liquidity (ease of sale): Consider exit strategies for your assets and choose areas with large market sizes and high liquidity. Properties in urban areas with many buyers are easier to sell when the time comes. Condominiums, in particular, have a wide range of demand, making them relatively highly liquid and easy to sell.
• Consider overseas markets: Some wealthy individuals invest in overseas real estate markets. Properties in major cities in the US, Europe, and Asia are attractive from the perspective of diversification and high growth. However, foreign real estate involves legal and tax systems, exchange rate risks, and other challenges, so beginners should seek the support of reliable local experts when taking their first steps.

Once you have narrowed down potential areas based on the above considerations, conduct on-site inspections and collect market data to evaluate them qualitatively and quantitatively. In particular, location conditions (distance from the nearest station, surrounding environment, and convenience for daily living) are directly linked to rental demand and should be prioritized. As the real estate investment adage goes, “Location, location, location,” the quality of the location is the key to asset value and profitability. Take your time and carefully evaluate the area.

3. Understanding property types – grasping their characteristics and advantages/disadvantages

After selecting the investment area, the next step is to decide which type of property to invest in (property type selection). While ultra-high-net-worth individuals have a wider range of properties they can purchase, each property has different income characteristics and risks, so it is essential to understand their features correctly. Below is an overview of the main types of investment properties and their advantages and disadvantages.

• Single-building condominiums/apartments (newly constructed): This involves purchasing an entire building and renting out all of the units. This is an area that is easier for wealthy individuals with sufficient capital to enter, and one of the advantages is that there is little competition. Newly constructed properties are attractive in themselves, and even if the rent is slightly higher, they tend to attract tenants easily, so vacancy risk is low. However, the high purchase cost and the tendency for rent to decrease after the first tenants move out (the new construction premium wears off) are drawbacks. While major repairs are not immediately necessary due to the new construction, the return on investment tends to be lower than for used properties.
• Single-building condominiums/apartments (used): This involves purchasing a used single-building property from the previous owner. The advantages include lower property prices compared to new construction, resulting in better initial investment efficiency, and more stable rent levels (having been adjusted from higher initial rates). As the property ages, rent declines tend to stabilize, making it easier to operate in line with expected yields. However, it is important to note that maintenance costs increase as the property ages. Generally, major repairs are required every 10–15 years, which may include exterior wall repairs, roof repairs, plumbing system upgrades, and renovations of common areas, all of which require significant capital expenditures. It is crucial to conduct thorough due diligence on the property's maintenance history and condition at the time of purchase and estimate future maintenance costs in advance.
• Condominium units (such as one-room apartments): This is an investment style where you purchase a single unit (one room) within a condominium building rather than the entire building. It allows you to start with a relatively small amount and gradually increase the number of units you own, making it a suitable option for affluent individuals who are hesitant about making a large investment right away. By owning multiple units in different locations, you can also expect a diversification effect that reduces the risk of disasters and market fluctuations. Additionally, condominium units have broader market demand compared to entire buildings, offering the advantage of higher liquidity (ease of sale). This allows for greater flexibility in converting assets to cash as needed. However, in condominium ownership, you only own the exclusive use portion, and management of the entire building is entrusted to the homeowners' association or similar entity. Since you cannot independently participate in decisions regarding repairs or renovations of common areas, the inability to implement improvements through self-management is a drawback. It is important to confirm the soundness of the management association and the status of repair reserves, and choose a property with a reliable management system.
• Commercial real estate (offices, stores, logistics, etc.): This involves investing in properties for tenant businesses. Compared to residential properties, commercial properties tend to have longer and more stable lease terms and can generate higher rents. However, they are also more susceptible to economic fluctuations and tenant trends. For example, office buildings face the risk of increased vacancy rates during economic downturns, while commercial facilities may struggle to attract new tenants after a tenant's departure, requiring specialized knowledge. While ultra-high-net-worth individuals may opt to acquire their own buildings or make large-scale investments, these options are challenging for first-time investors. It is advisable to gain experience with residential properties first before considering such investments.

