Real estate investment is attracting attention as one of the stable asset management options, but how exactly does it "make money"? For beginners, it may be difficult to understand the structure that makes real estate investment profitable. In this article, we will explain from the basics why real estate investment is profitable and carefully explain the structure that generates profits. The basic profit structure of real estate investment, including income gains (rental income) and capital gains (profit on sale), the three pillars that generate profit (rental income, increase in asset value, and tax savings), points that beginners should pay attention to (location selection, management system, and financial planning), simple profit simulations, and ways to increase profitability The course will provide easy-to-understand explanations of each point, including the innovations (management methods, vacancy countermeasures, etc.) that will increase profitability. We hope it will help those who are just starting to invest in real estate to understand the structure of real estate investment and make a solid profit.
Income gains andcapital gains are two types of profits that can be earned from real estate investment. First, income gains are the regular income you receive from renting out your property, or rent income. After deducting expenses such as loan repayments and management fees, the remainder of the income is the investor's profit. Capital gains, on the other hand, are gains from the sale of a property at a higher price than when it was purchased. For example, if a property purchased for 20 million yen can be sold a few years later for 25 million yen, the difference of 5 million yen becomes a capital gain (profit). Thus, the two pillars of the basic profit structure of real estate investment are continuous profit from rentals and temporary profit from sales.
Real estate investment is also characterized by its ability to leverage (the principle of leverage). By taking out a loan from a financial institution, you can purchase a large amount of real estate with relatively little capital on your own, and you can earn a large amount of income from a large asset with a small amount of capital. This leverage effect allows you to target profits more efficiently than if you were to invest only your own funds, which is one of the reasons why real estate investment is "profitable.
The sources of income from real estate investment can be divided into three main categories: first, monthly rental income (income gain), second, profits from increases in property values (capital gain), and third, the tax-saving effects unique to real estate investment. Let's take a closer look at how each of these types of income is generated.
Rental income is the main source of income from real estate investment. By renting out your property to others, you can earn a steady income gain in the form of monthly rent. The advantage of rental income is that you receive income continuously as long as there are tenants in the property, and the income is relatively stable. Rent prices are not easily affected by the economy or prices of commodities, and once tenants move in, they tend not to fluctuate significantly. Therefore, as a source of monthly cash flow over the long term, rental income is a pillar supporting real estate investment.
However, the profit derived from rental income is the amount remaining after deducting necessary expenses. Specifically, the actual profit (net income) is the amount that remains after expenses such as property management fees, reserve for repairs, property taxes, fire insurance premiums, and loan interest are paid from rental income. The yield on the income after deducting such expenses is an indicator of investment efficiency, and is generally called the real yield (net yield). In order to earn stable rental income, it is important to avoid vacancies and keep the property fully occupied, which is discussed in the section "Measures to Prevent Vacancies" below.
If the asset value of a property increases from the time of purchase, a large profit can be earned when the property is sold. This is capital gain. If the price of the property rises due to factors such as real estate market conditions, regional development, or redevelopment, you can sell the property at a price higher than the purchase price and make a profit on the difference. For example, if you are able to sell the property for 10% more than the purchase price, you will keep 10% of that amount as a capital gain. The attraction of capital gains is the possibility of making a large profit from a single transaction.
However, there are risks involved in capital gains. Depending on market conditions, property prices may fall and you may incur a loss (capital loss) when you sell. The value of real estate does not fluctuate violently on a daily basis like stocks, but over the long term it will rise and fall with changes in the economy, demographics, and other factors. Beginners should not rely solely on capital gains, but rather view them as bonus profits, and basically secure a stable income from rental income, while being lucky if you get a gain on the sale of the property.
Real estate investment also has advantages in terms of taxation. Rental income earned from property management is legally taxable as "real estate income," but when calculating this income, various expenses incurred in property management can be deducted as costs. Specifically, property tax, interest on loans, depreciation (prorating the cost of the building), fire insurance premiums, and management fees can be deducted as expenses, and income tax and inhabitant tax are imposed on the remainder after these expenses are deducted from the rental income. Since taxable income can be reduced by deducting expenses, the tax burden is lightened by the amount of the expenses.
In addition, if real estate income becomes a loss due to deducting expenses, the loss can be aggregated with other income, such as employment income, to reduce the tax burden. For example, if a company employee with a high income posts a loss from real estate investment due to depreciation and amortization, his/her overall income will be reduced by that amount, and as a result, he/she may receive a refund of income tax and inhabitant tax. Thus, one of the pillars of profitable real estate investment is the expected tax-saving effect. However, it would be a mistake to make an unreasonable investment for the sake of tax reduction, so it is advisable to take the stance that the property is profitable and tax reduction can be achieved as a result.
In order to make a stable profit from real estate investment, it is important to conduct thorough planning and research beforehand, rather than just buying a property in the dark. There are three points that beginners should pay particular attention to: location selection, management system, and financial planning. Let's look at each of these in detail.
Location Selection: The value of real estate and rental demand are greatly influenced by location. For beginners, it is important to first choose a property in an area with high demand (close to a station, convenient for living, an area where universities and companies are concentrated, etc.). If there is a high demand for rentals in the surrounding area, the risk of vacancy will be reduced, and this will also support the future value of the property. Before purchasing a property, research local population trends, development plans, and the status of competing properties to take advantage of the "power of location.
