With the promotion of reforms in the way people work, many company employees are now turning their attention to side hustles. In particular, more and more people are considering real estate investment as a side business as they are increasingly concerned about their future and seeking to diversify their income.
We, INA & Associates, have been supporting real estate investment for many years. With "human resources" and "trust" at the core of our management, our mission is to realize a society in which all people are fairly evaluated and rewarded.
By reading this article, you will gain a comprehensive understanding of the basic structure of real estate investment, how to get started, the key to success, and the risks to be aware of. We hope that this article will serve as a practical guide for those who are considering real estate investment as an option to secure a stable source of income and prepare for the future.
The real estate investment market is showing extremely solid growth in 2024. Investment in commercial real estate is expected to land at a level well above 4 trillion yen, which indicates that the market environment remains favorable for investors.
Of particular note is the market forecast for 2025. Financial institutions' lending attitudes are expected to stabilize, creating a favorable investment environment for both buyers and sellers. Behind this is a change in monetary policy, from the elimination of the negative interest rate policy to a zero-interest rate policy, but a sharp rise in interest rates is expected to be avoided.
Securing stable rental income
The greatest appeal of real estate investment is the stable cash flow from monthly rental income. There is relatively little risk of price fluctuation, as is the case with stock investments, and it is easy to predict income over the long term. With proper property selection and management, it is possible to generate stable income for as long as 10 or 20 years.
Utilization of Tax Saving Effects
In real estate investment, building depreciation, management costs, repair costs, and interest on loans can be recorded as expenses. This allows you to reduce your income tax and inhabitant tax by aggregating your employment income and real estate income through profit and loss. This tax-saving effect is especially beneficial for high-income earners.
Inflation hedge effect
Cash and deposits lose their real value when inflation rises. Real estate, on the other hand, is a real asset and thus acts as an insurance against inflation. Rental income also tends to rise in tandem with price increases, contributing to the maintenance of purchasing power.
Asset Building Effect
In real estate investment using loans, assets can be formed using other people's capital (loans). By paying off the loan with monthly rental income, the structure is essentially tenant-paid, and you end up with a debt-free property.
Easy access to financing
Company employees are in a better position to obtain loans from financial institutions because of their stable salary income. In particular, listed companies and public employees have high credit ratings from financial institutions and may be able to obtain loans on favorable terms. It is considered realistic to start real estate investment with an annual income of around 6 million yen, making it an affordable investment option for many company employees.
Efficiency through outsourcing to a management company
In real estate investment, management tasks such as tenant solicitation, rent collection, complaint handling, and maintenance can be outsourced to a professional management company. This allows you to continue investing without interrupting your core business. The management fee is generally about 5% of rent income, but it is considered a necessary expense for company employees who have many time constraints.
Investment Methods with Fewer Time Constraints
There is no need to constantly monitor market trends, as is the case with stock investments or FX. Once you purchase the right property and outsource it to a reliable management company, you are freed from daily management tasks. This is a big advantage for company employees who want to concentrate on their day jobs during the week and spend time with their families on weekends and holidays.
There are some tax considerations when investing in real estate on the side. When an office worker invests in real estate on the side, the size of the property must be less than "5 buildings and 10 rooms. If the size of the property exceeds this limit, it is considered to be business-like and the tax treatment will change.
Before starting real estate investment, it is important to set clear goals. Instead of a vague "I want to make a lot of money," setting specific numerical goals will help you develop an appropriate investment strategy.
Determining Earnings Goals
First, decide how much income you are aiming for on a monthly basis. For example, if your goal is to generate additional income of 50,000 yen per month, a property with a surface yield of 6% would require you to purchase a property worth approximately 10 million yen. However, it is important to understand that you will actually need a more expensive property if you factor in management fees, reserve funds for repairs, taxes, and other expenses.
Investment Period
Real estate investment is based on long-term investment. The investment period is set based on comprehensive consideration of the loan repayment period, the useful life of the property, and the timing of future sales. In general, it is important to plan for a long-term holding period of 20-35 years for condominium unit investments.
Confirm your risk tolerance
Investing involves risk. It is important to confirm in advance to what extent you can tolerate various risks such as vacancy risk, rent decline risk, and interest rate rise risk. Depending on your risk tolerance, determine the type of property to invest in, its location, and the terms of financing.