As described above, each property type has different revenue structures and risk profiles. The strength of ultra-high-net-worth individuals lies in their financial flexibility, which allows them to consider options such as “newly constructed single-building properties” or “multiple-unit condominium ownership,” which are difficult for general investors. It is important to compare multiple options and select the property type that aligns with your objectives and risk tolerance. If you are unsure, trying both single-building and multi-unit options is also an option. As a diversification strategy unique to high-net-worth individuals, incorporating different types of properties into your portfolio can be an effective way to spread risk and expand opportunities.

4. Partner Selection – Building a Trustworthy Team of Experts

To succeed in real estate investment, it is essential to select trustworthy partners (experts). While ultra-high-net-worth investors have many options due to their financial strength, they are also more susceptible to unscrupulous operators, making it crucial to identify appropriate advisors and business partners.

The first step is to select a real estate brokerage firm or real estate investment consultant. It is advisable to choose a company with extensive experience in handling investment properties and a track record in large transactions and asset management support for high-net-worth individuals. While general real estate companies can handle income-generating properties, only a limited number of companies have extensive experience in high-end properties and single-building investments for high-net-worth individuals. Given the large scale of assets involved, consulting with a professional in asset management who can provide comprehensive proposals considering asset allocation and tax implications is a key step toward success.

Key points for selecting a partner:

• Track record and expertise: Review the past performance of potential real estate companies or advisors. Look for a track record of successful cases with high-net-worth clients, years of experience, and relevant professional qualifications (such as real estate broker licenses or financial planner certifications).
• Compatibility with investment strategy: As mentioned earlier, each company has its own areas of expertise. Some companies specialize in single-building investments, while others focus on condominium management. It is important to assess whether the company can provide proposals that align with your investment objectives and whether their strategies are compatible. During the consultation, clearly communicate your objectives and evaluate the depth of their proposals and expertise.
• Transparency and reliability: Be cautious if a real estate company's explanations are unclear or if they emphasize only the benefits without mentioning the drawbacks. Some companies target wealthy beginners and pressure them into contracts using convenient information. Stay calm in the face of overly aggressive sales pitches or extreme claims such as “you'll lose out if you don't buy now.” If you feel even the slightest discomfort, do not take their word for it and take the time to research on your own.
• One-stop service: Real estate investment requires a wide range of knowledge and tasks, including property selection, contract and legal procedures, loan arrangements, property management, and exit strategies. Ideally, you should have reliable experts in each field, but it is also effective to use a company that offers a one-stop service that coordinates these experts. For example, some major real estate companies targeting wealthy individuals collaborate with tax accountants, lawyers, and property management companies to provide comprehensive support.

Additionally, a property management company (property manager) is an important partner after purchasing real estate. By hiring a company with extensive experience in rental management, you can entrust them with tasks such as tenant recruitment, rent collection, and building maintenance. Especially for busy high-net-worth individuals, it is impractical to handle detailed management on their own, so it is advisable to entrust a reliable management company and establish a system for regular reports. When selecting a management company, check their track record in terms of the number of properties managed, occupancy rates, and reputation for handling issues.

Finally, it is reassuring to collaborate with tax and legal experts. High-value investments involve complex tax calculations and legal procedures such as corporate structures. We recommend consulting with experienced tax accountants, certified public accountants, and lawyers at an early stage to proceed with the optimal structure.

Tips: High-net-worth individuals are often targeted by scammers. Investment scams targeting wealthy individuals unfamiliar with real estate investment exist, so it is important to educate yourself to avoid being deceived. While partnering with a trustworthy partner, acquiring at least basic knowledge yourself can help reduce the risk of entering into unfavorable contracts.

5. Funding Plan and Loan Strategy – Optimizing Finance

Developing a financial plan is also an important step before starting real estate investment. In the case of ultra-high-net-worth individuals, it is possible to purchase entirely with cash due to sufficient self-capital, but it is also worth considering a strategy that utilizes loans. Conduct a concrete simulation of how to balance cash on hand and borrowing, as well as how to draw up income and expenditure plans and risk scenarios.

