When considering asset management, many investors consider real estate investment. Real estate investments have advantages over other investment products, such as stable profitability over the long term and resistance to inflation. On the other hand, there are issues unique to real estate investment, such as high initial investment and management hassles.
This report provides a detailed explanation of real estate as an investment, from the basics to practical applications, based on data. We hope it will be of help to those who are considering real estate investment and portfolio diversification.
Basics of Real Estate Investment
What is real estate investment?
Real estate investment is an investment technique in which real estate, such as land and buildings, are purchased with the objective of generating income from these assets. The two main sources of income are
- Income gain (rental income): Regular income from leasing real estate.
- Capital gain (profit on sale): Profit obtained by selling the property at a higher price than the purchase price.
A major characteristic of real estate investment is that it is an investment based on physical assets, which have relatively high stability in value. Another major feature is the ability to invest more than one's own capital by utilizing bank loans (leverage).
Types and Characteristics of Real Estate Investment
There are various types of real estate investment, each with its own characteristics, advantages and disadvantages. The following is an introduction to typical investment methods.
Comparison of single building investment and condominium unit investment
| Characteristics | Investment in a single building | Sectional investment |
|---|---|---|
| Investment Scale | Large (tens to hundreds of millions of yen) | Small to medium (millions to tens of millions of yen) |
| Risk diversification | Diversification of multiple units within a single property possible | No diversification due to single unit |
| Management flexibility | High (entire building can be renovated) | Low (exclusive use only) |
| Purchase hurdles | High (financing and screening) | Relatively low |
| Profitability | Medium to high (varies depending on size) | Low to medium (stable) |
| Vacancy risk | Diversifiable | Concentration (risk of total income disruption) |
| Ease of sale | Slightly low | Relatively high |
Single building investment is an investment method in which an entire building, such as an apartment or condominium, is purchased and rental income is earned from multiple tenants. An investment in a condominium unit is a method of purchasing a portion of a building, such as a room in an apartment, and renting it out.
The general perception is that "single building investment is for investors with strong financial resources, while condominium investment is for beginners or investors who want to start with a small amount of money. In fact, there is a large difference in the initial investment amount, with a condominium investment starting at several million yen, while a single building requires at least several tens of millions of yen.
Other Types of Real Estate Investment
- Detached house investment: Buy a detached house and rent it out.
- Parking lot investment: Use land as a parking lot.
- REIT (Real Estate Investment Trust): A product that securitizes real estate and allows investment from small amounts.
- Homestay investment: Renting out properties for short-term stays
- Trunk room investment: Leasing storage space
As of April 2024, the total market value of the REIT market in Japan has grown to approximately 14.8 trillion yen.
Major Indicators of Real Estate Investment
The following are some important indicators for real estate investment.
Types of Yields and Calculation Methods
-
Surface Yield (Gross Yield)
Formula: Annual rental income / Property purchase price x 100 (%)
This is the most basic and simplest profitability indicator. It does not take expenses into account, so it differs from actual profitability. -
Real Yield (Net Yield)
Formula: (Annual rental income - Annual maintenance costs) ÷ Property purchase price × 100 (%)
Indicates the actual profitability after deducting expenses. It is an indicator that is close to the actual situation, but accurate grasp of expenses is necessary for the calculation. -
NOI (Net Operating Income) Yield
Formula: (Annual rental income - Annual operating expenses (excluding depreciation)) / Purchase price of the property x 100 (%)
This is an index often used by professional investors and is suitable for measuring the earning power of the property itself.
Yield is an indispensable indicator for evaluating a property, but it is important to make a comprehensive judgment based on location, quality of the property, and future potential, rather than making a judgment based solely on this indicator.
Other Important Indicators
- CCR (Cash on Cash Return): Ratio of annual cash flow to cash on hand.
- DCR (Debt Coverage Ratio): Annual NOI divided by loan repayments
- IRR (Internal Rate of Return): Overall rate of return on investment
- Cap Rate: Expected yield when the property is traded in the real estate market.
Making investment decisions based on a comprehensive evaluation of these indicators is the path to success.
Merits and Demerits of Real Estate Investment
Merits
The main advantages of real estate investment are as follows
-
Stable source of income
A stable monthly rental income can be expected from rental real estate. It is less susceptible to economic conditions and provides a long-term source of income. -
High leverage effect
In real estate investment, it is possible to purchase a property with a loan several to dozens of times your own capital. For example, if a property worth 50 million yen can be purchased with 10 million yen of one's own funds, all profits from the property's price appreciation will be the investor's. -
High tax-saving effect
In real estate investment, depreciation and various expenses can be recorded, and income and inhabitant tax savings can be expected. It is also effective in saving inheritance and gift taxes when real estate is inherited or donated, as the tax assessed value is lower than that of cash. -
Resistant to inflation
Real estate values and rents tend to rise during times of inflation, thus functioning as an inflation hedge. Unlike cash or bonds, it prevents the diminution of asset value due to inflation. -
Highly effective asset-building
Continued loan repayment automatically leads to asset building. After the loan is paid off, the value of the property becomes the net asset as it is.