The standard amount of personal funds for real estate investment is approximately 20% of the property price. In addition, you will need about 7-10% of the property price for other expenses (registration fees, brokerage fees, fire insurance premiums, etc.).
Estimated Investment Potential by Annual Income
The table below shows the approximate amount of money that can be invested according to annual income.
| Annual Income | Approximate amount of personal funds | Property price available for purchase | Estimated Monthly Income | Remarks |
|---|---|---|---|---|
| 6 million yen | 2 million yen | 10 million yen | 50,000-80,000 yen | Studio in central Tokyo |
| 8 million yen | 3 million yen | 15 million yen | 80,000-120,000 yen | 1K-1DK in central Tokyo |
| 10 million yen | 4 million yen | 20 million yen | 100,000-150,000 yen | 1LDK in central Tokyo |
| 12 million yen | 5 million yen | 25 million yen | 120,000-180,000 yen | Multiple units can be owned |
However, these figures are only a guide, and financing conditions vary greatly depending on personal credit status, employer, length of employment, and other factors.
Financing Methods
The following financing options are available when personal funds are insufficient.
The most basic method is to use savings. Systematic savings will provide the necessary personal funds. This is the safest method, although it delays the start of investment.
Borrowing from relatives or donating funds is another option. However, gift tax issues and the impact on family relationships should be fully considered.
Some financial institutions may offer full loans or overdrafts even if you have little personal funds. However, the interest rate may be higher and the screening process more stringent, so careful consideration is required.
Importance of Location
Location is one of the most important factors in real estate investment. As the saying goes, "location, location, location." Properties in good locations have low vacancy risk and rents decline slowly.
The basic rule is to choose a location with good access to the city center. Ideally, the location should be within a 10-minute walk from a major station, have access to multiple train lines, and be close to commercial and medical facilities.
Future development plans are also an important determining factor. Areas scheduled for redevelopment and areas where new stations are scheduled to open can be expected to increase property values in the future.
Selecting the Property Type
For beginners, investment in condominiums, especially studio condominiums, is recommended. Compared to a single building, the investment amount is lower and the management time and effort are reduced.
Newly built properties have the advantage of new facilities and low initial repair costs, but tend to be more expensive and have lower yields. Used properties are less expensive and have higher yields, but may have higher repair costs.
How to Calculate Yield
The surface yield (gross yield) is the annual rental income divided by the property price. However, to determine the actual profitability, the real yield (net yield) must be calculated.
Real Yield = (Annual Rental Income - Annual Expenses) / Property Price x 100
Annual expenses include management fees, reserve for repairs, property taxes, city planning taxes, management fees, fire insurance premiums, etc.
Evaluation of Future Potential
When evaluating the future potential of a property, the following factors are considered
Demographic analysis is important. We investigate whether the area's population is on an upward trend, what the age structure is like, and what the percentage of single-person households is like.
The development of the transportation infrastructure is also an important factor. Scheduled opening of new lines, station improvements, and bus line enhancements can increase the value of a property.
Changes in the surrounding environment should also be monitored. Relocation of universities and companies, development of commercial facilities, and construction of public facilities can have a significant impact on rental demand.
How to Select a Financial Institution
There is a wide range of financial institutions offering real estate investment loans. City banks, regional banks, shinkin banks, and non-banks all have their own characteristics.
City banks tend to offer lower interest rates, but their screening process is more stringent and there are certain requirements for annual income and place of employment. Regional banks and shinkin banks are more community-based and may be more flexible. Non-banks have a relatively relaxed screening process, but tend to have higher interest rates.
Comparison of Loan Terms
When comparing loan terms, you should consider not only the interest rate, but also the loan term, loan amount, guarantee fee, and administrative fees.
The choice between variable and fixed interest rates is also important. Floating rates offer lower initial interest rates, but carry the risk of future interest rate increases. Fixed interest rates avoid the risk of rising interest rates, but the initial interest rate is set higher.
Tips for passing the screening process
The following points are important to pass the loan approval process.
Proof of stable income is most important. Pay stubs, withholding tax slips, tax returns, etc. show that you have a continuous and stable income.
