In recent years, interest in real estate investment has been growing rapidly among the wealthy. According to a recent survey by Nomura Research Institute, the number of affluent and ultra-affluent households in Japan has reached approximately 1,653,000, and their total net financial assets are a massive 469 trillion yen.
Of particular note is the fact that 83.6% of the HNWIs with assets exceeding ¥100 million invest in real estate. This is no mere coincidence. High-net-worth individuals choose to invest in real estate because of its unique advantages and strategic value that cannot be obtained through other investment methods.
At INA&Associates, we work with ultra-high-net-worth clients on a daily basis and have come to realize that real estate investment is more than just a means of asset management; it is at the core of a comprehensive wealth strategy. In this article, we will provide a full overview of real estate investment strategies practiced by high-net-worth individuals, from tax-saving effects to asset management benefits, with specific data and case studies.
| Classification | Number of households | Net Financial Assets Held |
| High Net Worth Households | 1,535,000 households | 100 million yen or more but less than 500 million yen |
| Ultra-high-net-worth households | 118,000 households | 500 million yen or more |
| Total | 1,653,000 households | 469 trillion yen |
Table 1: Statistical Data on High Net Worth Individuals in Japan (2023)
Seven Reasons Why High Net Worth Individuals Choose Real Estate Investment
Simple profitability is not the only reason why high-net-worth individuals place real estate investment at the core of their asset management. Having served ultra-high-net-worth clients for many years, I have a deep understanding of the affinity between the unique investment needs of the wealthy and real estate investment.
Securing a stable, disposable income
One of the most important factors for the wealthy is securing a stable income. Real estate investments generate regular monthly cash flow in the form of rental income. Compared to dividends from stock investments or interest from bonds, rental income from real estate investments is relatively stable and resistant to inflation.
In fact, a rental property in a good location can be expected to generate a stable income of 3-5% per annum over a long period of time. This is in line with the basic investment policy of "increasing assets without decreasing them" sought by high-net-worth individuals.
Portfolio Diversification Effect
Today's high-net-worth individuals deeply understand the importance of risk diversification. By incorporating real estate, a real asset, as well as financial assets, they can effectively diversify their overall portfolio risk.
Of particular note is the low correlation between real estate and the stock market. Even when the stock market declines significantly, real estate prices tend to remain relatively stable. This increases the overall asset's resistance to market fluctuations.
Take advantage of tax benefits
Real estate investment offers a number of tax advantages that are not available through other investment methods. The most important is the tax savings from depreciation. The building portion of the property can be depreciated over a certain period of time depending on its structure, thus creating a loss on the books.
This deficit can be offset against employment income or business income through profit and loss, leading to substantial savings in income and inhabitant taxes. The higher the annual income of the wealthy, the greater the benefit of this tax-saving effect.
Effect as an inheritance tax measure
Inheritance tax measures are an important issue that wealthy individuals cannot avoid. Real estate investment is an extremely effective inheritance tax measure.
By converting cash into real estate, the inheritance tax assessed value can be significantly reduced. Generally, the assessed value of real estate for inheritance tax purposes is approximately 80% of its market value, so this alone has the effect of reducing the assessed value by 20%. In addition, in the case of real estate for rent, an additional reduction can be achieved through the valuation of land with attached rental properties.
Utilization of leverage effect
Wealthy individuals have high creditworthiness with financial institutions and can obtain real estate investment loans with favorable terms. This allows them to take advantage of the leverage effect, which allows them to obtain a large investment effect with a small amount of their own funds.
For example, if a property worth 100 million yen is purchased with 20 million yen in cash on hand and 80 million yen in loans, the actual investment efficiency will be greatly improved on a cash-on-hand basis. In the current environment of low interest rates, this leverage effect is particularly effective.
Relatively low price fluctuation risk
Compared to financial instruments such as stocks and FX, real estate is characterized by relatively low price volatility risk. This is an extremely important factor from the perspective of "asset preservation," which is a priority for high-net-worth individuals.
Real estate prices are less susceptible to short-term market sentiment and are formed based on medium- to long-term fundamentals such as demographics and economic growth. As a result, the risk of sudden loss of value is low, and one can continue to hold the property with peace of mind.
Inflation Protection Effect
As a physical asset, real estate is an excellent hedge against inflation. When inflation rises, both real estate prices and rents generally tend to rise.