Disadvantages
On the other hand, real estate investment has the following disadvantages
-
Low liquidity
Compared to stocks and other securities, it takes longer to sell and is difficult to convert to cash immediately. In particular, when market conditions deteriorate, it may be even more difficult to sell. -
Vacancy risk.
During the period when there are no tenants, no income is earned and you are responsible for paying the loan and expenses. Particularly with condominium unit investments, there is a risk that vacancy will directly lead to zero income. -
Repair and maintenance costs.
Buildings deteriorate over time, requiring periodic repairs and updating of facilities. Planned financial preparation is important. -
There is a risk of rising interest rates.
If a variable interest rate loan is used, there is a risk that the repayment burden will increase due to rising interest rates. -
Management is time-consuming.
Various management tasks, such as dealing with move-ins and move-outs and building management, are required. It is possible to outsource these tasks to a management company, but this incurs costs.
Suitable and unsuitable people
The characteristics of people who are suitable for real estate investment are as follows.
- People who have a stable income
- People who can invest from a long-term perspective
- People who can tolerate a certain level of risk
- People who are strong with numbers and can manage their money systematically
- People who are interested in real estate.
On the other hand, real estate investment is not recommended for the following people
- People who expect large returns in a short period of time
- People who do not have enough funds to invest
- People who have a low risk tolerance and value safety
- People who do not have sufficient financial resources to deal with unforeseen circumstances.
Real estate investment is a "middle-risk, middle-return" investment. Although it is not a guaranteed success, stable returns can be expected with proper property selection and management.
Comparison of real estate investment with other investments
Differences from Stock Investments
Real estate and stock investments are considered by many as typical investment options, but each has its own characteristics. Let's compare them in the table below.
| Comparison Items | Real Estate Investment | Stock Investment |
|---|---|---|
| Main source of income | Rental income (income gain) | Focus on capital gains |
| Required capital | Large amount (from several million yen) | Small amount (from tens of thousands of yen) |
| Leverage | Available (financing is common) | Limited (margin transactions only) |
| Stability | Relatively high (rental income) | Fluctuates widely |
| Liquidity | Low (time and cost to buy and sell) | High (can be bought and sold immediately) |
| Management effort | A lot (property management, tenant relations, etc.) | Less (mainly information gathering) |
| Tax benefits | Taxes can be saved through expense recognition and depreciation | Some preferential treatment in specified account, NISA, etc. |
| Average yield | 4% to 8% (dividend only) | 1.5% to 3% (dividends only) |
| Characteristics of price fluctuation | Moderate (over several years) | Rapid (fluctuates on a daily basis) |
While stable rental income is attractive for real estate investment, stock investment has the advantages of starting with a small amount and high liquidity. It is important to choose according to the investor's financial resources, investment objectives, and risk tolerance.
Differences from Investment Trusts and REITs
In addition to direct real estate investment, there is another option for investing in real estate: REITs (real estate investment trusts), which are financial instruments that use funds collected from many investors to purchase and manage real estate and distribute the proceeds to investors.
| Comparison Items | Physical Real Estate Investment | REIT (Real Estate Investment Trust) |
|---|---|---|
| Investment Unit | Large amount (from several million yen) | Small amount (from tens of thousands of yen) |
| Investment Entity | Investors themselves | Specialized investment management company |
| Diversified investment | Difficult (financial constraints) | Easy (invest in multiple properties with one unit) |
| Liquidity | Low | High (buy and sell on the stock exchange) |
| Management effort | Much | Almost none |
| Investment decisions | Individual decision for each property | Judged by fund management policy and performance |
| Dividend yield | 4% to 8% approx. | 3% to 5% approx. |
| Taxation | Tax saving effect due to depreciation, etc. | Taxed as dividend income |
| Risks | Property-specific risk | Market risk, interest rate risk, etc. |
REITs have the advantage that they allow investors to participate in real estate investment without expertise in real estate investment or a large amount of capital. On the other hand, since the management is entrusted to experts, the scope of control is limited.
The Japanese REIT market (J-REIT) has been growing steadily since its establishment in 2001, with a market capitalization of approximately 14.8 trillion yen and 57 listed issues as of April 2025.
