Is real estate investment really unprofitable? An in-depth analysis of the difference between success and failure.

Many beginners may have heard people say, "Don't invest in real estate," or "Real estate investment is not profitable." It is true that real estate investment requires a large amount of money and involves risks, so it is natural to feel uneasy. It is also true that some people have actually failed in real estate investment and incurred losses. Therefore, there is a widespread image that real estate investment = unprofitable. However, this is not entirely true. There are many people who are making stable profits from real estate investment ifthey have the right knowledge and strategies.In this article, we will analyze the background of why real estate investment is said to be "unprofitable," and thoroughly explain the profit structure, examples of failure and success, risks that beginners should avoid, and key points for success.Gain a proper understanding of therisks andreturns ofreal estate investmentand acquire the knowledge that will enable even beginners to take the first step with peace of mind.

Basic Profit Structure of Real Estate Investment

There are two main types of earnings from real estate investment.

Income gain (investment income)

Income gains, represented by monthly rent income, are profits that can be earned continuously through rental management. The appeal of this type of income is that once a property is rented out, a fixed monthly income is received, generating a stable cash flow over the long term. However, rental income is not guaranteed forever and may fluctuate depending on economic fluctuations and the availability of tenants.

Capital Gain (Profit on Sale)

Capital gains are gains on the sale of real estate holdings. For example, if you sell your property at a time when the price of the property has increased from the time you purchased it, you can earn a large gain on the sale. Capital gains are large one-time gains and can be a great opportunity when the real estate market is strong. On the other hand, however, since the value of real estate is affected by the economy and demand, it is important to note that you may not always be able to sell your property at the price you want.

Thus, real estate investment income consists of both "steady monthly income gains" and "capital gains from future sales". To succeed in real estate investment, it is important to understand these two profit structures and make an investment plan from a long-term perspective.

Reasons why people say "real estate investment is not profitable" and examples of failures

There are several typical reasons why people say "real estate investment is not profitable.

The main reasons are

• Fear of having to take out a large loan - Real estate is expensive, so it is common to take out a loan. Many people are reluctant to take on large debts, but the basic principle is to repay the loan with monthly rental income.

• Vacancy risk and rent delinquency risk - In rental management, there is always the risk of vacancy and rent delinquency. There is always the risk of not finding tenants, of having no rental income for a period of time, or of tenants not paying their rent.

• Expenses due to disasters and repairs - Buildings deteriorate over time and will eventually require major repairs. In addition, if the building is damaged by fire, earthquake, flood, or other disasters, there is a possibility of incurring expenses that are not covered by insurance.

• Low yields and poor profitability - Some people point out that "real estate investment is not as profitable as stocks or FX. The take-home yield on real estate is generally around 4-5%, which some people find less attractive than high-risk, high-return investments.

• Knowledge and management required (time-consuming) - Real estate investment does not work by "buy and leave". A wide range of knowledge and effort is required, from property selection and loan negotiation to tenant solicitation and property management.

• The existence of malicious agents - There are some unscrupulous agents who sell unsuitable properties to beginners through aggressive sales and hype. In some cases, the experiences of people who have been cheated by such vendors and lost money in the past have led to people saying, "Don't invest in real estate.

Typical examples of failure

Failure case 1: A case of an old one-room apartment in a rural area suffering from vacancy

Mr. A purchased an old one-room condominium in a regional city, expecting a high return of 12%, but after the tenant moved out when the contract was up for renewal, he was unable to secure a new tenant and the rental income ceased. He was forced to lower the rent by more than 10,000 yen per month and finally found a new tenant six months later, but one year later, the tenant moved out again, leaving the apartment vacant for a long period of time. Since the property was old and located 20 minutes away from the nearest station, there were no buyers, and the property was difficult to sell. As a result, the initially expected yield became a blip on the radar, and the company was left with only loan repayments and maintenance costs to manage the property at a loss.

Failure Case (2): Newly-built studio apartments that do not break even

Mr. B purchased a newly built studio apartment in Tokyo with a full loan in search of a stable income for his retirement. In reality, however, the monthly loan repayment exceeded the guaranteed rent income by approximately 20,000 yen, and he found himself having to take out money every month immediately after the purchase. Furthermore, three years after signing the contract, we received a notice of reduction of the guaranteed rent, and the burden of having to take out more money increased further. We then considered selling the property, but the appraisal value had fallen from 28 million yen at the time of purchase to approximately 18 million yen, resulting in an unrealized loss of 10 million yen.

As these examples of failures show, incorrect property selection, poor financial planning, and inadequate risk countermeasures lead to the result that "real estate investment is not profitable. In other words, the biggest cause of failure is to start investing without proper judgment and preparation.

