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.
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
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).
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.
| 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.
As of April 2024, the total market value of the REIT market in Japan has grown to approximately 14.8 trillion yen.
The following are some important indicators for real estate investment.
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.
Making investment decisions based on a comprehensive evaluation of these indicators is the path to success.
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.
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.
The characteristics of people who are suitable for real estate investment are as follows.
On the other hand, real estate investment is not recommended for the following people
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.
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.
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.
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.
The key to success in real estate investment is to select the right property. Evaluate properties based on the following criteria.
Location
Profitability of the property
Property quality
Demand and supply
Financing plan
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.
The general steps to start investing in real estate are as follows
Setting goals and acquiring knowledge
Formulation of a financial plan
Select and research properties
Contract and financing
Acquisition of the property and start of operation
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.
It is important to understand risks in real estate investment and their 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 |
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.
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
Overall, yields are declining (prices are rising), indicating intensifying competition for investment.
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.
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.