Management system: Good or bad management after purchasing a property can make the difference between success and failure in rental management. With proper management in place, tenants will stay longer and be more satisfied, leading to a stable rental income. Specifically, it is important to outsource cleaning and inspections of the property to a trustworthy management company and entrust them to deal with tenants, and even if you manage the property yourself, it is important not to neglect regular maintenance. If the company is quick to respond to problems, it will gain the trust of tenants, and if a vacancy occurs, it will be easier to quickly secure the next tenant. Having a solid management system in place will help stabilize earnings over the long term.
Financial planning: It is also essential to carefully plan the amount of investment and financing. Since many real estate investments involve loans, simulate the balance between monthly loan repayments, rental income, and expenses to create a reasonable repayment plan. It is important to ensure that you have sufficient surplus funds (buffer) so that you will not be stuck with repayments even if interest rates rise or vacancies occur. Also, pay attention to the balance between your own funds and borrowings (leverage). Increasing borrowings can increase returns, but it also increases risk. It is a safe strategy to start with a moderate borrowing ratio and expand it as you see the results of your business.
Let us simulate a simple model case to see how much profit a real estate investment can generate. Below is an example of a case where a studio apartment is purchased and managed as a rental property.
Property purchase price: 15 million yen (purchased with a combination of personal funds and loan)
Monthly rental income: 70,000 yen
Annual rental income: 70,000 yen x 12 months = 840,000 yen
Annual expenses (approximate estimate): approx. 240,000 yen for property tax, management fees, reserve for repairs, insurance, etc.
Annual take-home pay: 840,000 yen - 240,000 yen = 600,000 yen (pre-tax cash flow)
Surface yield: 840,000 yen ÷ 15,000,000 yen × 100 ≈ 5.6% ( yield based on annual gross income)
Real yield: 600,000 yen ÷ 15,000,000 yen × 100 = 4.0% ( yield after deducting expenses)
Assumed gain on sale: If the property can be sold for 16 million yen after 5 years, the difference of 1 million yen from the purchase price will be the capital gain.
From this simulation, we can see that a real estate investment can expect an annual yield of roughly several percent of the purchase price. For example, in the above case, the real yield is about 4%, which is a much higher return than the interest on a bank deposit. On the other hand, it should be noted that if there are loan repayments, the principal repayment amount will be deducted from the net income. In addition, if there is a vacancy period, the rental income will decrease accordingly. Therefore, it is important to note that the simulation results are based on the assumption that the property is fully occupied. Actual income may rise or fall depending on the property's occupancy status and interest rate trends, but through solid management, it is possible to aim for stable income and future gains on sales, as described above.
Finally, we would like to mention some ideas for further improving the profitability of your real estate investment. Profitability does not end with the acquisition of a property, but varies greatly depending on the efforts made during the management phase.
Effective management techniques: In order to maintain the value of the property and maintain a high occupancy rate, effective management should be conducted on a daily basis. Specifically, conduct regular facility inspections and repairs to keep the building in good condition, and respond promptly to tenant inquiries and problems to increase satisfaction. It is important to repair or renovate any deteriorated areas as soon as possible to maintain and improve the property's attractiveness. A well-managed property will be appreciated by tenants, resulting in long-term occupancy and higher rents.
Vacancy Prevention: In real estate investment, prolonged vacancy is a major factor that puts pressure on earnings. Effective measures to prevent vacancies include reviewing the terms and conditions of the offer and rent setting, effective advertising and promotion to brokers, and improving the attractiveness of the property. For example, keeping rents at a reasonable level compared to the surrounding market and setting flexible deposit and key money requirements will make it easier to attract tenants. In addition, renovating the interior in an attractive manner can increase the competitiveness of the property and shorten the vacancy period. If you can secure the next tenant quickly while increasing rental income through focused renovations, it will directly lead to an improvement in profitability. The secret to stable management is to always be aware of vacancy risks and have a system in place to quickly find the next tenant when they do occur.
Efforts to improve asset value: Efforts to maintain and improve asset value during the holding period also contribute to profitability. Although the location cannot be changed, the value of the property itself can be increased through management. Remodeling and updating facilities mentioned above are examples of such efforts. Upgrading the interior and facilities to match the times can raise the market value of the property. Beautifying entrances and common areas and installing security equipment can also improve rent and occupancy rates. If the property is to be sold in the future, improvements that meet the needs of the market can be expected to bring in a higher appraisal value at the time of sale.
By devising these measures, you can steadily improve the return on your real estate investment and realize solid rental management with minimal risk. As a beginner, you may be groping your way through the process, but as you gain experience and keep a close eye on property conditions and market trends, you will be able to aim for higher returns.
The answer to the question, "Why is real estate investment profitable? The three pillars of income are the stable income from monthly rental income, capital gains from the increase in asset value, and tax savings by taking advantage of the taxation system. In addition, the attractive point of real estate investment is that it can be managed efficiently from a small amount of funds through the leverage effect of loans. Of course, real estate investment is not a "no-risk, always profitable" investment. However, it is an investment technique that offers stable long-term returns with relatively low risk, provided that the key points such as location selection, management system, and financial planning are firmly grasped, and that appropriate risk management and investment ingenuity are applied. Even beginners can accumulate steady profits from real estate investment if they understand the mechanisms explained in this article and plan carefully. We encourage you to take on the challenge of real estate investment with the right knowledge and strategy.