Commonalities and Successful Cases of Successful Investors

On the other hand, there are many successful investors who are continuously making profits from their real estate investments. So what makes these profitable investors different? What they have in common is "planning based on correct knowledge" and "solid property selection and management.

Success Stories

The first pattern that is often cited as a success story is the case where the basic principle of real estate investment, "buy a property at a low price, rent it out, and sell it at a high price in the future," is steadily put into practice. In particular, there are many examples of success by purchasing used condominiums and houses at a discount price and renting them out. Since the price of used properties is lower than that of new properties, it is possible to secure a surface yield of 10% or more, depending on the balance between the rent and the property. Properties that achieve such high yields tend to have income remaining after deducting loan repayments and expenses, resulting in successful investments.

Next, strategies that emphasize diversification of vacancy risk and long-term management are also common among successful investors. For example, one company employee, Mr. A, who was a beginner in real estate investment, took on the challenge of purchasing a single existing apartment building in the suburbs of central Tokyo with a view to building future assets, and succeeded in achieving stable management. When selecting a property, Mr. A paid attention to areas near train stations that are convenient for commuting and areas where the population is likely to increase in the future. In addition, Mr. A carefully selected properties with low management effort and low vacancy risk. Another factor in her success was that she searched for properties with a clear policy of "securing stable, high yields over the long term," rather than with a short-term orientation of "wanting to resell immediately to generate cash.

Points in common with successful people

• Purchase properties at a discount - Always research properties that can be purchased at a discount to the market price, and acquire them when good conditions are available. Especially with used properties, there is room for price negotiation, and the lower the price, the higher the yield and the higher the success rate.

• Focus on yield and income/expense balance - Focus not only on the superficial yield figure, but also on whether the real yield, after deducting loan repayments and expenses, is positive. Successful investors conduct detailed income/expense simulations prior to purchase and carefully verify that the plan will generate income on hand.

• Choose an area with high demand - To lower the risk of vacancy, it is an ironclad rule to invest in an area with stable and high rental demand. Properties near train stations, in central Tokyo, near universities, and in other areas where people tend to gather easily are less susceptible to economic downturns and are suitable for long-term stable management.

• Long-term perspective and diversification - Successful real estate investors do not look for short-term gains and losses, but rather view real estate investment as a long-term asset-building strategy. They also diversify their sources of income by investing in multiple properties or a single building, if possible, to diversify their risk so that one failure does not ruin their entire portfolio.

Key Points for Beginners to Succeed in Real Estate Investment

So, how should a beginner who is just starting out in real estate investment go about it? The following is a summary of important points. 1.

1. acquire the right knowledge

The first step is to acquire basic knowledge about real estate investment. Obtain information from books, seminars, and trusted advisors to acquire a broad knowledge of the profit structure, risk management, taxation, and other aspects. It is dangerous to start investing without sufficient knowledge. 2.

2. selecting a solid property

For beginners, it is especially important to select properties with an emphasis on "safety. Specifically, pay attention to the following points:

• Focus on location: close to train stations, convenient transportation, and convenient living facilities
• Areas with stable demand: close to universities and large companies, areas with little population decline
• Condition of the property: Check the age of the building, condition of facilities, repair history, etc.

3) Establish a realistic income/expense plan

The success or failure of a real estate investment depends on a realistic income/expense plan. Consider the following points when planning

• Vacancy rate expectations: Plan for a certain period of vacancy, rather than always assuming full occupancy.
• Reserve for repairs: Set aside a certain amount of money each month for future repairs.
• Plan for adequate funds: Have enough cash on hand for unexpected expenses. 4.

4. find a reliable partner

Real estate investment is not a one-person job. Having the following partners will increase your chances of success:

• A reliable real estate company: one that can not only introduce you to properties, but also provide long-term support.
• Experienced management company: A company you can rely on for tenant recruitment and day-to-day management.
• A tax accountant who is knowledgeable about real estate investment: a specialist who can provide tax advice.

5. think long-term

Think of real estate investment as long-term asset building, not short-term profit seeking. By persevering, the compound interest effect will work and your assets will steadily increase.

Conclusion: Real estate investment can be profitable "if done correctly

While some people say that "real estate investment is not profitable," there is no doubt that it is an investment method that provides stable income if you have the proper knowledge and strategy. Many failures are due to insufficient preparation or bad decisions, and even beginners have a good chance of success if they take the right approach.

The real appeal of real estate investment lies in the fact that the results can vary greatly depending on one's judgment and efforts. The shortcut to success is to acquire sufficient knowledge before you start investing, make a reasonable financial plan, and take a long-term perspective.

The term "unearned income" may appeal to many people, but in reality it requires a lot of "investment" effort, especially in the first few years. However, if that effort pays off, it will be a great support as a stable source of income in the future.

Real estate investment is not an investment method that is "easy for anyone to make money," but it can be said to be "profitable" if done correctly.