In real estate investment, the purchase of a property is the "entry point" and the sale is the "exit point. While many investors focus on selecting and purchasing properties, they tend to overlook the importance of exit strategies. However, it is actually the timing and method of sale that determines the success of an investment.
An exit strategy is to plan in advance when, how, and for how much you will sell your investment property. An appropriate exit strategy will maximize your investment return and minimize your tax burden.
This article provides a comprehensive overview of exit strategies for real estate investments based on the extensive experience and expertise of INA & Associates, Inc. From how to determine when to sell, to specific techniques, to tax considerations, we will detail the important points that all investors should know.
An exit strategy in real estate investment refers to a strategy to maximize the recovery of invested capital through the sale of the investment property. This strategy should be carefully planned from the time the property is purchased. This is because the timing and method of sale can make a significant difference in the return on investment.
The reason why exit strategies are so important is that selling at the optimal time can maximize returns. If you sell at the wrong time, you may only be able to sell at a lower price than expected, resulting in a loss that exceeds the income from rental income you had previously earned.
There are three main exit strategies for real estate investment.
| Selling Method | Characteristics | Applicable Cases | Advantages |
|---|---|---|---|
| Sold as income-producing property | Sold as a rental income property | Highly profitable and stable property | High profitability can be appealed |
| Sold as a property for own residence | Sold as a property for the purchaser to live in | Property with good location and layout | Possibility of selling at a higher price than income property |
| Sold as vacant land | Sold as land after demolishing the building | Older, dilapidated property | Can maximize the value of the land |
Selling as income-producing property is a way to sell the property as income-producing property for the purpose of earning rental income. If there are tenants, the property is sold as an owner-occupied property.
This method is suitable for cases where the property is highly profitable and is expected to generate stable income on an ongoing basis. Properties with low vacancy rates and convenient transportation access, such as being within a 15-minute walk from the nearest station with easy access to a terminal station, are expected to generate stable rental income in the future.
When selling a property as an income-producing property, securing tenants at the highest possible rent and keeping vacancy rates low will lead to a high sale price. It is also important to regularly maintain the building and facilities in order to maintain the property's value.
Selling for personal residence is a case in which the property is sold as a property for the purchaser to live in by himself/herself. This method is suitable for cases where the tenant wishes to purchase the property or responds when approached to purchase the property.
If the property meets the tenant's desired location, layout, and size, it may sell for a higher price than if it is sold as an income property. However, it should be noted that the sale of the property to a non-tenant for his/her own residence is limited to the timing when the property becomes vacant.
Selling as vacant land is a method of dismantling the building and selling it as land. This method is suitable for cases where the building is old and outdated, and it is more likely to sell at a higher price if it is sold as vacant land.
This also applies to cases where it is difficult to find buyers because the building has deteriorated considerably, such as illegal construction, the building is leaning, or it has been damaged by white ants. However, the case of selling the property as cleared land is subject to the assumption that there are no tenants, which is a hurdle that requires a lot of time and money.
One of the most important factors that determines the success of a real estate investment is determining the best time to sell. Selling at the right time can maximize your investment return and minimize your tax burden.
The following are the best times to sell your investment property or condominium.
| Timing | Reason | Tax advantages | Market conditions |
|---|---|---|---|
| When interest rates are low | Increased number of people considering purchase | -When | Seller's market |
| Before major repairs | Avoid repair cost burden | -Avoiding the burden of repair costs | Reduce buyer's burden |
| Before depreciation ends | Reduce tax burden | Depreciation can be recorded | -In the event of price appreciation |
| When the price increases | Possible to sell at a higher price | -Seller's market | Seller's market |
| Over 5 years holding period | Long-term transfer income | Tax rate 20% (39% for short term) | -When interest rates are low |
Periods of low interest rates are the best time to sell investment properties. Low interest rates reduce loan repayments, which increases the number of potential buyers and makes it a seller's market.
In July 2023, the Bank of Japan announced its policy of allowing long-term interest rates to rise up to 1%. Since there is a possibility that monetary easing measures will be modified, it is important to pay attention to future interest rate trends while timing the sale.