• Deciding on budget allocation: First, decide on the maximum amount to allocate to real estate investment. Determine the percentage of total assets to be allocated to real estate investment (e.g., “up to 20% of total assets”) and distribute the remaining funds across other asset classes to maintain overall balance. Generally, ultra-high-net-worth individuals tend to allocate approximately 20–30% of their total assets to real estate (tangible assets). Set an appropriate investment scale based on your own portfolio strategy.
• Combination of equity and debt: Cash purchases have no interest costs and are simple, but they tie up a significant amount of capital and may result in missed investment opportunities. Borrowing allows you to retain some cash while leveraging the return, but it also entails interest costs and repayment risks. Ultra-high-net-worth individuals may be able to secure loans from banks under extremely favorable terms. In some cases, loans with ultra-low interest rates of around 0.1–0.2% per annum are available, enabling access to funding under exceptionally favorable terms. Under such favorable conditions, many affluent individuals may choose to leverage loans without overly concerning themselves with interest burdens, thereby expanding their real estate investments effectively. However, caution is also necessary regarding future trends in market interest rates. Even though interest rates are currently extremely low, if interest rates rise in the medium to long term, interest burdens will increase. Therefore, it is important to incorporate interest rate fluctuation risk into your financial plan. Measures such as securing fixed interest rates through fixed-rate loans or maintaining flexibility for early repayment can be considered.
• Cash flow simulation: Once the target property has been decided, identify rental income and expense items and conduct a long-term cash flow simulation. On the income side, factor in not only current rental rates but also potential future declines (e.g., the possibility of rates dropping a few years after construction for new buildings). On the expense side, include all items such as loan repayments (principal and interest), property taxes, management fees, maintenance reserves (for condominiums), property management fees, fire insurance premiums, tenant recruitment costs, and future maintenance reserves. Common mistakes made by beginners include focusing solely on the surface yield (annual rental income divided by property price) and being overly optimistic, only to find that actual net income is significantly reduced due to various expenses and vacancy losses. For example, unexpected repair costs or management fees may accumulate, resulting in lower-than-expected income—a typical example of such a mistake. To avoid this, we carefully calculate the net yield (after deducting expenses) and cash flow, and verify whether the property can withstand the worst-case scenario.
• Risk scenarios and countermeasures: The income and expense plan includes multiple scenarios, such as an increase in vacancy rates, a decline in rent, or an increase in interest rates. For example, we conduct stress tests with scenarios such as “a 10% vacancy rate occurring annually,” “rent declining by 1% annually in the future,” or “interest rates rising by 2%,” and verify whether the cash flow remains sustainable. If there are scenarios resulting in a deficit, adjustments are made by increasing the amount of equity investment to reduce the loan-to-value ratio, incorporating early repayment plans, or reevaluating the property's yield conditions. Additionally, it is essential to ensure sufficient contingency funds (buffers) to prepare for unforeseen long-term vacancies or major repairs. Even affluent individuals with financial flexibility may face opportunity losses or adverse effects on other assets if unexpected additional investments accumulate. It is crucial to approach planning with a high safety margin.
• Additional benefits of loan utilization: One advantage of affluent individuals using loans is the life insurance substitute effect provided by group credit life insurance (GCLI). By attaching GCLI to a loan, the outstanding loan balance is paid off by insurance in the event of the borrower's death or severe disability. The surviving family members are left with the real estate asset free of debt, enabling them to continue receiving rental income or sell the property to obtain a lump-sum payment. This effectively provides the same benefits as having life insurance while investing in real estate. Even for ultra-high-net-worth individuals, considering such a loan strategy with insurance functionality is worth exploring if you want to ensure peace of mind for future heirs.

Based on the above, let's create a comprehensive financial plan. While you can consult professionals for income and expenditure simulations or financial planning, it is important that you also understand and grasp the details yourself. At this stage, please reconfirm whether the investment amount and loan amount align with your risk tolerance.

6. Considerations unique to the wealthy – Tax, inheritance, corporate structures, and a holistic view of assets

From here, we will explain the unique perspectives of the wealthy that are particularly important when ultra-high-net-worth individuals engage in real estate investment. These include taxes, inheritance, the use of corporations, and the positioning of real estate investment within the overall asset portfolio. These are highly specialized fields, but by thoroughly understanding them and incorporating them into your strategy, you can make smarter investments and better protect your assets.

