Real estate investment has again attracted attention in recent years as a means of asset building. While there are various investment vehicles such as stocks and investment trusts, real estate, a physical asset, offers stability and multifaceted advantages not found in other financial products. This article explains why people invest in real estate for beginners who are beginning to consider real estate investment in the future. We will summarize the main motivations and advantages from the perspective of future lifestyle planning and asset defense.
As Japan's birthrate declines and the population ages, there is growing concern that public pensions alone will not be sufficient to provide adequate funds for retirement. In fact, according to a survey conducted by the Life Insurance Cultural Center of Japan, 82.2% of respondents answered that they "feel insecure" about their own retirement, and in 2019, a report by the Financial Services Agency pointed out that "approximately 20 million yen in assets other than public pensions are needed in retirement," which became a major social issue (the so-called "20 million yen retirement age problem"). This is the background of the "20 million yen problem in old age. Against this backdrop, an increasing number of people are turning to real estate investment as a means of preparing funds for retirement.
By purchasing real estate and renting it out, one can earn a steady cash income in the form of monthly rental income. Unlike dividends from stock investments, there are few extreme fluctuations due to economic fluctuations, and as long as there are tenants, this is a source of income that can be earned continuously. If you purchase a property with a loan and manage it over the long term, the rental income will remain in your pocket after the loan is paid off, and will serve as a kind of private pension. Even amid concerns about the raising of the age for receiving public pension benefits and the reduction of benefits, income from real estate has the advantage of being received in one's own timing. Thus, real estate investment is expected to help stabilize one's life in retirement as a way to prepare for future pension shortfalls.
Inflation (rising prices) risk is something that cannot be ignored when considering asset building. While cash and deposits lose their real value when inflation rises, real estate is considered to be a real asset that easily retains its value even when prices rise. When prices rise, real estate prices generally tend to rise, and rents can be revised (raised) in line with prices. Therefore, real estate investment can be expected to function as an inflation hedge (countermeasure against inflation), and many investors are actually choosing real estate as an asset defense measure.
Another advantage is that real estate rental management is not easily affected directly by economic fluctuations like the stock market. Since a place to live is necessary for life even in an economic downturn, there are rare cases where values plummet or tenants disappear en masse, as is the case with stock prices. In fact, some point out that "just because there is a recession, tenants do not move out en masse, and there is no sudden drop in rent prices. The fact that such stable assets are resistant to economic fluctuations is a major attraction as a motivation to prepare for future uncertainty.
Real estate is a tangible, physical asset, and it is important not to overlook the fact that it provides a sense of psychological security. Unlike equity investments in companies managed by others, land and buildings that you own have real value, and the possibility of their value falling to zero is considered low. In fact, some say that the appeal of real estate investment is "the sense of stability that comes with owning a physical asset, unlike stocks or investment trusts. In addition to the fact that the value of the building itself remains, the land does not deteriorate over time, so it remains the foundation of an asset even if held for a long time. The fact that the real property remains in the hands of the investor makes it easier for beginners to feel that they are "growing their own property" in the future.
There are many tax advantages to real estate investment, and some people start real estate investment with the motive of saving taxes. For example, if you purchase a property and manage it as a rental property, you may be able to reduce your income tax and inhabitant tax burden as a result of filing a tax return every year. Although real estate income is taxed in addition to other income such as employment income, the taxable income can be reduced by recording the expenses incurred in real estate management as expenses. If you can reduce your final taxable income through this profit and loss deduction, you can lower the amount of tax you pay compared to if you do nothing. The expenses that can be included in the cost of the property include depreciation, loan interest, management fees, fire insurance premiums, property taxes, and repair costs. In particular, depreciation (the cost of dividing the value of a building proportionally over its useful life) is a non-cash expense, so it is attractive because it allows you to save taxes while keeping profits on the books and cash on hand.
As a point of caution, although the relative tax saving effect diminishes when the real estate balance is positive and profitable, it is easier to record a loss during the initial to mid-term period when loan interest expenses and depreciation are high, and as a result, there are cases where the tax burden can be reduced by offsetting employment income. These tax benefits are counted as one of the advantages of real estate investment as a mechanism to streamline asset building.
How to pass on assets built up in the future to the next generation is an important aspect of asset building. Real estate investment is considered to be one of the effective measures against inheritance tax. The assessed value of real estate is lower than that of cash or deposits at the time of inheritance. Land is assessed based on roadside land prices set by the government, and buildings are assessed based on the property tax assessment value, which is usually set lower than the prevailing market value.
In addition, in the case of real estate for lease, the circumstance of "leasing to others" is taken into consideration, and the inheritance tax assessed value is further reduced. Since heirs cannot immediately use the property freely when it is leased, a certain percentage is deducted from the assessed value. By taking advantage of this system, holding real estate rather than cash can reduce the tax burden at the time of inheritance, and there is a possibility that more assets can be passed on to the remaining family members. In addition, by bequeathing the property to family members, a continuous source of income in the form of rental income can also be left to them, which has the effect of guaranteeing the livelihood of the surviving family members.