Because high-net-worth individuals value long-term asset preservation, it is critical to prevent inflation from diminishing the real value of their assets. Real estate investment is an effective solution to this challenge.
| Rationale | Specific Effects | Expected Results |
| Stable income | Regular income from rental income | Annual interest rate of about 3-5 |
| Portfolio diversification | Risk diversification effect | Stabilization of asset value |
| Tax benefits | Tax savings from depreciation | Tax savings on income tax rate |
| Inheritance measures | Reduction in assessed value (up to 80% reduction) | Up to 80% reduction |
| Leverage effect | Improved investment efficiency through borrowing | Improved ROI |
| Low price volatility risk | Stable asset value | Asset protection effect |
| Inflation protection | Value preservation through real assets | Preservation of purchasing power |
Table 2: Reasons and Benefits of Real Estate Investment by High Net Worth Individuals
Tax Saving Effects of Real Estate Investments by High Net Worth Individuals
One of the most attractive features of real estate investment is its excellent tax savings. For high-income individuals in particular, this tax benefit is an important factor in their investment decisions. When I make recommendations to clients, I often discuss strategies that emphasize tax-efficiency as well as profitability.
Income and inhabitant tax savings through depreciation
Depreciation is the core of tax reduction in real estate investment. For the building portion of the property, depreciation can be taken over the useful life of the property, which is determined based on the structure of the building.
The statutory useful life is 22 years for a wooden building and 47 years for a reinforced concrete building. Since depreciation is a non-cash expense, it can be used to create a loss on the books without harming cash flow.
For example, if you purchase a reinforced concrete condominium with a building value of 30 million yen, you can record an annual depreciation expense of approximately 640,000 yen (30 million yen divided by 47 years) (simplified calculation for simplicity). If real estate income is in the red due to this depreciation expense, income tax and inhabitant tax can be substantially reduced by adjusting the loss against employment income and business income.
Specific Methods for Inheritance Tax Prevention
Real estate investment is extremely effective as an inheritance tax measure. By converting cash into real estate, the assessed value for inheritance tax purposes can be significantly reduced.
The basic effect is that the assessed value of real estate for inheritance tax purposes is approximately 80% of its market value. This is based on a valuation method based on roadside land prices and property tax assessed values. In other words, if 100 million yen in cash is used to purchase 100 million yen of real estate, this alone can reduce the assessed value for inheritance tax purposes to approximately 80 million yen.
In addition, there is an additional reduction effect in the case of rental real estate. Rental buildings can be reduced by approximately 30% due to the valuation of rental houses, and the site of such buildings, land with attached rental buildings, can be reduced by approximately 21%. Combined, these reductions can reduce the assessed value for inheritance tax purposes by approximately 50% compared to cash.
Use of Special Exception for Small Building Lots
The use of the small building lot exception is particularly important in inheritance tax planning. This exception allows for a substantial reduction of up to a certain area of residential land used by the decedent for residential or business purposes.
In the case of residential land, 80% reduction is allowed for the area up to 330m2. In the case of residential land used for lease, a 50% reduction is allowed for up to 200 m2.
Specific Strategies for Real Estate Investment for High Net Worth Individuals
Real estate investment for high-net-worth individuals requires a strategic approach that differs from that of ordinary investors. While abundant financial resources and high creditworthiness can be utilized to aim for greater investment returns, proper risk management is also essential. Here are some specific strategies we propose to our clients.
Selection Criteria for Investment Properties
Property selection is the most important factor in real estate investment for high-net-worth individuals, as it is the key to success. It is necessary to evaluate not only the simple yield, but also the overall investment value.
Importance of Location
The first and most important factor to consider is location. As the saying goes, "Location is everything in real estate investment." Properties in prime locations can expect to maintain long-term asset value and stable rental demand.
Specifically, it is important to select a location that is within a 10-minute walk from a major station, has access to multiple train lines, and is surrounded by commercial and educational facilities. In particular, the central Tokyo area and major areas in Osaka City are expected to have stable long-term rental demand due to the continuous influx of population.
Building quality and management status
Building structure, age, and management status are also important selection criteria. Properties constructed of reinforced concrete are suitable for long-term investment due to their high durability and long depreciation period.
In addition, selecting a property with an appropriate repair plan and a soundly managed management association will reduce the risk of future large-scale repair costs.
Profitability Analysis
In addition to the surface yield, a detailed analysis of the real yield and internal rate of return (IRR) is necessary. The real profitability is evaluated by taking into account various expenses such as management fees, reserve for repairs, property taxes, and insurance premiums.
Furthermore, a conservative earnings forecast that incorporates the risk of future rent declines and vacancy risks will enable you to make a safe investment decision.
Maximizing the leverage effect
Wealthy individuals have high creditworthiness from financial institutions and can obtain loans on favorable terms. Leveraging this advantage is an important leverage strategy.