Prior to large-scale repairs, which occur every 10 to 15 years, is a good time to sell investment condominiums. Large-scale repairs are construction work carried out as condominiums deteriorate over time.
The reason why this is an appropriate time to sell is that there is a possibility that the repair reserve fund will be raised or a one-time fee will be collected before or after the large-scale repair work. Since prospective buyers purchase properties taking into consideration not only loan repayment but also the amount of management fees and repair reserve fund payments, they may end up going over budget.
To mitigate this risk, it is recommended to sell the property before the consideration of large-scale repair work begins.
Selling before depreciation ends is the best time to sell because it reduces taxes. Depreciation of real estate means that the purchase cost of a property is expensed over its legal life.
The legal useful life is the legally defined period of time over which the property can be used. The legal useful life is determined by the type of building as follows
The period over which depreciation can be taken is limited to the period of the legal useful life. If depreciation cannot be taken, the amount of taxes owed will be higher, so it is best to sell before that time.
When the price market is rising, it is an easy time to sell at a high price. The national real estate price index, which serves as a guide to market prices, has been rising steadily since 2010.
The real estate price index is an index of real estate prices based on transaction price information of approximately 300,000 real estate transactions per year. It is important to monitor market trends and consider selling when prices are in an upward trend.
When the holding period of real estate exceeds five years, the tax rate for long-term transfer income is applied. This is an important time when the tax burden is significantly reduced compared to short-term transfer income.
| Holding period | Income tax rate | Residential tax rate | Total tax rate |
|---|---|---|---|
| Less than 5 years (short-term) | 30% (short-term) | 9% (short term) | 39% (short-term) |
| Over 5 years (long-term) | 15% 5% 5% (long-term) | 5% (long-term) | 20% (long-term) |
The long-term transfer income tax rate for over 5 years is 15% for income tax and 5% for inhabitant tax, for a total of 20%, while the short-term transfer income tax rate for less than 5 years is 30% for income tax and 9% for inhabitant tax, for a total of 39%. Since this 19% difference has a significant impact on investment returns, it is important to consider selling your property in excess of 5 years whenever possible.
A dead-crossing is a situation in which the amount of loan principal repayment exceeds the amount of depreciation. When this situation occurs, the company's actual cash flow is in the red even though it is in the black on the books, resulting in a heavy tax burden.
The timing of a dead cross is another important indicator for considering the sale of a property. In particular, a property that is older is more likely to experience a dead cross because the principal repayment amount of the loan remains the same while depreciation decreases.
The following important points need to be addressed in order to have a successful exit strategy for real estate investment. By understanding and practicing these points, you can maximize your investment returns.
It is important to determine the right time to sell based on a comprehensive assessment of multiple factors, including market conditions, interest rate trends, and tax incentives. In particular, determine the optimal timing in light of your own investment strategy, referring to the five best timings mentioned above.
Setting the offer price is an important factor that holds the key to a successful sale. It is necessary to set an appropriate price based on an accurate understanding of the market rate and a comprehensive evaluation of the property's profitability, location, building condition, and other factors.
If the pricing is too high, buyers will not be attracted, and if it is too low, profits will be lost. It is important to set the price strategically, referring to assessments by multiple real estate companies.
The exit strategy begins at the time of purchase. By selecting a property that is unlikely to decline in value in the future, you can expand your options when selling. Select a property by carefully considering its location, transportation convenience, and the development potential of the surrounding environment.
Purchasing a property with an appropriate equity ratio will increase your options at the time of sale. The higher the equity ratio, the easier it is to respond to changes in market conditions and the more flexible you can be in adjusting the timing of sale.
It is important to maintain the value of the property through regular maintenance and proper management. If the building and facilities are in good condition, a higher price can be expected at the time of sale.
Selling an investment property at a higher price requires a strategic approach. The following three strategies can be implemented to maximize the sale price.
Be sure to request an appraisal of the sale of real estate from more than one real estate company. Because a large difference in an assessed value price is produced by a real estate company, it is not possible to judge whether the price is high or cheap by the appraisal of only one company.
