Real estate investment is one of the most promising options for asset building and asset succession for high-net-worth individuals. Unlike stocks and financial instruments, real estate is a real asset that can be expected to provide a stable income and retain its value over the long term, and can be used as an asset for the next generation. However, successful real estate investment requires sufficient preparation in advance and a clear philosophy. This article explains the key points of mindset and strategy formulation that should be in place prior to investment for high net worth individuals who are new to real estate investment who are about to start real estate investment in earnest. We will go step-by-step to confirm the importance of a philosophy from a long-term perspective, specific property selection, financial planning, cooperation with experts, and even final preparations before the initial purchase. We will help you take a strong first step toward real estate investment.
Before you begin investing in real estate, it is important to clarify your mindset and investment philosophy. Be prepared to grow your assets from a long-term perspective, rather than being concerned with short-term gains. For high-net-worth investors in particular, it is essential to consider real estate from the perspective of passing on assets not only to yourself but also to the next generation. In order to build assets that will continue to demonstrate value to their children and grandchildren, they must be prepared to "play the long game, looking 10 to 20 years into the future.
It is also important to consider whether one's investments are useful to society and to others. Providing quality housing and commercial space through real estate investment and contributing to the revitalization of local communities is a major social contribution. For example, investing funds to renovate an aging building and revitalize it into a comfortable living environment and attractive commercial space will lead to an increase in the value of the city. While it is natural to pursue returns on investments, it is also important to consider that "unless an investment leads to the enrichment of society as a whole, its own returns will not be sustainable in the long run. As a social responsibility of the wealthy, by approaching investments with an awareness of their positive impact on society, and not merely their monetary gain, the likelihood of achieving stable long-term returns will increase as a result.
Finally, be sure to articulate an investment philosophy that is consistent with your own values. For example, setting goals such as "building assets for the future security of my family" or "becoming a real estate owner who can contribute to the local community" will give you an axis to build on when you are unsure about your investment decisions. Investors with a clear philosophy are less likely to blur, making it easier to adopt a consistent strategy from property selection to investment policy. First, establish your own investment philosophy, incorporating perspectives such as long-term perspective, social contribution, and asset succession.
Once you have established your mindset, the next step is to set specific goals and develop an investment strategy. Rather than purchasing a property in the dark, it is essential to clarify "for what purpose," "by when," and "to what extent" you are aiming for a return. If your objectives remain vague, you run the risk of wavering in your policy midway through the process, or getting involved in inappropriate properties.
First, clarify your investment objectives. For example, people have different objectives, as shown below.
Securing stable income gain: To earn a steady monthly income (rental income) with an eye on retirement.
Growth of asset value (capital gain): You want to sell the property within a few years and aim for a profit on the sale.
Actual demand and utilization in the future: To secure residential or business property for future use by oneself and one's family.
The best strategy depends on these objectives. Therefore, it is important to verbalize "what you are aiming for" before taking the first step. For example, it is a good idea to set specific goals such as "to achieve a positive monthly cash flow of ³,000 by the end of five years" or "to own a fat property within X years.
Once the goals are set, develop an investment strategy in line with them. The type of property and area you choose will depend on whether you are focusing on cash flow or asset value appreciation. In general, cash flow-oriented strategies tend to choose properties in areas with high and stable rent demand, such as studio apartments and family apartments near train stations that are popular among singles. The goal is to steadily increase monthly cash flow by accumulating properties with low vacancy risk and easy access to continuous rental income. On the other hand, the capital gain-oriented strategy is based on targeting properties in areas where land prices and demand are expected to rise in the future. It may be effective to acquire properties in areas where there are plans for large-scale redevelopment or infrastructure improvement, or to purchase used condominiums in popular areas and resell them after renovation, in order to add value and increase the asset value. In this way, it is important to decide whether to focus on income gains (rental income) or capital gains (profit on sale), and to formulate your own strategy.
In addition, consider your financial situation and risk tolerance when considering your goals and strategies. Identify your current annual income, disposable income, asset holdings, and planned life events (e.g., children's education, retirement, etc.) to determine the size of funds you can invest and the risks you are willing to accept. For example, if your risk tolerance is low, you may choose a stable property with a low level of borrowing, or if you have sufficient funds, you may take on a slightly higher-risk project. The roadmap to success is to clearly define "where you are now" and "the goal you are aiming for," and to draw concrete measures to fill the gap between the two.
Once you have established your goals and strategy, the next step is to consider the types of properties to invest in. Real estate investment differs greatly in terms of management style and risk/return characteristics depending on the type of property you choose to invest in. Typical property types include "condominiums," "single apartments (or single condominiums)," and "commercial buildings. It is important to understand the characteristics of each and choose the type that best suits your strategy.