Tax Strategies and Tax Benefits

Real estate investment offers various tax benefits, making it an attractive tax planning tool for high-net-worth individuals. However, tax laws are subject to frequent changes, so it is essential to stay updated on the latest information and remain flexible in your approach.

• Income Reduction Through Depreciation: When acquiring rental real estate, the value of the building can be expensed annually over its statutory useful life (depreciation). This allows you to reduce real estate income by deducting expenses from rental income, and by offsetting gains and losses with other business income or salary income, you can reduce your overall taxable income. This tax benefit is particularly significant for ultra-high-net-worth individuals who pay high income taxes and resident taxes.
• For example, individuals with annual income exceeding several million yen may be able to reduce their income tax burden by hundreds of thousands of yen through depreciation and interest expense deductions. However, tax planning through depreciation is essentially deferring income (the accumulated depreciation amount may increase capital gains upon future sale). It is crucial to balance tax benefits with investment profitability to avoid making investments that prioritize tax planning over their intended purpose.
• Greater tax planning benefits and legal reform risks for high-net-worth individuals: As mentioned earlier, the top income tax rate reaches 45% (effectively up to 55% including resident tax), so the impact of real estate investment for tax planning is greater for high-income individuals. In fact, there are cases where people are enticed with the promise of tax benefits through real estate investment, but it is important to note that the benefits are limited to high-income individuals earning over 15 million yen annually, and the effects are minimal for those with lower incomes. Additionally, tax laws can change in the future. There is no guarantee that current tax planning schemes will remain effective indefinitely.
• For example, tax laws may be amended to address tax planning strategies used by the wealthy, such as the “tower mansion tax planning” that has recently come under scrutiny, rendering such strategies ineffective. It is important to plan with the understanding that “current tax planning strategies may not remain effective in the future,” and avoid overreliance on tax planning benefits. Stay informed about tax reform trends and maintain flexibility to adjust strategies as needed.

Inheritance and Business Succession Planning

For ultra-high-net-worth individuals, inheritance tax and business succession are unavoidable issues. Real estate investment is a highly effective tool in this area of inheritance planning.

• Inheritance Tax Valuation Reduction Effect: Real estate is assessed at a lower inheritance tax valuation (tax assessment value) compared to cash or securities, allowing the taxable amount of inheritance tax to be significantly reduced by holding assets in real estate. For example, if you hold 10 billion yen in cash, the entire amount is subject to taxation. However, if you hold the same amount in real estate, the assessed value could be reduced to approximately 7 to 8 billion yen. In other words, even if the market value of the asset is the same at 10 billion yen, converting it into real estate can reduce the taxable base by 2 to 3 billion yen. Additionally, if the real estate is rented out, the “rental property land” or “rental property” valuation reduction applies, further lowering the assessed value. As such, real estate is more advantageous than cash in terms of inheritance tax, making it reasonable for the wealthy to hold a portion of their assets in real estate.
• Smooth asset succession planning: While real estate is difficult to divide, smooth succession is possible with advance planning. For example, if there are multiple children, you can designate heirs for each property in advance or establish a corporation for each property and divide the shares to prevent inheritance disputes. Additionally, methods such as pre-death gifts or family trusts can be used to transfer assets to the next generation in advance. By utilizing tax-exempt gifts of up to 1.1 million yen per year or the inheritance tax settlement system, assets can be transferred in a planned manner. It is important to consult with professionals and implement strategies based on the latest regulations.
• Tax Payment Funds and Real Estate Liquidity: When significant inheritance taxes are incurred, it is also necessary to consider how to secure the tax payment funds. Real estate is less liquid than cash for tax payment purposes, so in some cases, selling part of it to generate funds for tax payment may be an option. Fortunately, if you have included liquid real estate such as condominium units in your portfolio, you can quickly sell them upon inheritance to secure tax payment funds and protect other major assets (e.g., company shares or business-use real estate). Utilizing life insurance is also a standard strategy in inheritance planning, so considering life insurance alongside real estate investment would be a comprehensive approach.