Loans used for real estate investment generally come with group credit life insurance (danshin). This group credit life insurance is designed to pay off the balance of the loan with the insurance proceeds in the event of the owner's death or severe disability during loan repayment. As a result, the surviving family members are left with a debt-free property and the associated monthly rental income. This is the same effect as a large sum of money being paid out in a life insurance death benefit, and it is said that real estate investment can function as an alternative to life insurance.
In the case of life insurance, policyholders are required to pay premiums periodically, but in the case of real estate, loan repayments (including insurance premiums, in effect) can be allocated from rent income, so it is said that it is possible to obtain life insurance-like coverage by using rent income to repay loans, but there are also risks such as vacancy and rising interest rates However, the risks of vacancy and rising interest rates must also be taken into account. Furthermore, if the value of the property itself increases over time, the asset itself can be expected to appreciate. While the amount of insurance coverage is fixed at the time of contracting, the value of real estate may increase during ownership, depending on market trends. Many people choose to invest in real estate as a means of both providing security for their families and managing their assets.
One of the reasons why even beginners who want to invest but do not have a large amount of personal funds can easily start real estate investment is that they can take advantage of loans from financial institutions. Although real estate is an expensive asset, it is possible to borrow funds from a bank and use leverage to acquire it. For example, a property that can be purchased with only 5 million yen of one's own funds is worth about 5 million yen, but if one uses 5 million yen as a down payment and borrows another 25 million yen to purchase a property worth 30 million yen, one can earn rent income six times as large with the same amount of one's own funds . There is also an estimate that you can earn six times as much rent income with the same amount of personal funds. In this way, by utilizing loans, one can enter into large investment projects that would normally be out of reach and efficiently expand one's assets.
In particular, Japan's long-standing low interest rate policy, which has kept interest rates on loans at historically low levels, is also a tailwind. This is an environment in which it is easy to earn the difference (interest margin) between rent income and financing at a low interest rate. The ability to manage large assets using loans even with little capital on hand is a unique advantage of real estate investment, and is a major reason why it attracts people who want to "accelerate asset building.
One of the most common motivations for starting real estate investment is the desire to have a stable source of income other than a salary. For those who have a main income from their main job, such as salaried workers, rental income from real estate can be a second pillar of income. Especially in recent years, with the lifting of the ban on side jobs and the spread of FIRE (early retirement) orientation, more and more people are looking to increase their future options by obtaining a regular monthly cash flow. Rental income can come in without much hassle as long as tenants are secured, so it provides a source of income that is not tied to working hours and brings a sense of freedom to people's lives. In fact, real estate investment is considered a hassle-free asset management method even if you have a day job, and it is said to be a suitable investment for busy professionals because there is no need to check price fluctuations on a daily basis.
In addition, when looking at an asset portfolio as a whole, the inclusion of real estate is also effective in enhancing diversification. By holding real estate, which has different price movements from stocks and bonds, you may be able to compensate for a downturn in one market with other assets, thereby reducing the total fluctuation of your assets. In particular, demand for housing in Japan's urban areas has remained steady, and rental needs remain high in metropolitan areas. The dual benefits of stable income and asset diversification make real estate investment an attractive way to build a more solid foundation for asset formation.
Finally, I would like to touch on trends in the Japanese real estate market. As mentioned earlier, individual real estate investment is on the rise, supported by the low interest rate policy, but there are other factors that are also providing a tailwind. For example, redevelopment projects are being undertaken one after another, especially in central Tokyo, and the value of urban real estate is expected to increase due to improved convenience. Since redevelopment will increase the demand for rental properties in areas where people can easily gather, these properties are attracting the attention of investors, including those aiming for future capital gains in value.
Another factor is the growing interest in asset management among the younger generation, which has been fueled by the boom in individual investors following the new Corona model, and the spread of tax incentive programs such as NISA and iDeCo, etc. The concept of "asset building through investment" has begun to spread among people in their 20s and 30s, and an increasing number of people are becoming interested in real estate as an extension of this trend. Real estate investment is becoming a stable asset management option in the "100-year life period" as a means of steadily growing assets from a long-term perspective.
In summary, the main reasons why people choose real estate investment are a sense of security in preparing for the future and a variety of advantages not found in other investments. Stable rental income and the maintenance of the value of real assets are very attractive as a way to cope with concerns about retirement funds and inflation risk. In addition, tax benefits, inheritance measures, security effects, and asset expansion through leverage are some of the advantages of real estate investment. Of course, as an investment, there are risks and points to keep in mind, but it is worthwhile for beginners to first properly understand these motives and merits and consider real estate investment as a form of asset management that suits their life plan.