Condominium investment (purchasing one unit of an apartment): This is a typical property type that is easy for beginners to get started with. The capital requirement is relatively low because you can buy a single unit, and the risk is lower than buying a whole building. For example, by purchasing a studio condominium unit in the city center, you can become a real estate owner in a good location with high demand with a small amount of capital. Another advantage of condominiums is that the overall management of the building is handled by the management association or management company, so the owner does not have to take on the hassle of managing the property himself/herself. Even busy businesspeople can manage the property without much hassle by utilizing outsourced management. On the other hand, it is important to note that vacancy risk is concentrated in the case of only one apartment. If one tenant leaves, the income will be zero, so it is important to choose the right location and manage tenants. Another feature of condominium investment is that properties are highly liquid (easy to sell) and can be easily converted into cash. The condominium unit investment is suitable for beginners who want to start small and gain experience, as it is easy to start with a small amount, learn the market, and sell it as needed.
Single-unit apartment/condominium investment (purchase of an entire building): This type of investment is larger in scale than condominiums and is more like a full-fledged real estate business. Since multiple units are owned at once, the total amount of rental income earned at one time is large, and loans can be used to efficiently increase the size of the asset. The risk diversification effect of having a large number of rooms, such as being able to compensate for vacancies with income from other tenants, is an advantage not found in condominiums. Furthermore, as the owner, you can exercise discretion in the management of the entire building, so there is room to increase profitability through remodeling, setting rents, and other measures of your own devising. On the other hand, the larger initial investment carries a greater risk of failure, and you are solely responsible for property management. Even if you can rely on the help of professionals such as property management companies to maintain and manage the building and deal with tenants, there are a wide range of matters that you, the owner, must grasp. For those who have sufficient assets and wish to increase the yield and asset size, single building investment is suitable, but property selection and financial planning should be done more carefully.
Investment in commercial buildings (office buildings, retail buildings, etc.): This is an investment in commercial real estate that has companies and stores as tenants. Compared to residential properties, rent levels can be set higher, resulting in a greater earnings impact when the property is fully occupied. In some cases, prime commercial buildings in central Tokyo can generate high income with stable tenants for a long period of time. However, the risk is also high, and it is said to be suitable for intermediate and advanced investors. If a tenant's business is affected by economic trends, it is easy for the rent to be reduced or the tenant to move out. Property prices tend to be high, and bank financing tends to be more difficult to obtain. Successful investment in commercial buildings requires a wide range of expertise, including analysis of the trade area of the location, know-how on attracting tenants, and legal knowledge on contracts. For this reason, it is safest to start with residential properties to gain experience, and then move on to commercial buildings in the future. Wealthy individuals may have the financial resources to consider acquiring commercial buildings from the start, but as a first step, we recommend starting with low-hurdle condominiums and single-family residential properties in order to develop an eye for property and management know-how.
As described above, each type of property has different merits, demerits, and risk/return balance. In light of your investment objectives and strategy, consider "which type is right for me" and "in which order should I work on them". For example, you can start with condominiums to learn the market and eventually move up to a single building, or you can try a single apartment building for high income from the beginning. The important thing is to fully understand the characteristics of each property, control risk, and choose the property that best suits your resources.
In the world of real estate investment, it is said that " location is everything," and the choice of property location can make or break an investment. Even for similar properties, rental demand and future asset values vary greatly depending on the location, so strategic location selection is required. Here, we will look at three typical location strategies: "central Tokyo," "redevelopment areas," and "prime locations in regional cities.
Even in regional cities outside the Tokyo metropolitan area, real estate values can be expected to increase in areas that are becoming more attractive due to redevelopment and other factors.
1. central Tokyo (central areas of major cities): In the 23 wards of Tokyo (especially the five central wards of Tokyo) and the centers of major cities such as Osaka and Nagoya, rental demand is extremely stable and asset values are generally firm. With a continuous influx of population and economic activity, central Tokyo is an area with low vacancy risk, making it suitable for long-term ownership. In fact, data shows that the price of used condominiums in Tokyo has shown a marked upward trend over the long term, increasing approximately 1.7 times in the 10 years since 2013. Although the initial acquisition cost of properties in central Tokyo is high, they are popular among wealthy individuals as "safe assets" due to their strong underpinnings in asset value. On the other hand, yields (rate of return on investment) tend to be lower, and rental income earned for the same price tends to be less than that of regional properties. Therefore, investment in city center properties easily matches asset preservation strategies and is suitable for those who seek solid investment instead of large price gains. 2.