For ultra-high-net-worth individuals, the inheritance tax rate can reach up to 55%, meaning that without proper planning, more than half of the assets could be taken away. It is essential to effectively utilize real estate to reduce the taxable amount while establishing an inheritance plan as early as possible. Depending on the situation, consider combining trusts, corporations, and insurance to implement a comprehensive inheritance strategy.

Utilizing corporate structures

In real estate investment for high-net-worth individuals, structures utilizing corporations are also common. By establishing an asset management company (commonly referred to as a family company) and holding real estate under the company's name, there are numerous tax and inheritance benefits.

• Reduction of inheritance tax valuation through a corporation: When holding real estate through an asset management company, the real estate is inherited as shares of the company at the time of inheritance. The valuation of the company's shares is calculated by deducting the amount equivalent to corporate tax on the unrealized gains of the real estate held by the company. As a result, the assessed value is lower than if the real estate were held directly by an individual, enabling a significant reduction in inheritance tax. This is an effective method, particularly for high-net-worth individuals who hold assets with significant unrealized gains, such as real estate or company shares.
• Comparison of income tax and corporate tax benefits: When individuals earn real estate income, the top tax rate can reach up to 55% for ultra-high-net-worth individuals. However, for corporations, the effective tax rate for corporate tax and local corporate tax is approximately 30% (varies depending on income scale). By retaining profits within the corporation, you can increase retained earnings at a lower tax rate than individuals. This allows you to organize asset management by using future profits to purchase additional properties or expand business operations. However, when transferring profits from the corporation to individuals (through dividends or executive compensation), additional taxes apply. To maximize tax benefits, it is essential to effectively utilize profit retention within the company and expense deductions.
• Salary payments as an alternative to pre-death gifts: By establishing an asset management company and employing family members as executives or employees, you can transfer money to family members annually in the form of salaries. This effectively achieves the same result as a tax-free gift during one's lifetime. By paying salaries as company expenses, the corporation's taxable income decreases, and family members can receive income while also benefiting from the salary income deduction. As a result, it is possible to distribute cash to family members while reducing the inheritance estate. Additionally, by holding assets through the corporation, inheritance can be divided smoothly by distributing shares during the inheritance process.
• Limited liability and enhanced creditworthiness: If the corporation owns the property, any losses from failed investments remain with the company, preventing direct impact on personal assets (principle of limited liability). Additionally, having legal entity status as an asset management company can make it easier to secure bank loans and enhance external creditworthiness in some cases.

However, corporate structures also involve maintenance costs and administrative burdens. Annual financial statements, tax adjustments, and social insurance contributions are required, which may not be cost-effective for small-scale investments. For ultra-high-net-worth individuals managing substantial assets, the tax planning and asset preservation benefits of establishing a corporation often outweigh the costs. However, it is essential to conduct thorough simulations with a tax accountant or other professionals regarding specific applications. In some cases, alternative structures such as trusts or general incorporated associations may be more suitable.

The Role of Real Estate in the Asset Portfolio

Finally, consider how to position real estate investments within your overall asset portfolio. Ultra-high-net-worth individuals typically hold a diverse range of asset classes, including stocks, bonds, business investments, and art. Among these, real estate plays a unique role as a tangible asset (real asset).

• Diversification and risk reduction: Real estate has different price movement patterns than stocks and bonds, so including it in your portfolio can help diversify overall risk. Even when the stock market is volatile, real estate rents tend to be relatively stable, which can help reduce the overall volatility of the portfolio. In fact, the ultra-wealthy tend to allocate a larger portion of their assets to alternative assets other than traditional stocks and bonds, with real estate occupying a major position among these. According to one survey, approximately 21% of the assets of the world's ultra-wealthy are allocated to directly owned real estate. This further underscores the importance of real estate as a key component of wealthy individuals' portfolios.
• Stable income source through income gains: Alongside stock dividends and bond interest, real estate rental income is a valuable source of income gains. As an asset that generates regular cash flow, it can serve as a base income to cover living expenses and business operating costs. Even for the ultra-wealthy, cash flow management is important, and rental income, which tends to remain relatively stable even during economic downturns, contributes to fiscal stability. In the long term, rental income and real estate prices are also likely to rise in tandem with inflation, making real estate a potential hedge against inflation.
• Asset preservation and the security of tangible assets: Real estate has intrinsic value as a tangible asset, providing a sense of security as a “last line of defense” for asset preservation. Even if the value of currency declines or financial markets become unstable, the physical property of land and buildings remains. In extreme cases, even if securities become worthless during a financial crisis, real estate can still be utilized through rental income or self-use. For the ultra-wealthy, holding a portion of their assets in real estate is a rational choice from the perspective of wealth preservation.
• Liquidity and balance: On the other hand, real estate is an asset with low liquidity (it takes time to sell). It is difficult to convert real estate into cash immediately when a large amount of cash is suddenly needed, and pricing also takes time. Therefore, it is necessary to ensure sufficient liquid assets (such as deposits or listed stocks) in the overall portfolio to mitigate liquidity risk. In the asset allocation plan of the wealthy, a balance is maintained between alternative assets like real estate and liquid assets to prevent mismatches between long-term assets and short-term funding needs.

