In order to make a successful real estate investment, it is very important to choose the right property in the right area. Property prices, rental demand, yields (return on investment), and other characteristics vary greatly depending on the area, and the investment strategy to adopt will also vary. For beginners, it is important to choose the area that best suits your objectives (whether you are aiming for capital gains, focusing on income gains, or holding for the long term). In this article, we will organize the characteristics and advantages/disadvantages of each area, such as central Tokyo, suburbs, Kansai area, regional cities, and redevelopment areas, and explain the investment strategies suitable for each in an easy-to-understand manner. Finally, the support of professional companies is also discussed so that beginners can start real estate investment with peace of mind.
There are several types of target areas for real estate investment. Let's take a look at the market characteristics and merits and demerits of each typical area.
Properties in central Tokyo (e.g., major wards in the city center) are said to be "high-cost but low-risk. The major attraction is that vacancy risk is extremely low due to the continued influx of population and extremely high rental needs. Even slightly older properties can be compensated for by the good location of the property, and stable income can be expected because the rent market itself is higher than in the suburbs. In addition, because demand is high, buyers are easy to find when selling, and it tends to be easy to formulate an exit strategy (to lock in a profit from the sale of the property). Real estate in central Tokyo does not easily decline in asset value, and there is a good possibility of gaining capital gains in the future.
On the other hand, the high initial cost is a major hurdle. The prices of city center properties are extremely high, and naturally the amount of loan debt and personal funds are also large. For example, it is said that the capital requirement for real estate investment is around 20% of the property price, but the amount is much higher for urban properties than for regional properties, which increases the capital burden and risk. In addition, the higher the property price, the lower the yield (rate of return) tends to be. In fact, in some rural areas, surface yields can reach 15%, while in central Tokyo, yields can be as low as 3%. Taxes (property tax and city planning tax) are also high, so the monthly balance tends to be relatively low. Furthermore, since there are many attractive properties in central Tokyo and competition is fierce, you need to devise ways to get people to choose your property (such as differentiating your facilities), but there is still a risk of being buried in the competition.
Advantages (Central Tokyo):.
Very high rental demand and low vacancy risk
High rent levels and stable rental income can be expected.
Property values do not decline easily, and buyers are easy to find when selling (easy to develop an exit strategy).
Depending on the area, there is a possibility of capital gains in the future.
Disadvantages (Central Tokyo): 1.
Property prices are high, and initial investment costs and personal funds are high.
Rental income is relatively low compared to property prices, and yields tend to be low.
Taxes and maintenance fees are also high, making it difficult to increase residual income.
Competition for rental properties is high, so it is necessary to be creative in attracting new tenants.
Suburbs" refers to commuting areas up to about one hour by train from central Tokyo and residential areas in neighboring prefectures (Saitama, Chiba, Kanagawa, etc.). The tendency of suburban properties is described as "low price but high risk. The biggest advantage is still the low property price, which makes it easy to purchase even with a small amount of personal funds. The lower purchase price naturally results in a higher surface yield, making it possible to aim for a higher yield than in the city center. For example, according to a survey by the Ministry of Land, Infrastructure, Transport and Tourism, if the land price level in Tokyo is set at 100, the index for neighboring Saitama Prefecture is approximately 30, while the index for Ibaraki Prefecture is only 8.4, indicating that even in the Tokyo metropolitan area, prices are significantly lower in suburban areas outside of Tokyo. This means that suburban areas outside of Tokyo are much less expensive, and therefore can be purchased with lower capital requirements and, depending on rent, can be expected to yield higher yields. In addition, the supply of rental properties in the suburbs is not as large as in the city center, so there is less competition, and property differentiation (remodeling, adding facilities) is more effective. In terms of financing, it is also pointed out that the lower property price lowers the hurdle for borrowing from financial institutions, making it easier to reduce the amount of personal funds.
However, investing in the suburbs carries the risk of declining rental demand in the future. In areas where the population is concentrated in the city center and outflows from the suburbs, vacancies cannot be filled and rents may have to be lowered. It is said that the balance between supply and demand is easily upset in the suburbs, and a vicious cycle of vacancies (vacancies → deteriorating earnings → reduced investment in maintenance → more vacancies) is likely to occur. In addition, suburban properties tend to be more difficult to sell than urban properties. In some cases, there are fewer buyers, so they cannot sell at the expected price, making it difficult to formulate an exit strategy. In areas where the population is expected to decline in the future, there is a high risk that real estate prices themselves will fall, and you need to be careful about the eventual diminution in asset value (capital loss).