2. redevelopment areas: Urban redevelopment areas that are expected to grow significantly in the future are particularly attractive locations for investment. In areas where large-scale redevelopment projects are underway, new commercial and office buildings are expected to change the flow of people and increase demand for real estate in the surrounding area. In fact, there have been reported cases where land prices have doubled and prices of surrounding condominiums have jumped several times in areas where redevelopment has taken place in the city center. Investing in redevelopment areas is highly compatible with a strategy that aims for future increases in asset values (capital gains). However, there are many uncertainties in the planning stage, so it is essential to collect the latest information. Check not only newspapers and government announcements, but also specialized news in the real estate industry and urban planning documents from local governments to understand the progress of development and how companies are being attracted to the area. It takes time for redevelopment to change the face of a city, so if you are investing in such an area, you need to take a long-term stance that allows you to sit tight and wait.
3) Excellent locations in regional cities: There are also attractive investment candidates in core cities throughout Japan. Major regional cities such as Sapporo, Sendai, Hiroshima, and Fukuoka have been actively redeveloping in recent years, and there are areas where real estate values can be expected to rise as urban functions improve. The major advantage of regional properties is that they can be purchased with less capital and tend to have higher yields than those in urban centers. In many cases, the rate of return is favorable when viewed in balance with rent because property prices can be kept low, and rental income can be efficiently earned with high-yield properties. In fact, in some rural areas, the decline in rents is smaller than the decline in prices, and as a result, surface yields tend to be higher than in urban areas. Higher yields make it easier to repay loans early and secure funds for additional investment, which will give momentum to asset expansion. At the same time, however, the risks of a declining population and deteriorating supply and demand cannot be overlooked. In order to make a successful investment in a regional city, it is necessary to closely examine the demographic and industrial trends of the area and determine whether stable demand can be expected in the future. Specifically, check whether the area has a slightly increasing or maintaining population, whether it is well-equipped with universities, hospitals, and other facilities that can attract customers, and whether there are positive factors such as the presence of new companies or an increase in tourists. From the viewpoint of exit strategy (future sale), it is also important to check whether the area is popular enough to attract buyers. Areas near stations that are expected to undergo redevelopment will be easier to sell in the future, and this will give you a sense of security when exiting the property.
As described above, it is possible to consider location strategies based on the axes of "urban centers vs. rural areas" and "mature areas vs. growing areas. If you are a high-net-worth beginner, it is a good idea to first gain experience in solid, high-quality locations in central Tokyo, while balancing a portion of your portfolio with redevelopment areas and promising regional areas. In either case, please keep in mind that you can change the property but not the location, and select an area with an eye toward the future.
Next, let's consider the initial financial plan for starting a real estate investment. While many wealthy individuals may have a large amount of personal funds available, it is necessary to carefully decide how much to invest in personal funds and how much to use loans (borrowings). In addition, when receiving a loan from a financial institution, it is important to consider building a relationship with the institution as a partner, rather than simply borrowing money.
In real estate investment, it is common for investors to combine their own funds with loans from financial institutions to take advantage of the leverage effect for greater investment opportunities. For example, if you invest all of your 100 million yen in cash, you can only buy a 100 million yen property, but if you limit your own funds to 50 million yen and procure the remaining 50 million yen through a bank loan, you have the possibility to invest in another property with the remaining funds on hand. The appeal of real estate investment is that by utilizing loans in this way, you can aim for a large return with little personal funds, but you must also be fully aware of the risks that borrowing brings. If interest rates on loans rise or rent income from properties falls below expectations, the more leveraged an investment is, the more likely it is that cash flow will deteriorate. Therefore, when obtaining a loan from a financial institution, it is solid to set a high self-financing ratio and plan a repayment plan with a sufficient margin, rather than easily jumping into a full loan or an overdraft. In general, it is recommended that you invest 20-30% of the property price in your own funds, and simulate a generous cash flow to ensure that you will have sufficient cash flow after loan repayment. A financial plan that can withstand unexpected vacancies and interest rate fluctuations is the foundation for long-term stable management.