In summary, real estate investment occupies a unique position in ultra-high-net-worth individuals' asset management, combining both defensive and offensive strategies. For those who already manage their assets through stocks or mutual funds, investing in real estate can provide additional diversification benefits. Conversely, those who hold a large amount of real estate may need to reassess the balance with liquid assets. Maintaining the optimal ratio from an asset allocation perspective while always keeping an overview of the entire portfolio is the key to ensuring the long-term prosperity of the wealthy.

7. Learning from failure and success – Lessons to know in advance

Finally, let's review common mistakes made by beginners in real estate investment and the key success factors unique to the wealthy. By learning from others' experiences in advance, you can make your own investments safer and more profitable.

Common Mistakes and Lessons Learned

• Mistake 1: Blindly Believing a Broker's Sales Pitch – A client, Mr. A, was pressured by a broker who claimed, “This is your last chance to buy a prime property in the city center at a discounted price,” and impulsively purchased an older property without conducting thorough research. After purchasing, they were met with significant repair costs due to the property's age, leaving little rental income remaining. The lesson here is that even affluent individuals should not blindly trust professionals but instead objectively assess the merits of a property themselves. Consider the underlying reasons why a “bargain property” is on the market and seek opinions from third-party experts to maintain caution.
• Failure Case 2: Relying on an overly optimistic scenario – Mr. B purchased a property with numerous vacant units after being persuaded by a sales pitch claiming, “The area will soon host a major event (○○ boom), so it will definitely fill up.” However, upon closer inspection, tenants did not materialize as expected, and the anticipated boom effect was nonexistent, leaving Mr. B to cover loan repayments out of his own pocket. This example highlights the importance of not relying on optimistic future projections but making decisions based on current realistic cash flow. Instead of hoping that things will improve in the future, base your investment decisions on whether the current situation is financially viable.
• Failure Case 3: Losing sight of the original purpose and failing due to a change in strategy – C, who was considering a small-scale investment in a one-room apartment for stable income in retirement, impulsively purchased a single-building apartment in the suburbs because it was cheap. As a result, the property remained vacant, and C was unable to generate the expected income, eventually selling it at a low price. This case highlights the importance of staying true to one's original intentions. Instead of selecting a property type aligned with the investment objective, the decision was swayed by the immediate appeal of a low price, leading to failure. Properties that deviate significantly from the initially defined strategy or area should be approached with caution, even if they appear attractive.
• Failure Case 4: Investing without considering profits because of tax benefits – G, with an annual income of around 5 million yen, heard that real estate investment could reduce taxes and decided to invest in a condominium unit in Tokyo. While there was a tax refund of several tens of thousands of yen in the first year, subsequent years saw real estate income turn into a loss, increasing tax liabilities, and ultimately resulting in a net loss. In this case, the failure was analyzed as starting the investment without understanding the system, focusing solely on tax benefits. The lesson here is that tax benefits are an effective secondary effect for high-income taxpayers and should not be the primary purpose of investment decisions. Real estate investment only makes sense if its profitability is ensured, so be careful not to pursue tax benefits alone.