Credit history management is also important. Credit card delinquencies, history of consumer credit use, etc. can negatively impact the screening process.
Self-financing readiness also affects the screening process. The more personal funds you have, the more creditworthy you are to financial institutions and the more favorable terms you may be able to obtain financing.
Why it is recommended for beginners
One-room condominium investment is the easiest investment approach for real estate investment beginners. It is suitable for company employees who have a day job, as the investment amount is relatively small and the management effort is reduced.
Demand for studio apartments is stable due to the increase in the number of single-person households. Particularly in central Tokyo, demand continues to come from young company employees who value convenience of commuting, as well as from those who are relocating to other areas.
Another advantage for beginners is that, as condominiums are condominiums, the management association manages the entire building, while individual investors only need to consider the management of the exclusive area.
Analysis of Successful Cases
Most successful investors have the following in common
Location selection is a top priority. They choose properties that are within a 10-minute walk from a station, have access to multiple train lines, and have a good surrounding environment. Even if the price is a little higher, we select properties with an emphasis on long-term stability.
Selection of an appropriate management company is also an important factor. By contracting with a management company that is capable of recruiting tenants and responding quickly, we minimize the duration of vacancies.
Keeping up with regular maintenance is another secret to success. By making small repairs early, we avoid major repairs and maintain the value of the property.
Points to keep in mind
The following points should be noted when investing in studio apartments.
Investing in only one unit carries the risk of zero income in the event of vacancy. If possible, it is important to consider diversified investment in multiple units.
In older properties, repair costs may increase due to aging facilities. The condition of the building should be thoroughly investigated prior to purchase, and future repair plans should be confirmed.
There are various risks involved in real estate investment. Understanding these risks and taking appropriate countermeasures are keys to success.
Major Risks and Countermeasures
The following table summarizes the major risks and countermeasures for real estate investment.
| Risk | Probability of Occurrence | Countermeasure | Severity | Impact |
|---|---|---|---|---|
| Vacancy risk | High | Location Selection, Facilities, Appropriate Rent Setting | High | Large |
| Risk of rent decline | Medium | Market research, regular maintenance and renovation | ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ | Medium |
| Risk of rising interest rates | Medium | Fixed-rate option, early repayment, monitoring of interest rate trends | ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ ★ | Medium |
| Disaster Risk | Low | Fire insurance, earthquake insurance, earthquake resistance | Low | Large |
| Repair risk | Medium | Reserve for repairs, periodic inspections, preventive maintenance | Medium | Medium |
| Liquidity Risk | Low | Location-oriented and marketable property selection | ★☆☆ | Medium |
Measures to Mitigate Vacancy Risk
Vacancy risk is the greatest risk in real estate investment. To mitigate this risk, the following measures are effective.
Location selection is most important. Selecting a location with high rental demand, such as near a train station, in the city center, or in an area with a growing population, can significantly reduce vacancy risk.
The quality of facilities is also an important factor. Air conditioning, washable toilet seats, independent washstands, auto-locks, and other amenities that tenants demand will increase your competitiveness.
Setting an appropriate rent is also important. Setting rents that are too high compared to the surrounding market can prolong the vacancy period. Regular market surveys should be conducted to maintain an appropriate rent level.
Dealing with the Risk of Rising Interest Rates
The risk of rising interest rates requires special attention when a loan is taken out at a variable interest rate.
By choosing a fixed interest rate, the risk of rising interest rates can be avoided. However, since fixed interest rates are set higher than variable interest rates, the total repayment amount may increase.
You can reduce the impact of rising interest rates by reducing the loan balance through prepayment. If you have surplus funds, actively consider prepayment.
Monitoring interest rate trends is also important. It is important to regularly check the Bank of Japan's monetary policy, economic indicators, and market interest rate trends, and consider refinancing if necessary.
Use of Insurance
A variety of insurance policies can be used to mitigate risk in real estate investment.
Fire insurance is essential. It covers not only fire, but also water, wind, and theft. The amount of insurance is set based on the replacement cost of the building.
Earthquake insurance is purchased in combination with fire insurance. Since Japan is an earthquake-prone country, it is important to be prepared for earthquake risk. However, the maximum amount of earthquake insurance coverage is 50% of the fire insurance coverage.