When using financing, it is also important to build a relationship of trust with financial institutions. Especially in the case of large, single-building loans, banks will examine the borrower's "asset background" in detail. Asset background refers to the assets held by the applicant or related corporations, and the bank will focus on whether or not the borrower can collect from other assets in the event of non-payment. Wealthy individuals may have many assets other than real estate, such as stocks, deposits, real estate (land and buildings), etc. It is important to disclose their own financial position including these assets to give financial institutions a sense of security. Specifically, you should prepare appropriate proof of asset balance and income, and prepare an investment plan so that you can logically explain "why you are investing in this property and how you will manage and repay the loan. If you can gain the trust of the loan officer, future negotiations for additional financing will be smoother, and in some cases, you may be able to receive preferential treatment in terms of interest rates and lines of credit.
Many wealthy individuals may already have a relationship with their main bank or private banker. Take advantage of that relationship for your real estate investment. By starting with a relatively small property investment at first and establishing a track record of trouble-free operation and repayment, you can expect to receive a higher evaluation from the bank, making it easier to obtain a larger loan the next time around. Conversely, financial institutions are more likely to trust someone who has a track record of success with even a small amount of money than someone who has never invested in real estate before, no matter how much money he or she has. Therefore, the key to getting your real estate investment off the ground is to steadily build up your track record and credibility while leveraging within a reasonable range.
While investors' own judgment and actions are key to real estate investment, the success rate can be greatly enhanced by leveraging the knowledge of experts in various fields. High-net-worth investors may already have relationships with professionals such as tax advisors and lawyers, but we strongly recommend building a team of trusted experts in real estate investment as well. Here we will review the roles of real estate companies, tax accountants, and lawyers as representative professionals with whom you should especially collaborate.
Real estate company (real estate consultant/broker): A reliable real estate company is essential for obtaining quality property information and conducting appropriate transactions. An experienced real estate representative understands market trends and the true value of a property and can be a strong partner in finding a property that meets your investment objectives. In particular, information on large deals for high-net-worth individuals and off-market properties often comes through personal connections and relationships of trust, so it is important to maintain good communication and build trust on a regular basis. In addition, real estate companies are also responsible for rental management after the property is purchased. By entrusting the rental management operations such as tenant recruitment, contracts, handling of complaints, rent collection, and move-out settlements to professionals, owners can concentrate on strategic decision making. Choose a real estate company as a good partner that supports your real estate management over the long term, not just as a property broker.
Tax Accountant (CPA): Tax strategies are critical to maximizing returns and minimizing risk in real estate investment. There are a wide variety of tax issues in real estate, such as calculating income and inhabitant taxes on rental income, utilizing depreciation and amortization, deducting loan interest and other expenses, and dealing with property and city planning taxes. A tax accountant not only handles these tax matters properly, but also provides advice on tax planning. For example, they can guide you to the best solution for your personal situation, such as incorporating your real estate investment to take advantage of tax rate brackets, or the merits of using real estate from an early stage as an inheritance tax measure. In the case of wealthy individuals, the absolute tax burden is also large, so the support of an excellent tax accountant can greatly improve the balance of your investment. Furthermore, it is beneficial to consult with a tax accountant before purchasing a property to simulate the tax differences depending on the type of property to be purchased and the name of the property (individual or corporate). A tax accountant can help you develop the most efficient plan, taking into account the rental income from long-term holdings, future gains on sales, and the taxes associated with such gains.
Lawyer: There are many legal issues involved in real estate transactions and rental management. An attorney's role is diverse, ranging from legal checks of property purchase and sale contracts, confirmation of rights, drafting and revising contracts, and even responding to problems that may arise. Real estate is a high-value transaction, and contractual disputes can occur. In the case of rental management, disputes with tenants (e.g., overdue rent or surrender negotiations) can also occur in rare cases. To be prepared for such cases, it is a good idea to have an advisory contract with a lawyer who is strong in real estate law. Especially in the case of commercial buildings and large properties, lease contracts with tenants tend to be complicated, requiring specialized knowledge of renewal fees, security deposits, restoration to original condition, and conditions when tenants vacate. With a lawyer, risks can be hedged from the contract stage, leading to the prevention of future disputes. In the case of wealthy investors, the wisdom of a lawyer can also be useful in terms of asset preservation and inheritance measures. They will be able to obtain advice on long-term asset management, such as the use of trusts and wills, and legal advice when establishing corporate schemes.
In addition to the above, there are many other experts who are reassuring if you can collaborate with them, such as architects and real estate appraisers for understanding the condition of the property, and financial planners for financing aspects. The important thing is the sense of building a team around you. By teaming up with professionals you trust with each other, you can obtain accurate information and objective perspectives, enabling you to make decisions with less risk. Make the most of your network and financial resources, which are the strengths of high-net-worth individuals, to build a team of real estate professionals. This will be a great support to continue asset management with peace of mind over the long term.