There are various other failure patterns, such as “overreliance on loans leading to difficulties due to rising interest rates” and “delegating everything to a sublease operator and noticing problems too late.” A common thread among these failures is a lack of knowledge, inadequate preparation, and poor judgment. Even ultra-high-net-worth individuals with substantial financial resources must be mindful of these issues, just like ordinary investors.

Key Points for Success

On the flip side, what are the key points for wealthy individuals to succeed in real estate investment? Here are a few representative examples.

• Choose properties with broad appeal: While the wealthy may want to prioritize interior design and building quality, when it comes to investment properties, it is wiser to choose properties with a classic design that are widely accepted in the market rather than those that reflect personal preferences. Unconventional designs or unique floor plans can narrow the target tenant base. Properties with simple, user-friendly floor plans and standard amenities in popular areas are more likely to attract tenants and reduce vacancy risks. Even for high-end properties targeting affluent individuals, properties with universal appeal that appeal to a wide audience tend to yield better long-term investment returns than overly elaborate properties.
• Don't jump at high yields: Properties with high numbers like “yield of X%” may seem attractive, but properties with high surface yields often have underlying reasons (e.g., low property price = issues with location or building quality). In reality, surface yields do not account for expenses or vacancy risks, so the actual returns may not match the advertised figures. For high-net-worth individuals, there is no need to take unnecessary risks to achieve asset growth. Therefore, prioritizing low risk over high yields is the right approach. Focus on stable income from properties with solid locations and prioritize caution when considering properties that tout unusually high yields.
• Utilize advice from experienced professionals: As mentioned earlier in the section on selecting partners, the advice of an experienced team of professionals is essential for successful real estate investment for high-net-worth individuals. Rather than making decisions on your own, incorporating the opinions of experienced professionals into your investment decisions and management strategies can help you avoid oversights and improve the quality of your decision-making. Professionals who can provide advice on the overall allocation of assets and tax strategies are particularly valuable. Do not hesitate to invest in securing the services of an excellent advisor.
• Have a long-term perspective and plan ahead: Real estate investment should not be approached with short-term gains in mind. It is important to consider results from a long-term perspective, such as 10 or 20 years. High net worth individuals tend to prioritize long-term growth and preservation of assets over short-term gains, so it is important to stick to a solid investment plan that is not easily swayed by economic fluctuations. By maintaining a consistent approach while remaining flexible to changes in market conditions, both asset value and returns should increase over time.

Many successful wealthy investors have their own investment philosophy while keeping the above points in mind. The key to long-term success is to learn and make decisions on your own, without being swayed by information or the opinions of others.

Summary

We have covered the key points to keep in mind when ultra-high-net-worth individuals take their first steps into real estate investment. Finally, we will summarize the recommended steps for starting real estate investment.

1. Clarify your investment objectives and goals: Clearly define your investment objectives, such as asset formation, income security, tax planning, and inheritance planning, and establish a strategy guideline.
2. Market research and area selection: Narrow down promising investment areas through reliable data and site visits, and comprehensively evaluate demand trends, yields, and future potential.
3. Decide on the property type and investment scale: Decide on the type of property (apartment or entire building, new or used, residential or commercial) and the approximate investment amount based on your objectives and funds.
4. Consult with experts and build a team: Consult with real estate companies with a track record in serving high-net-worth individuals, asset consultants, tax accountants, and other professionals to secure appropriate advisors and partners.
5. Specific property selection and due diligence: Compare and evaluate multiple candidate properties, and conduct thorough due diligence, including on-site inspections, income and expense projections, and legal investigations.
6. Funding plan and purchase procedures: Finalize the combination of equity and loans, and develop a realistic cash flow plan. Acquire the property through the contract and settlement process.
7. Operation and monitoring: Once rental operations begin, manage the property under an appropriate management system and regularly monitor cash flow and asset value. Seek expert advice as needed to achieve long-term asset growth.

By following these steps, even first-time real estate investors can avoid major mistakes and expect stable and profitable results befitting ultra-high-net-worth individuals. Real estate investment offers significant benefits to the affluent as a means of achieving both asset protection and asset growth. We encourage you to use this article as a guide to take your first step. With thorough preparation and planning, you can build a solid foundation for future generations with steady returns. Leverage your financial resources to the fullest and achieve further growth through steady real estate investment.