Comparison of Risk and Return Characteristics
The risk and return characteristics of each investment product can be summarized as follows
| Investment Instrument | Risk | Expected Return | Liquidity | Stability |
|---|---|---|---|---|
| Deposits & Bonds | Minimum (0.001% to 1%) | Minimum (0.001% to 1%) | High | Highest |
| REIT | Medium | Medium (3% to 5%) | High | Medium to High |
| Real Estate Investment | Medium to high | Medium to high (4% to 8%) | Low | Medium |
| Equity Investment | High | High (high volatility, long-term 5%～) | High | Low |
| FX, Futures, etc. | Highest | Highest (high volatility) | Highest | Lowest |
Real estate investment is a middle-risk/medium-return investment with a good balance between risk and return. By incorporating it into the core of your asset portfolio, you can expect to diversify overall risk and secure stable income gains.
Real Estate Investment Practices
Investment Decision Criteria
The key to success in real estate investment is to select the right property. Evaluate properties based on the following criteria.
-
Location
- Convenience of transportation (distance from station, access to major stations)
- Surrounding environment (commercial facilities, educational institutions, medical facilities, etc.)
- Future potential (existence of redevelopment plans and infrastructure improvement plans)
-
Profitability of the property
- Surface yield: 5% or more as a rough guide
- Actual yield: 3% or more
- CF (cash flow): Ideally, positive monthly cash flow
-
Property quality
- Age and condition of the building
- Seismic performance
- Condition of facilities and update history
-
Demand and supply
- Occupant needs (e.g., for singles, families, etc.)
- Vacancy rate in the surrounding area
- Status of competing properties
-
Financing plan
- Balance between own funds and borrowings
- Response to interest rate fluctuation risk
- Securing a reserve fund for repairs
In evaluating a property, it is important to make a calm decision based on numbers, without being influenced by emotions. Beginners in particular should consider not only the yield but also the property's future potential and ease of management.
Steps to Start Investing
The general steps to start investing in real estate are as follows
-
Setting goals and acquiring knowledge
- Clarify investment objectives (tax reduction, asset building, income gain, etc.)
- Acquisition of basic knowledge through books and seminars
- Cultivation of a market view of the real estate investment market
-
Formulation of a financial plan
- Secure personal funds (approx. 20-30% of the property price)
- Confirm the amount of borrowing available (prior consultation at financial institutions)
- Create income/expense simulation
-
Select and research properties
- Consultation with a real estate agent
- Collect and compare property information
- Site survey and confirmation of surrounding environment
-
Contract and financing
- Execution of sales contract
- Loan application and review at financial institutions
- Be sure to attach loan covenants
-
Acquisition of the property and start of operation
- Delivery of the property
- Contract with management company (if necessary)
- Recruit tenants and begin leasing
When investing in real estate for the first time, it is important to start within a reasonable range. In particular, pay attention to the following points.
- Do not take out an unreasonable loan ： If the repayment burden is too large, it may cause problems in your life.
- Do not underestimate the risk ：Prepare a financial plan for risks such as vacancy and repairs.
- Consult an expert ：Consult a tax accountant or a real estate specialist for appropriate advice.
Risk Management and Countermeasures
It is important to understand risks in real estate investment and their countermeasures.
Major Risks and Countermeasures
| Risks | Contents | Countermeasures |
|---|---|---|
| Vacancy risk | Risk of losing tenants | ・Selecting areas and property types with high demand ∙ Appropriate rent setting Regular maintenance of the property |
| Risk of nonpayment of rent | Risk of tenants failing to pay rent on time | Use of rent guarantee companies Stricter tenant screening |
| Risk of rising interest rates | Risk of variable interest rates rising | Consider fixed interest rates Securing sufficient repayment capacity Use of early repayment |
| Repair Risk | Risk of unexpected repairs | Secure repair reserve fund Periodic inspections and preventive maintenance Conduct building condition surveys (inspections) |
| Disaster Risk | Risk of earthquakes, floods, etc. | Improvement of insurance Selection of earthquake-resistant properties Confirmation of hazard maps |
| Market fluctuation risk | Risk of deterioration of real estate market conditions | Invest from a long-term perspective Avoid excessive borrowing Consider diversified investment |
Key Risk Management Points
-
Secure cash reserve
It is recommended to set aside a cash reserve equivalent to about 6 months' worth of rental income in case of unexpected expenses. -
Obtain appropriate insurance
Mitigate risk by purchasing necessary insurance such as fire insurance, earthquake insurance, and rent guarantee insurance. -
Build a network with professionals
By building a network with reliable real estate companies, management companies, tax accountants, etc., you can respond quickly when problems arise. -
Continue to gather information
Always collect the latest information on trends in the real estate market and taxation system, and revise your strategy as necessary.