Advantages (Suburbs):.
Property prices are low, making it easy to reduce the amount of personal funds and borrowings.
Surface yields tend to be higher due to lower purchase prices.
There are not as many properties in the suburbs as in the city center, so there is less competition and it is easier to differentiate yourself.
Easy to start real estate investment with relatively small capital (low hurdle for beginners)
Disadvantages (suburbs): 1.
High risk of tapering off of rental demand in some areas (vacancy rates tend to rise)
Difficult to formulate exit strategies (difficult to attract buyers, takes time to sell)
Property and land values may decline in the future.
Compared to urban areas, the location is less attractive, and there are concerns about the stability of long-term earnings.
The Kansai area (Osaka, Hyogo, Kyoto, etc.), Japan's second largest economic zone, is also a popular real estate investment destination. The city of Osaka, in particular, is a large city with a population of approximately 2.7 million, and demand for housing is stable. The Kansai area is characterized by lower property prices and higher yields than the Tokyo metropolitan area. For example, according to a survey by the Japan Real Estate Institute, the yield on one-room investment in the Jonan area of Tokyo is 4.0%, while in Osaka it is higher at 4.6%. Even though rent levels are lower than in Tokyo, higher yields can be achieved because property prices are even lower. In addition, in recent years, Osaka has been planning many redevelopment projects and international events, with promising projects such as the 2025 Osaka-Kansai Expo and the "Umekita Phase 2" large-scale development project in the north side of Osaka Station. Due to these factors, there is a trend toward "investing in the Kansai region rather than the Tokyo metropolitan area, where prices have risen too much. While property prices have soared in the Tokyo metropolitan area, resulting in a marked decline in yields, some companies report that there are many properties in the Kansai region with surface yields in excess of 10%. To obtain a certain amount of cash flow while keeping the initial investment low, properties in the Kansai area are attractive.
One disadvantage of investing in the Kansai region is that the population is beginning to decline in some areas. The population of Osaka Prefecture as a whole is slightly declining, and vacancy risk may be an issue for some properties. The Kansai region includes areas with strong rental demand, such as central Osaka City and Kyoto City, as well as suburbs and areas close to regional cities. If the area is selected incorrectly, the risk of not filling vacancies increases, so it is necessary to assess demand trends even in the Kansai region. Also, some say that the speed of price increases and liquidity (trading activity) are somewhat lower than in Tokyo, due to the lack of inflows of foreign investment money. The number of properties is not as large as in the Tokyo metropolitan area, so a network of professionals can be helpful in finding properties that match your requirements.
Advantages (Kansai area): 1.
Property prices are lower and yields are higher than in the Tokyo metropolitan area.
Osaka and other major cities have large populations and can expect stable rental demand.
Property values are expected to increase due to redevelopment plans and international events (e.g., Osaka Expo, Umekita development).
Significance of building a portfolio outside of the Tokyo metropolitan area from the perspective of regional investment diversification
Disadvantages (Kansai region): 1.
Population decline and vacancy risk in some areas (some areas have weak demand)
Liquidity and room for future price appreciation may be limited due to the lack of foreign investors as in the Tokyo metropolitan area.
It may take time to find properties that match the desired conditions (property information can be obtained with the help of specialized companies).
For investors who are not familiar with the local area, knowledge of market conventions and popular areas is necessary.
Major regional cities outside the Tokyo and Osaka areas (e.g., Nagoya, Fukuoka, Sapporo, Sendai, Hiroshima, etc.) are areas where real estate prices are generally kept low and it is easy to target high-yielding properties. The lower the property price, the higher the yield as a percentage of rent income, and it is not unusual to see projects with surface yields of 10% or more. Even if you have little capital on hand, you can start with a reasonably priced property, so the hurdle to investing is low, which is the appeal of regional properties. In addition, since the supply of land and properties is limited in rural areas, there is less competition for properties in good locations, which makes it easier to set rents freely. If the property meets the needs of the area, it is easy to secure a high occupancy rate, and if there are few similar properties in the vicinity, there is room for the owner to take the initiative in setting rents.
