The Power of Time in Real Estate Investment: Building Wealth Long-Term

When most investors hear about real estate investment, they first look at "numbers" such as yield and cash flow. Of course, these indicators are extremely important in investment decisions. However, in many cases, investors are so focused on the numbers that they overlook the value of the most powerful weapon that real estate investment inherently possesses: time.

In the pursuit of short-term gains, people are too quick to make hasty decisions, being too happy or sad at the slightest fluctuation in the market. This is one of the typical failure patterns in real estate investment. Essentially, real estate investment is not a short-distance race, but a marathon to grow assets from a long-term perspective.

In this article, we, as INA & Associates, Inc., will explain the essence and specifics of the real estate investment strategy of "making time your friend," which we have always emphasized, from our professional perspective. The steady accumulation of income gains, the accelerated growth of assets due to the compounding effect, and tax benefits. Understanding these factors, which increase in value over time, is the first step to building stable assets. The key to success in real estate investment lies in a deep understanding and strategic use of the concept of "time" that exists beyond the numbers.

What is "time value" in real estate investment?

A fundamental concept in the investment world is the idea of "time value of money. This is the principle that, in a nutshell, "10,000 yen in the present is worth more than 10,000 yen in the future. This difference arises from two main factors.

One is "opportunity cost. Funds currently on hand have the potential to generate profits in the future by being invested. For example, if the money can be invested at an annual interest rate of 5%, it will increase to 10,500 yen in one year. Receiving money in the future means losing this investment opportunity.

The other is "uncertainty (risk). There is no guarantee that future promises will be fulfilled. You must also consider the risk of default and the possibility that the value of your money itself may diminish due to inflation.

The concept of time value of money is extremely important in real estate investment. Real estate, which generates future cash flow in the form of rental income, is the very embodiment of time value of money. As loan repayments progress, net worth increases, and rents and property values can be expected to rise during periods of inflation. Thus, real estate investment is an excellent way to maximize the time value of money and generate stable income in the future.

Why "time" is the greatest weapon in real estate investment

In real estate investment, having "time" on your side, or in other words, holding properties from a long-term perspective, brings numerous advantages that are difficult to obtain with other financial instruments. While there are strategies that aim for short-term capital gains, if you are aiming for stable asset building, long-term holding is the way to go.

Five advantages of long-term holding

1. Steady accumulation of income gains: The biggest advantage of long-term holding is the continuous monthly rental income (income gains). This is the foundation for steady asset building, as it ensures a stable cash flow that is not affected by short-term fluctuations in market prices.

2. Snowballing of assets due to the compound interest effect: The "compound interest effect" occurs when rental income is reinvested as early repayment or as a down payment for the next property, rather than being used for consumption. Even if the initial return is small, as time goes by, the principal amount will grow and the asset can be expected to increase in a snowball effect.

3. Tax benefit (lower long-term transfer income tax rate): Taxes on gains from the sale of real estate (transfer income) vary greatly depending on the holding period. If the holding period is 5 years or less, the tax rate is 39% as "short-term transfer income", but if the holding period exceeds 5 years, the tax rate is greatly reduced to 20% as "long-term transfer income".

4. High-yield operation after loan repayment: When a property is purchased with an investment loan, the loan repayment burden is eliminated after the loan is fully repaid, and a large portion of the rental income remains in hand. This dramatically improves cash flow and allows for extremely high yields.

5. Leveling the risk of market fluctuations: Although there are price waves in the real estate market, over the long term, prices tend to rise gradually along with economic growth. By continuing to hold for a long period of time, rather than rushing to sell when prices decline in the short term, the risk of price fluctuations can be equalized and the possibility of enjoying an eventual increase in asset value can be increased.

Short-term holding vs. long-term holding

To better understand the differences between the two, let's compare the key items in the table below.

Thus, it is clear that long-term holdings have an overwhelming advantage in terms of stability, taxation, and asset growth potential. Of course, the best choice depends on individual investment strategies and economic conditions, but for the purpose of asset building, long-term holding with time as an ally should be the basic strategy.

Specific Strategies to Make Time Your Ally

After understanding that long-term holding is advantageous, the next important thing is a specific strategy to maximize the benefits. Simply allowing time to pass alone will not bring out its full benefits. Here we discuss three key strategies to accelerate asset building.

Reinvestment Strategies to Maximize the Effect of Compound Interest

The power of "compound interest" is immensely effective in long-term real estate investment. By actively reinvesting the rental income earned, rather than simply saving it, assets grow at an accelerated rate.

Specifically, a portion of the rental income is used to prepay the loan, thereby shortening the repayment period and securing a line of credit to acquire the next property more quickly. The company then increases the number of properties by adding a second and third property using a combination of its own funds and the new loan. By repeating this cycle, cash flow steadily accumulates and asset size expands dramatically. Generally, it takes 10 years or more to realize the effects of compound interest, but in real estate investment, the key to determining the speed of asset building is how efficiently this reinvestment cycle is executed.