Finally, we will summarize the items you should check and prepare just before actually purchasing your first property. Even at the "ready to buy" stage after property selection and financial planning have been completed, it is essential to take a breath and inspect the surrounding matters. Keep the following points in mind
Consideration of incorporation: When starting a real estate investment, it is important to consider whether the purchasing entity should be an individual or a corporation. In general, the tax benefits of incorporation are greater for real estate investments above a certain size. Incorporation increases tax advantages, such as being taxed at a lower tax rate than individuals, being able to carry forward losses for 10 years, and being able to record depreciation at any time. In addition, tax measures unique to corporations can be utilized, such as income diversification through the payment of executive compensation and income transfer by appointing family members as directors. In terms of inheritance tax measures, corporate-owned real estate has the advantage of being easily divided and passed on in the form of shares. On the other hand, establishing a corporation is costly and time-consuming, and even after its establishment, the administrative burden of closing accounts and filing returns increases every year. If the size of the company is small, the tax benefits may not be worth the cost, so please consult with your tax advisor to determine when you should incorporate. Whether to start as a corporation from the time of initial purchase or to start as an individual and incorporate as needed in the future, choose the most appropriate method based on your own investment size prospects.
Assess your asset portfolio: Before embarking on your first real estate investment, take stock of your overall asset portfolio. High-net-worth individuals may have a variety of assets in addition to real estate, including stocks, bonds, business investments, and cash and deposits. Check to see what proportion of these assets real estate accounts for, and whether the purchase of the property will reduce their liquidity (cash assets) excessively. Since real estate is an illiquid asset that takes time to convert to cash, we will make sure that you have an allowance for cash and liquid assets that you can use in an emergency. For example, after purchasing real estate, it is a good idea to keep a deposit to cover loan repayments and expenses for 6 months to a year, and to secure a line of credit to cover unexpected expenses. If real estate accounts for too large a portion of your total assets, there is a risk that the entire asset portfolio may be damaged when land prices decline. While maintaining appropriate diversification, clearly define the role that real estate assets play in your portfolio (e.g., as a source of stable income, inflation hedge, asset protection, etc.).
Due diligence and final confirmation of plans: Before deciding to buy, be sure to conduct a detailed investigation of the property itself and finalize your plans. This is the process of verifying the appropriateness of the investment from multiple perspectives, including the property's legal rights (checking the registry, mortgages and defects), physical condition (building inspection, seismic resistance, repair history), and income/expense simulations (reviewing expected yield, vacancy rate and expense ratio). With the help of a team of experts, we also check to see if any risk factors have been overlooked. Especially when investing for the first time, it is effective to have a third party evaluate the plan from a dispassionate viewpoint, as it is easy to be lax in judgment due to excitement and anxiety. If you also have a concrete simulation of your post-purchase management plan (rental solicitation strategy, renovation schedule, etc.) and put it together as a business plan, it will be more persuasive in bank financing situations. If you plan to establish a corporation, complete the registration of its incorporation, and prepare all the necessary documents for negotiations with financial institutions and contracts with specialists.
Once you are confident that you can manage this property without any problems, that your financial plan is reasonable, and that you have the support of all parties involved, it is time to make your first real estate purchase. By going through a careful preparation process, you can get started with as few sources of anxiety as possible.
When taking the first step in real estate investment, careful preparation and planning in advance is of the utmost importance. High-net-worth novice investors have the advantage of financial strength, but they also have the responsibility to protect and increase their assets. That is why it is important to approach investment from a long-term, big-picture perspective, rather than focusing on short-term gains or losses. Establishing your own mindset and philosophy, and developing clear goals and strategies before you begin investing will set you on the path to success. While careful and strategic decisions must be made when selecting property type and location, the points discussed in this paper should help you to see the options you should take. Furthermore, by striking the right balance between personal funds and loans, building a relationship of trust with financial institutions, and making wise use of leverage, it will be possible to achieve the dynamic asset building that only high-net-worth individuals can. While working with a team of experts to reduce risk and deepen your knowledge, do not neglect to prepare for the future by incorporating and managing your entire portfolio of assets.
Real estate investment is not a magic way to make millions of dollars overnight. However, if you steadily build up your wealth under the right philosophy and strategy, the benefits to your wealth and your life will surely grow. Now is the time to take the first step, to act with prudence and passion. We hope that the content of this article will serve as a guide for you as you take that first step and help you lead a rewarding real estate investment life for years to come. Please put your plans into practice with conviction, and I hope that you will achieve both long-term success in the world of real estate investment and contribute to society at the same time. We sincerely hope that your challenge will bear fruit.