However, there are significant caveats to investing in local cities. The biggest disadvantage is the instability of rental demand. The population is smaller than in urban areas, and in many areas the population is expected to decline over the long term due to the aging of the population and the exodus of younger people. For example, if environmental changes occur, such as companies withdrawing or universities relocating, there is a risk that demand will suddenly decline and vacancies will not be filled. Also, if demand slumps, there is an increased risk of not being able to find a buyer to sell the property , making exit strategies difficult. The situation where real estate is purchased but not sold should be noted as a risk of not being able to recover funds. In addition, financial institutions in rural areas are more cautious in their lending stance, and depending on the property, it may be difficult to obtain a loan. Another risk factor is that the equity ratio tends to be high.
However, the situation differs between growing cities and declining regions. In recent years, there are regional cities such as Fukuoka and Sapporo where the population is increasing and demand is strong, and there are also cities with potential for tourism and as business hubs. Successful investors in local properties carefully study the demographics and competition in the area, and select areas where demand can be expected. For example, it is important to choose a location that is likely to attract people in the long term, such as "near a train station in a prefectural capital," "near a university campus," or "in a central area that is scheduled for redevelopment. In addition, to prevent vacancies, the property must be operated with sufficient capacity to flexibly respond to changes in rent settings and the installation of popular facilities.
Advantages (regional cities):.
Property prices are very low, so you can start investing from a small amount.
Ratio of rental income to purchase price is high, making it easy to aim for high yields.
If there is not an oversupply, there is little competition, and there is a high degree of freedom in setting rents.
In some growing cities, there are opportunities for land price increases and demand growth
Disadvantages (regional cities): 1.
High risk of stagnant or declining rental demand (prolonged vacancy due to population decline or companies leaving the area)
High risk of not being able to find a buyer and exit strategies may be difficult
Difficulty in obtaining financing, and reliance on own funds (difficult to leverage)
Cooperation with local real estate agencies is essential for property management and customer acquisition, which increases the time and effort required for operations in remote areas
Redevelopment areas are areas where large-scale development projects are underway due to urban planning or other reasons. When new commercial facilities, offices, condominiums, etc. are built as a result of urban redevelopment, the convenience and image of the surrounding area is renewed, and real estate values are likely to increase. For example, Tokyo's recent "once in a century" scale redevelopment projects include eight large-scale buildings planned for the Shibuya Station area and a large-scale complex in the Toranomon/Azabudai area (opening of Azabudai Hills). These areas are expected to create new jobs and change the flow of people, which will boost rental demand and raise land prices and rents. If redevelopment brings greater transportation and commercial convenience to an area, it can be expected that real estate in that area will grow over the long term, making it an area of interest for investors. In fact, when redevelopment projects are announced, land prices, including those in surrounding areas, tend to rise ahead of other areas, and capital gains can be targeted if the property is acquired at an early stage. In addition , redevelopment makes the entire city new and convenient, making it suitable for a strategy of holding properties for a long time to generate stable income. Another advantage is that there may be more buyers (next investors) in the future, increasing opportunities to sell the property.
However, there are caveats and risks associated with investing in redevelopment areas. First, "just because there is redevelopment does not necessarily mean that rents and prices will increase. The effects will vary depending on the scale and content of the project, and there may be cases where the attractiveness of the area does not improve as much as expected. Especially in the case of suburban redevelopment projects (e.g., construction of a large commercial facility in the suburbs), if the influx of people is limited, there may be no significant change in real estate prices in the surrounding area. Also, beware of price spikes caused by excessive expectations and their repercussions. When a redevelopment plan is announced, investors rush to the area and property prices tend to be overpriced, but there is a risk of a price adjustment (decline) if it turns out that the property does not generate as much revenue as expected after completion. Furthermore, redevelopment takes a long time, so rents may not rise as much as expected during the period until completion. During construction, the surrounding environment may become temporarily inconvenient, and it is necessary to allow for vacancy risk and income/expense planning during this period. Finally, there is no uncertainty that the plan itself may be changed or cancelled. When investing in anticipation of the benefits of redevelopment, it is important to consider these risks.
Benefits (redevelopment areas):.
Real estate values can be expected to increase due to infrastructure improvement and urban renewal (future capital gains expected).
Potential for increased rental demand due to improved commercial facilities and transportation network
Tendency for properties to increase in asset value and become easier to sell due to the improvement of the city's brand power (increasing investors' attention)
Attractive environment for long-term ownership (improved livability enables stable management)
Disadvantages (redevelopment areas):.