Stabilization of cash flow

The source of the reinvestment strategy is a stable daily cash flow. Cash flow in real estate investment is calculated by the following formula

Cash flow = annual rental income - (loan repayments + maintenance and repair expenses + property taxes and other expenses)

It is important to maximize and stabilize this "cash flow". To achieve this, it is essential to maintain a high occupancy rate through appropriate property selection, as well as to manage daily expenses. It is also necessary from a risk management perspective to always have a certain amount of cash set aside in case of unexpected repairs or vacancies. A stable cash flow creates a mental reserve that allows you to make calm investment decisions from a long-term perspective.

Importance of an Early Start

Time is an asset given equally to all. And in real estate investment, starting early itself is a big advantage. For example, let us consider using the "Law of 72," which provides a simple calculation of the time it takes for an asset to double in value.

72 ÷ interest rate (%) ≒ number of years until the asset doubles

If you start at age 30, your assets will double at age 42, quadruple at age 54, and increase eightfold at age 66. On the other hand, if you start at age 40, your assets will finally quadruple at age 64. This difference becomes tremendous over time. Of course, this is a simple calculation and there are many variables, but it is enough to understand the advantage of starting early.

Cautions and Risk Management for Long-Term Holdings

While long-term holdings offer many advantages, there are also risks and precautions associated with them. Understanding these risks in advance and taking appropriate measures are essential for stable asset management over the long term.

Dealing with Vacancy Risk

The greatest risk in real estate investment is the "vacancy risk," which is the risk of loss of rental income if tenants do not move in. To minimize this risk, the most important step is the property selection stage. It is necessary to thoroughly analyze demographics and rental demand to identify areas and properties where stable demand can be expected in the future. It is also extremely important to select a reliable management company and entrust them with recruiting tenants and promptly restoring the property to its original condition after tenants move out, in order to shorten the vacancy period.

Planning for Maintenance and Management Costs

Buildings age over time and require regular maintenance and major repairs. To prepare for sudden and expensive expenses such as replacing water heaters, painting exterior walls, and waterproofing rooftops, it is necessary to develop a repair plan from a long-term perspective and set aside funds in a systematic manner. Neglecting these maintenance and management costs can lead to a significant deterioration in cash flow and the collapse of the investment plan itself.

Preparing for market fluctuations

The real estate market, which is stable in the long run, is exposed to various fluctuating factors such as rising interest rates, changes in economic conditions, and local disasters. Risk can be mitigated by diversifying investments in multiple properties, rather than concentrating on specific areas or property types. In addition, it is essential to always have a financial plan with a sufficient margin and be prepared to respond flexibly to economic changes so that you do not have to sell in a hurry if market conditions deteriorate.

Conclusion: Investing in the Future with "Time

In this article, we have explained that the essence of success in real estate investment lies not in short-term "numbers" but in the utilization of long-term "time.

Real estate investment is an extremely rational asset-building method that allows investors to take advantage of time to enjoy benefits that are unobtainable with other investment methods, such as the steady accumulation of income gains, accelerated asset growth through compound interest, and significant tax benefits. It is a very rational asset-building method that offers benefits that are unmatched by other investment methods, such as accelerated growth of assets with compound interest, and significant tax benefits. We firmly believe that taking this high road is the surest path to financial stability and future security.

The key is to get started as early as possible, to make the most of your time, and to continue to steadily reinvest the earnings you gain. Of course, professional knowledge and proper risk management are essential to this process. Which property should you choose, how should you plan your finances, and how should you respond to the changing market? It is not easy to find the best answers to these questions on your own.

INA&Associates is a "human capital investment company" that works closely with each client's situation and goals, and proposes optimal real estate investment strategies from a long-term perspective. If you have any questions or concerns about real estate investment, please feel free to contact us. We promise to be your best partner in building your bright future.

Frequently Asked Questions

Q1:Why is time important in real estate investment?

A1: There are three main reasons why time is important. First, by holding the property for a long period of time, you can continuously receive stable rental income (income gain). Second, by reinvesting the income earned, the compound interest effect will work and your assets will snowball. Third, if the holding period exceeds five years, the tax rate on the sale of the asset is greatly reduced.

Q2:Which is more advantageous, long-term or short-term holding?

A2:If you are aiming for stable asset building, long-term holding is overwhelmingly advantageous. Short-term holdings are subject to greater risk of market price fluctuations and higher tax rates. On the other hand, long-term holdings are suitable for steady asset growth because they provide stable rental income and preferential tax treatment.

Q3:How long does it take to obtain the compound interest effect?

A3:Generally, it takes more than 10 years to clearly feel the effects of compound interest. In real estate investment, it is possible to realize the effect more quickly by continuing the cycle of using rental income for early repayment or purchase of the next property.

Q4:How many years do I have to hold the property to receive the preferential long-term transfer income tax rate?

A4:As of January 1 of the year of sale, you must have owned the property for more than five years. By meeting this condition, the tax rate on transfer income is significantly reduced from the short-term holding (approximately 39%) to approximately 20%.

Q5:What is the most important thing to keep time on your side?

A5:The most important thing is to start investing as early as possible. The earlier you start, the longer you can enjoy the compounding effect, which is a big advantage in asset building. It is also equally important to maintain a consistent strategy with a long-term perspective and not be swayed by short-term market movements.