Setting the optimal borrowing ratio
Generally, borrowing around 70-80% of the property value will allow you to control risk while achieving a moderate leverage effect. By setting the equity ratio at 20-30%, you can obtain favorable interest rate terms from financial institutions.
Managing interest rate risk
It is important to consider the balance between floating and fixed interest rates and prepare for the risk of rising interest rates. In the current low interest rate environment, you can hedge against the risk of future interest rate rises by borrowing a portion of your loan at a long-term fixed rate.
Early Repayment Strategy
Strategic early repayment once cash flow has stabilized can reduce the total amount of repayment and improve investment efficiency. However, it is important to consider tax implications and determine the optimal timing.
Importance of Risk Management
In real estate investment by high-net-worth individuals, proper risk management is essential in addition to the pursuit of profitability.
Risk Mitigation through Diversified Investments
Diversification of investments into multiple properties, rather than concentrating on a single property, can reduce vacancy and disaster risks. In addition to geographic diversification, diversification by property type (studio, family, office, etc.) is also effective.
Insurance coverage
In addition to fire and earthquake insurance, it is important to cover risks with comprehensive insurance such as rent guarantee insurance and facility liability insurance. Insurance premiums can be recorded as expenses, which has tax advantages.
Periodic Property Valuation
We regularly evaluate the value of our property holdings in response to changes in market conditions and review our portfolio as necessary. One important strategy is to consider selling properties whose profitability has declined.
Key Points in Portfolio Construction
In high-net-worth real estate investment, it is important to build a strategic portfolio rather than purchasing one-off properties.
Step-by-step investment expansion
An effective approach is to start with relatively small properties and expand the size of the investment in stages as you gain experience. This allows you to accumulate real estate investment know-how while limiting risk.
Cash Flow Optimization
It is important to comprehensively manage the cash flow of each property to ensure stable earnings overall. We aim to create a structure that allows the portfolio as a whole to remain in the black even if some properties experience temporary losses.
Consideration of Exit Strategies
Although real estate investment is based on long-term investment, it is also important to have an exit strategy that allows you to sell at the appropriate time in response to changes in the market environment or your personal asset situation. In particular, when considering inheritance, it is necessary to comprehensively consider how to pass on the property to the next generation.
| Risk Factors | Degree of Impact | Countermeasures | Points to note |
| Vacancy risk | High | Location Selection / Management Company Selection | Survey of rental demand |
| Interest rate rise risk | Medium | Fixed interest rate selection/prepayment | Monitoring interest rate trends |
| Disaster risk | Medium | Insurance coverage/seismic resistance confirmation | Hazard map confirmation |
| Liquidity risk | Low | Easy to sell property selection | Marketable location |
| Legal system change risk | Low | Information gathering and expert consultation | Trends in Tax Reform |
Table 5: Real Estate Investment Risks and Measures
Conclusion
We have described in detail the appeal and specific methods of real estate investment strategies for high-net-worth individuals. Real estate investment is more than just a means of asset management; it is an important investment technique that forms the core of a comprehensive wealth strategy.
Reaffirming the reasons why wealthy people choose to invest in real estate
Seven reasons make real estate investment an extremely attractive investment option for high-net-worth individuals: stable disposable income, portfolio diversification, utilization of tax benefits, inheritance protection, leverage effect, relatively low risk of price fluctuation, and inflation protection effect.
In particular, the tax-saving effects include income and inhabitant tax savings through depreciation, the effect of reduced assessed value as an inheritance tax measure, and the use of special exceptions for small residential lots, all of which significantly reduce the tax burden on the wealthy. The higher the annual income, the greater the benefit of this tax-saving effect.
Key Factors for Success
In order to succeed in real estate investment, it is essential to select appropriate properties, maximize the leverage effect, thoroughly manage risk, and build a strategic portfolio. In particular, location selection is of paramount importance and must not be compromised in order to maintain long-term asset value and ensure stable rental demand.
In addition, investment efficiency can be greatly enhanced by taking advantage of high creditworthiness, a unique advantage of wealthy individuals, and by obtaining financing on favorable terms. However, it is important to combine diversification and insurance coverage without neglecting proper risk management.
For Your Next Action
Real estate investment is a highly specialized investment field that requires knowledge of tax and legal issues. To be successful, it is essential to have the support of a trusted professional.
INA&Associates Inc. provides specialized real estate investment consulting services for ultra-high-net-worth clients. We offer optimal investment strategies based on each client's individual asset situation and investment goals.
If you are considering real estate investment, please contact us for a consultation. With our wealth of experience and expertise, we will firmly support your asset building and wealth succession.