Risk management is one of the most important aspects of real estate investment. The key to success is to be prepared for possible risks in advance, in the spirit of "be prepared and you will be safe.
Real Estate Investment Market Trends and Outlook
Current Market Conditions
The Japanese real estate investment market in 2024 is in a recovery phase from the Corona disaster.
According to JLL's research, Japanese real estate investment reached 3.85 trillion yen (+41% YoY) at the end of the third quarter of 2024, and is expected to reach approximately 5 trillion yen for the full year of 2024. This is a higher level than in pre-Corona 2019.
The percentage of investment by sector is as follows
| Sector | Investment Ratio |
|---|---|
| Office | 37% (of the total) |
| Hotel | 21% Logistics |
| Logistics facilities | 18% Rental housing |
| Rental Housing | 14% Retail |
| Retail | 8% Other |
| Other | 2% Others |
Of particular note is the growing interest of foreign investors in the Japanese real estate market, with foreign investors, who were on an oversold trend in 2023, turning to buy from 2024 onward. This is due to the rising inflation rate in Japan and the yen's depreciation, which has made Japanese real estate relatively undervalued.
In addition, according to the 51st Real Estate Investor Survey by the Japan Real Estate Institute (as of October 2024), 94% of respondents said they would "actively make new investments," indicating that investors continue to take a proactive stance.
Expected yields by asset type have been trending as follows
- Office ：3 .2% in the Marunouchi and Otemachi areas of Tokyo (unchanged for four consecutive quarters)
- Residential: 3.8% for both studio and family types in the Jonan area of Tokyo (unchanged)
- Retail ： 3.3% in the Ginza area (down 0.1 points, the lowest level since the survey began)
- Logistics facilities: 4.0% in the Tama area of Tokyo (down 0.1 points, the lowest level for an inland area since the survey began)
- Hotel: 4.2% in Tokyo (down 0.1 points, the lowest level for two consecutive quarters)
Overall, yields are declining (prices are rising), indicating intensifying competition for investment.
Future Outlook and Points of Interest
The following are some key points regarding the future outlook for the real estate investment market.
-
Changes in the interest rate environment
There is a possibility that the Bank of Japan will raise its policy interest rates from 2025 onward. While higher interest rates will put downward pressure on real estate prices, some believe that the market has already factored in higher interest rates and that any major impact will be limited. -
Inflationary Impact
Rising inflation in Japan could lead to higher nominal rents. Particularly in the office and residential sectors, higher rents are expected to boost earnings. -
Recovery of inbound demand
The hotel sector is expected to remain strong as the number of foreign visitors to Japan increases; projects under construction in 2024 represent 1.8% of the existing supply, which is an oversupply, and RevPAR (revenue per available room) is expected to rise. -
Growing Importance of ESG Investments
Sustainability and ESG (environmental, social, and governance) factors are becoming increasingly important in investment decisions. Properties with environmental certifications tend to receive premium valuations. -
Evolution of Technology
Developments in PropTech (real estate technology) are making property management and data analysis more sophisticated. Efficient operations and risk management are becoming possible. -
Opportunities in Local Cities
Real estate investment opportunities in regional cities are also increasing due to the easing of the concentration of Tokyo and regional development efforts. In particular, some properties in core regional cities can be expected to offer relatively high yields.
The real estate investment market is constantly changing, and the key to success is to respond flexibly to changes in the market environment. We recommend that you always collect the latest information and review your investment strategy as necessary.
Conclusion
Real estate investments play an important role in asset portfolios due to their stable long-term returns and resistance to inflation, as well as their ability to leverage and reduce taxes. While condominium investments are easy to start with small amounts and have high liquidity, single building investments offer the advantage of scale and internal risk diversification. REITs are also an effective way to diversify small investments through professional management. In investment decisions, income and expenditure simulations using indicators such as surface yield, real yield, and NOI yield are essential, and the location and future potential of the property must also be comprehensively evaluated. For risks such as vacancy, rising interest rates, and repair costs, it is essential to be prepared in advance and have sufficient funds by using a rent guarantee company, selecting a fixed interest rate, and securing a reserve for repairs and cash reserves. Furthermore, the key to success is to keep a close eye on changes in the market environment, such as interest rate and inflation trends, inbound demand, and ESG investment trends, and flexibly revise your strategy. With a clear investment objective and financial plan, and executed in collaboration with trusted professionals, real estate can be a core asset in your portfolio and provide stable asset growth.
