Real estate investment is attracting attention as an option that can simultaneously realize long-term stable income and asset preservation, while utilizing asset management expertise cultivated through stock investments. For high-net-worth individuals in particular, real estate investment offers many advantages that cannot be covered by stocks alone, such as inflation resistance, tax savings, and inheritance protection, while many are puzzled as to whether it is so easy to enter the market that "anyone can do it. This paper explains the conditions and steps that stock investors should keep in mind when stepping into real estate investment, as well as the points where beginners can easily stumble.
Price fluctuation and stability: Real estate investment is more resistant to market fluctuations than stock investment, and it is easier to aim for stable earnings over the long term. Holding investment properties provides regular rental income (income gain), and if the location and quality of the property are good, vacancy risk can be kept low, thus increasing the stability of earnings. In addition, real estate values and rents tend to rise during periods of inflation, and an inflation hedge effect can be expected to protect the real asset value. On the other hand, stock investments are subject to large price fluctuations due to corporate performance and economic conditions, and tend to move significantly in a short period of time.
Liquidity and leverage: While stocks are easy to buy and sell and highly liquid, there is also the risk of a sharp decline in individual stocks. Real estate has the inconvenience of taking time to sell, but it is easy to obtain large loans from financial institutions by taking advantage of its high collateral value, and large transactions are possible with little capital on hand. This leverage effect is a major attraction of real estate investment.
Nature of investment return: In real estate investment, you can aim for both rental income (income gain) and profit from the sale of properties (capital gain). It is dangerous to rely solely on surface yields. In addition to yields, many other factors such as location, property condition, and future supply and demand trends must be considered in a comprehensive manner.
Complementarity (diversified investment): Since stocks and real estate have low correlation in price movements, combining the two can diversify the overall risk of assets. For example, the "asset trifecta" of stocks, bonds, and real estate allows investors to compensate for losses in one by investing in the other, even in the event of an economic downturn. Real estate is a real asset that does not experience an immediate surge in supply or price collapse even if the stock market plummets, and thus contributes to the preservation of overall assets. As the saying goes, "Don't put all your eggs in one basket," and if you have ample funds, it is common to combine the two in order to build stable assets over the long term.
Stable income and high yield: For high-net-worth individuals, real estate investment is attractive because of the stable rental income and high leverage provided by large loans. Even a tower condominium in central Tokyo with a property price of 100 million yen can often be started with a down payment of 10-20%, making it possible to make a large investment with a small amount of capital. Furthermore, if the location is good, rental income and future gains on sale can be expected. Even if the surface yield is high, the real yield, which takes into account repair costs and vacancy risk, is important. However, the probability of success can be increased by focusing not only on the yield but also on the quality of the property, its location, and the supply and demand environment.
Diversification and asset protection: Including real estate in a portfolio can provide risk diversification. When combined with stocks and bonds, a balanced asset management strategy that is resilient to market fluctuations can be achieved, contributing to long-term asset building.
Inflation hedge effect: As mentioned above, real estate is also attractive in that it is easy to maintain real asset value during periods of inflation. Since rents and land prices tend to increase during periods of price hikes, this has the advantage of increasing income while protecting the real asset value.
Even if "anyone can do it," it is accompanied by sufficient preparation and conditions. In conclusion, " not everyone can invest in real estate, " but those with the necessary financial resources can take on the challenge. Specifically, there are the following requirements
Size of funds: A down payment and other expenses are required to purchase real estate. Generally, for investment properties, it is necessary to provide 20-30% of the property price as personal funds (down payment). For example, for a 50 million yen investment property, the standard amount of personal funds is 10-15 million yen. In recent years, financial institutions have expanded their loan limits, and there are cases where transactions can be completed with as little as 10-20% personal funds, but several million yen will be required if various expenses (brokerage fees, registration fees, reserve funds for repairs, etc.) are included.
Attributes and annual income: The screening process for real estate investment loans involves a comprehensive evaluation of the borrower's annual income, employment stability, and other borrowing conditions. As a general rule of thumb, annual income of at least 5-7 million yen is desirable, and while annual income of around 7 million yen is favorable for loan terms, there are ways to pass the screening process even for borrowers with less than 7 million yen, through creative use of financial institutions and loan products. If you are a salaried employee or have been with the company for a long time, you are more likely to be approved; on the other hand, if you are young, freelance, or have a low income, it tends to be more difficult to get a loan. In fact, there are many examples of successful real estate investments starting from an annual income of around 5 million yen.
Age: Although there is no specific age limit, it is said that those in their "30s and 40s" are most advantageous; those in their 20s and 30s have fewer assets and annual income, making financial screening more difficult, while those in their 50s and above may face difficulties because they will be older (over 80) when the loan is paid off. Nevertheless, investment is possible with the right strategy regardless of age.