Sustainable investment strategies with human capital and trust at the core
INA & Associates, Inc. places "human capital" and "trust" at the core of our management and emphasizes long-term relationships with our clients. We view real estate investment not as a temporary pursuit of profit, but as a means of building sustainable assets, and we help our clients realize prosperity for the future.
Through a fusion of technology and human resources, we aim to create new value not found in the traditional real estate industry, and to build an investment environment in which all parties involved can be happy. We promise to responsibly entrust our high net worth clients with their valuable assets and deliver optimal investment results.
Frequently Asked Questions
Here are answers to some of the questions we frequently receive from our high net worth clients regarding real estate investment.
Q1: What is the minimum investment amount for real estate investment for high net worth individuals?
A1: In general, real estate investments for high-net-worth individuals are considered starting at ¥50 million or more. However, there is no clear standard for the minimum investment amount.
What is important is not the size of the investment, but the appropriate ratio of the investment to the client's total assets. Generally, it is recommended that 20-30% of your total assets be allocated to real estate investments. For example, for a person with total assets of 500 million yen, a real estate investment of 100-150 million yen would be an appropriate size.
Rather than making a large investment from the outset, it is also effective to start with a property worth approximately 30 million yen and gradually increase the size of the investment as you gain experience.
Q2: How much tax savings can I expect?
A2: Tax savings vary greatly depending on your annual income and the size of your investment, but with a properly designed real estate investment, you can expect to save anywhere from several hundred thousand yen to several million yen per year in taxes.
If a person with an annual income of 20 million yen invests in a reinforced concrete property with a building value of 60 million yen, depreciation alone can be recorded as an expense of approximately 1.28 million yen per year. This will result in an annual tax saving of approximately 700,000 yen in income tax and inhabitant tax combined.
However, it should be noted that the tax saving effect is limited to the depreciation period and that transfer tax may be incurred at the time of sale. It is important to have an investment strategy that emphasizes a balance between profitability and tax-saving effects, rather than investing solely for the purpose of tax reduction.
Q3: What should I pay attention to in risk management?
A3: In risk management in real estate investment, special attention should be paid to the following points.
Measures against vacancy riskare most important. Vacancy periods can be minimized by selecting a prime location, setting appropriate rents, and choosing a reliable management company.
The risk of rising interest ratescan be hedged by setting an appropriate borrowing ratio and borrowing a portion of the loan at a fixed interest rate. It is also important to secure funds for early repayment.
For disaster risk, selecting a property with high earthquake resistance, purchasing comprehensive insurance, and checking hazard maps are effective.
For liquidity risk, it is important to select a location and property type that are easy to sell and to invest in properties with high marketability.
Q4: What is the most effective way to prevent inheritance tax?
A4: The most effective inheritance tax measure is to convert cash into real estate for rent.
Specifically, if you purchase a rental condominium with 100 million yen in cash, the inheritance tax assessed value can be reduced to about 50 million yen. This is due to the following valuation reduction effects.
The land portion can be reduced by approximately 21% due to the assessment of land with attached rental buildings, in addition to the roadside land value assessment (approximately 80% of the market value). For the building portion, in addition to the property tax assessment (approx. 70% of market value), a reduction of approx. 30% is applied based on the rental house assessment.
In addition, if the special exception for small-scale residential land can be utilized, a 50% reduction is possible for up to 200m2 of residential land for rent. By combining these measures, the inheritance tax assessed value can be significantly reduced compared to cash.
However, since inheritance tax measures may be affected by tax system revisions, periodic review and consultation with a specialist are essential.
Q5: When is the best time to start investing in real estate?
A5: Although there is no "perfect timing" for real estate investment, the following conditions are considered favorable for starting an investment
The prerequisite is thatyour personal assetsituation is stable. Ideally, you should have sufficient personal funds, a stable income, and enough money for living expenses other than real estate investment.
As for the market environment, the current low level of interest rates makes it easy to take advantage of the leverage effect. However, you should also consider trends in property prices and avoid investing at a time when it is relatively expensive.
Timing is also important to maximizetaxbenefits. By starting investments during periods of high income, one can take full advantage of the tax savings from depreciation.
Most importantly, start investing when you are well informed and prepared. While it is difficult to read market timing perfectly, with the right preparation and strategy, you can increase your chances of success in any market environment.
We will suggest the best timing to start investing based on each client's individual situation. Please feel free to contact us for a consultation.
Daisuke Inazawa
Representative Director of INA&Associates Inc. Based in Osaka, Tokyo, and Kanagawa, he is engaged in real estate sales, leasing, and management. He provides services based on his extensive experience in the real estate industry. Based on the philosophy that “human resources are a company's most important asset,” he places great importance on human resource development. He continues to take on the challenge of creating sustainable corporate value.
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