It is important to request an appraisal from at least three or more companies and to accurately grasp the market price. In addition, the service contents of each company and the affinity with the person in charge are also important judgment materials.
| Key points of the appraisal | Items to be confirmed | Importance |
|---|---|---|
| Basis of appraisal value | Transaction examples of similar properties, evaluation of profitability | ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ |
| Proposed sales strategy | Marketing techniques, estimated sales period | ★★★★ |
| Fees and Expenses | Brokerage fees and other expenses | ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ |
| Expertise of staff in charge | Track record of investment property transactions, market knowledge | ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ 2. |
When selling an investment property, it is important to select a real estate company that specializes in the sale and purchase of investment properties. This is because transactions of investment properties require expertise that differs from that of general real estate, such as income and expenditure calculations, taxes, and succession of lease contracts.
A real estate company with extensive experience in buying and selling investment properties will be able to advise you on the best time to sell your real estate investment, including market trends. Since they have a lot of know-how, you can feel confident in asking them for help.
In addition, a local real estate company is not necessarily superior when buying and selling investment properties. This is because investment properties are purchased not only by local buyers but also by investors from all over the country.
When selling investment properties, consider selling to foreign investors. In particular, Asian investors from China, Taiwan, and other Asian countries hold Japan in high regard and may be willing to purchase your property at a high price.
This is because yields on income-producing properties in China and Taiwan tend to be lower than those in Japan. In particular, real estate in Tokyo is popular among Asian investors, so consider including foreign investors as well, rather than focusing only on Japanese investors.
Understanding the taxation aspects of real estate investment exit strategies is extremely important. Appropriate tax planning can maximize your net proceeds.
The transfer income tax rate on the sale of real estate varies greatly depending on the length of time the property is held. By understanding this structure, you can determine the optimal timing of the sale.
Transfer income = sales price - (acquisition cost + transfer cost)
For the building portion, an amount equivalent to depreciation during the holding period must be deducted from the acquisition cost. This may result in an increase in actual transfer income and a heavier tax burden.
If certain conditions are met, special deductions can be deducted from the transfer income. The main types of special deductions are as follows
| Type of special deduction | Deduction amount | Conditions for application |
|---|---|---|
| Special deduction for residential property | 30 million yen | Used for personal residence |
| Special Exemption for Replacement of Specified Residential Property | -1,000,000 yen | If replacement requirements are met |
| Special deduction for expropriation, etc. | 50 million yen | Expropriation due to public works |
If a loss is incurred from the sale of real estate, the loss can be aggregated with other income under certain conditions. Losses that cannot be fully deducted can be carried forward to the next three years.
The exit strategy of a real estate investment is an important element that holds the key to a successful investment. Based on the information presented in this article, the following important points are reconfirmed.
Successful exit strategies require advance preparation and professional support, and at INA & Associates, Inc. we provide comprehensive support for your real estate investments based on our extensive experience and expertise.
With human capital andtrust at the core of our management, we offer optimal exit strategies tailored to each client's individual investment goals. If you have any questions about exit strategies for real estate investment, please feel free to contact us.
A1. An exit strategy should be considered from the time you purchase a property. It is too late to develop a strategy after purchase. It is important to comprehensively evaluate the future saleability and profitability of the property and envision multiple exit scenarios at the property selection stage.
A2. It is important to make a comprehensive judgment based on multiple factors rather than a single indicator. Of particular importance are the holding period (application of the long-term transfer income tax rate in excess of 5 years), market price trends, interest rate environment, profitability of the property (whether or not there are dead crosses), and remaining depreciation period.
A3. The appraisal of investment properties requires a specialized perspective that differs from general real estate appraisal. It is important to choose a real estate company that can comprehensively evaluate the property using the income capitalization method, compare current rent levels with market rents, analyze vacancy rates and occupancy rates, and forecast future earnings.
A4. When selling to foreign investors, it is important to pay attention to the complexity of legal procedures, language barriers, foreign exchange risks, and differences in taxation systems. It is important to select a real estate company that has extensive experience in dealing with foreign investors, is capable of handling transactions in English, and provides appropriate support.
A5. If a dead cross occurs, there are several measures that can be taken, such as considering selling the property, reviewing the repayment terms through refinancing, or revising the rent. It is important to comprehensively assess the property's future potential and the market environment, and choose the most appropriate option. We recommend that you seek professional advice.