Risk tolerance: Real estate investment is illiquid and subject to various risks such as vacancy, rent decline, unexpected repair costs, and disaster risk. You need to have the mental capacity and financial reserves to accept these fluctuations. Investing beyond one's risk tolerance" causes mental stress and tends to lead to poor investment decisions. Therefore, it is important to manage risk by planning repayment assuming worst-case scenarios, utilizing insurance, and accumulating reserves for repairs.
Personal funds and investment size: As mentioned above, a down payment of approximately 20-30% of the property price is required. Note that some projects can be started with a down payment of 10% or less, but careful consideration is required because of the increased repayment burden. If you have little personal funds, "real estate insurance management" using the income tax deduction and crowdfunding, in which you can invest as little as 10,000 yen, are also options.
Attributes/occupation: Salaried workers with stable income, public servants, and doctors, lawyers, and certified public accountants with preferential tax treatment will have an advantage in bank examinations. Self-employed individuals and those who have changed jobs in a short period of time may face tougher screening. On the other hand, if you are wealthy and already have a large amount of financial assets, you may be able to obtain a flexible loan depending on your relationship with the financial institution.
Age: Younger borrowers (in their 20s) are more likely to be screened, while those in their 40s are said to have the best balance between funds and repayment period, making it easier to obtain financing. 50s and older need to plan for cash flow with an eye toward retirement and pension benefits.
Investment objective/goal: For example, if you are aiming to replace your pension in retirement, a strategy to secure stable income by holding solid rental properties for a long period of time is suitable. On the other hand, if you are aiming for short-term asset appreciation, there are risk-taking methods such as land development and rehabilitation of old houses with the expectation of redevelopment. It is important to select a property type (condominium unit, single-family apartment, detached house, redevelopment project, etc.) according to your goals, and clearly define the investment period and exit strategy.
Property Selection: Do not make a decision based on surface yield alone, but examine the surrounding market, demand, building condition, age, and management status from multiple perspectives. Experts point out that it is dangerous to select a property based on yield alone, and recommend paying attention to multiple factors such as location, condition of the property, and vacancy risk. Generally, properties in central Tokyo or near train stations with convenient transportation are considered to have low vacancy risk, but competition is also fierce, so determine the balance between profitability and affordability.
Risk Management: Vacancy risk is the most important risk to consider when investing in real estate. It is important to find a new tenant as soon as possible after a tenant leaves. Specifically, the occupancy rate can be increased by outsourcing to a good management company, adding value through remodeling and interior improvements, and optimizing the setting of key money for security deposit and key money. Other risk mitigation measures include preparing for natural disasters (earthquakes, floods, etc.), reviewing repayment plans against rising interest rates, and setting aside funds for building repair expenses. Consider purchasing insurance and strengthening disaster response (selecting properties on higher ground or with higher earthquake resistance ratings).
Income Projection: Before investing, estimate cash flow using a simulation. Estimate the business profit (pre-tax cash flow) by subtracting loan repayments, property taxes, management fees, reserve for repairs, rental management fees, and other expenses from the estimated rental income. It should be noted that even though the surface yield is usually around 5-7%, the real yield often falls to 3-4% after subtracting expenses. If the property is to be held for a long period of time, tax savings can be expected by taking advantage of building depreciation in the first year, and future gains on sales of the property can also be considered. However, since the property is subject to economic trends and financial market fluctuations, you must be prepared to steadily accumulate income over the medium to long term, without being swayed by short-term price fluctuations.
Asset building from a long-term perspective: Be mindful not only of short-term gains in value, but also of creating real estate that can be passed on to the next generation. Products that can maintain or increase in value in the future should be selected. Specifically, keep in mind ongoing value creation by selecting a disaster-resistant location, selecting a durable building, and introducing technology (e.g., smart facilities) to increase asset value.
Emphasis on human capital and trust: Real estate investment success or failure depends not only on properties, but also on "trust with people. Investors themselves should emphasize "integrity" and "trustworthiness" in selecting partners (real estate companies, management companies, construction companies, etc.). It is important for investors to build a relationship of trust by ensuring "transparent information provision, honest communication, and responsible behavior. Even in investments, risks can be better managed by increasing the level of disclosure of property information and contract terms, and by carefully and honestly verifying expected income and expenditures.
Utilize organizational skills and experts: Investors should also not make decisions alone, but collaborate with trusted financial advisors, real estate appraisers, tax accountants, and other experts, which is the key to success. Diverse knowledge is necessary to develop strategies from a long-term perspective. The company has also shown a willingness to utilize technology to create an efficient operating structure, so it is a good idea to actively incorporate new methods such as IoT property management and smart contracts.
Honest and sustainable management: Since the property purchased is also a social asset for the owner, honest management that fulfills its responsibility to residents (e.g., performing maintenance, responding to complaints, etc.) is important. An attitude of taking good care of the property and its residents is essential in order to generate stable income over the long term, rather than pursuing short-term profit.