Facility liability insurance covers liability for damages caused to third parties due to building defects. In the case of condominiums, it is often purchased by the management association, but it is also worth considering for individuals.
Use of Depreciation
The greatest tax-saving effect of real estate investment is the ability to record building depreciation as an expense.
Based on the idea that buildings decrease in value over time, the purchase price divided by the legal life of the building can be expensed annually. The legal life of a reinforced concrete residential building is 47 years.
For used properties, the remaining useful life is shorter, resulting in a larger annual depreciation expense and higher tax savings. However, a shorter depreciation period also means that depreciation will end earlier.
Key Points for Recording Expenses
In real estate investment, the following expenses can be recorded as expenses.
Management fee and reserve for repairs are expenses paid for the management and repair of common areas of condominiums. Since they are paid in a fixed amount every month, they are easy to record as expenses.
Property tax and city planning tax are taxes incurred by owning a property. The annual tax amount is divided by 12 and recorded as a monthly expense.
The interest portion of a loan can be recorded as an expense, but the principal portion cannot. You must keep the interest and principal separate on the repayment schedule.
The management fee is a commission paid to the management company. Generally, it is 5-10% of the rental income.
Repair expenses are expenses spent to maintain and repair the property. However, improvements that increase the value of the property are not considered repair expenses, but capital expenditures that are subject to depreciation.
Points to keep in mind when filing tax returns
If you have real estate income, you are required to file an income tax return. Even salaried workers are required to file an income tax return if their real estate income exceeds 200,000 yen.
Real estate income is calculated by subtracting necessary expenses from gross income. In the case of a loss, you can receive an income tax refund by totaling your income from employment income and your loss from employment income.
By choosing to file a blue return, you can receive a special blue return deduction (maximum of 650,000 yen). However, if the property is not business-like in size (5 buildings with 10 or more rooms), the deduction is 100,000 yen.
The preparation and keeping of account books is mandatory. Income and expenses must be accurately recorded, and receipts and other vouchers must be properly kept.
Starting real estate investment as a side business can be an effective means of asset building for company employees with proper knowledge and preparation. We will reconfirm the important points conveyed in this article.
The key to success lies in location selection. Choosing a property near a train station, in an area with convenient transportation and good future potential will minimize vacancy risk and ensure a stable rental income.
Proper financial planning is also important. Preparing personal funds of about 20% of the property price and setting an investment size that is commensurate with your annual income will allow you to continue investing without strain.
Keeping a close eye on risk management will lead to long-term success. It is important to understand various risks such as vacancy risk, interest rate rise risk, and disaster risk, and take appropriate countermeasures.
Real estate investment is based on long-term investment. The secret to success is not to seek short-term gains, but to take a long-term perspective of 10 to 20 years to build assets. It is also important to improve the accuracy of investment decisions through continuous learning and understanding of market trends.
At INA&Associates, Inc., we place "human resources" and "trust" at the core of our management and support the asset building of each and every one of our clients. Please feel free to contact us if you have any questions or concerns about real estate investment. We are committed to helping you build your assets toward the realization of a society in which all people are justly valued and rewarded.
A1:Generally, in addition to the initial capital of about 20% of the property price, about 7-10% of the property price is required for other expenses. For example, a 10 million yen property will require 2 million yen in personal funds plus 700,000-1 million yen in expenses, for a total of 2.7-3 million yen in initial costs. However, conditions vary depending on the financial institution and property, so it is important to make a detailed financial plan in advance.
A2:Selecting a management company is an important factor for a successful investment. Evaluate the company's ability to recruit tenants, speed of response, management track record, and fee structure in a comprehensive manner. We recommend choosing a company that is community-based and knowledgeable about the rental market around the property, a company that is available 24 hours a day, and a company that provides regular reports. It is important to receive and compare proposals from multiple management companies.
A3:The most important thing is to avoid emotional judgments and make calm investment decisions based on numbers. Evaluate not only the yield, but also the location, age, management status, and future potential of the property in a comprehensive manner. It is also important to diversify your risk rather than investing all your money in one property. It is recommended that you consult with an expert if you have any questions and acquire sufficient knowledge before starting to invest.