Prices and rents do not always rise as expected (effects of redevelopment are case by case)
Risk of property prices becoming overpriced due to redevelopment information ahead of time (investment yield may decrease)
Time required to complete the project, so it takes time to recover the investment (there is also a risk of changes to the plan in the middle of the project)
When a large number of new properties are supplied, competition will increase, and vacancies may temporarily become more likely.
In real estate investment, the appropriate property type and area differ depending on what type of income you value (profit from sale or rental income, short-term or long-term). There are three main strategies: capital gains, income gains, and stable long-term holdings, and we will provide an overview of each and the areas suitable for each.
Capital gains are gains on the sale of purchased assets. In real estate investment, the strategy of aiming for capital gains is to aim for profit by "buying properties at a low price and selling them at a high price. For example, a "short-term sale" (so-called "flip") is a type of capital gain strategy in which properties are found and purchased at a discount to the market price, and then renovated to add value and resold. Another method is to make an upfront investment in an area scheduled for redevelopment or expected to develop in the future, and then sell the property for a profit when land prices rise over the medium to long term. When targeting capital gains, property selection and timing are extremely important. It requires the ability to gather information on areas that are likely to increase in value and to analyze market trends.
Areas suited for this strategy are central Tokyo, central areas of major cities, and areas with active redevelopment, where future property values can be expected to increase. Since land in central Tokyo is scarce and likely to maintain or increase in value over the long term, there is a possibility of profitable sales in a few years to a decade. Outside of Tokyo, cities with a continuing population influx and areas with large projects in the pipeline are also good targets. The aforementioned central area of Osaka City and Fukuoka City, for example, are expected to continue to see strong land prices in the future, and are attracting attention as investment destinations where capital gains can be expected. Redevelopment areas are ideal for capital gains, but as mentioned above, they are also dependent on planning, so excessive speculation is not advised. If you misjudge demand trends, there is a danger that prices will fall even after you have purchased at a high price.
Investing for capital gains has a high-risk, high-return aspect. If you do well, you can earn a large profit in a short period of time, but if market conditions deteriorate, you may incur a large loss. In particular, since real estate is illiquid, you need to be aware of the risk of not being able to find a buyer when you want to sell. For beginners pursuing capital gains, it is safer to invest in cities where growth can be expected over the medium to long term, rather than forcing short-term transactions. For example, you can buy a condominium in a popular area within the 23 wards of Tokyo and sell it 5 to 10 years later when the price rises. If you also receive rental income between the time of purchase and the time of sale, you can enjoy income gain at the same time. It is important for risk management not to neglect rental income even for the purpose of capital gains. If the property is continuously vacant, there is a risk of getting stuck in loan repayment, so the key to success is to choose a property that can be stably managed until it is sold.
Summary of points (capital gains): A strategy that focuses on post-purchase price appreciation. Areas with future potential such as Tokyo, central Osaka, and redevelopment areas are suitable for this strategy. On the other hand, it is also subject to economic and market trends and carries a high level of risk, so beginners should not jump into the market easily and should select properties carefully.
Income gain refers to the regular income that is generated during the ownership of an asset. In the case of real estate, monthly rental income is income gain. In income-gain-oriented strategies, the main objective is to secure stable rental income through rental management. In other words, the basic policy is to "continue to rent the property over a long period of time and steadily accumulate income. In an income-gain type investment, the stability of income and expenditures during the holding period is emphasized, including the property's yield, vacancy rate, and maintenance costs. If the monthly cash flow is positive and the occupancy rate remains high over a long period of time, the investor can earn sufficient profit even if there is no profit from the sale of the property.
Areas suitable for this strategy are those where high-yielding properties are easy to find, namely the aforementioned suburban areas and regional cities. High income gains can be expected in areas where there is stable rental demand for low property prices. Specifically, residential areas in government-designated cities and prefectural capitals, areas around universities and industrial parks, and apartments in suburban areas a short distance from the city center are a treasure trove of yield properties. For example, purchasing a used apartment in a regional city and managing it with a surface yield of around 10% will easily generate a comfortable monthly income and expenditure. Older properties (older properties) are also inexpensive, and therefore tend to generate high yields, making them popular with investors who are looking for income gains. However, older properties tend to have higher repair costs, so it is necessary to determine the balance between rental income and maintenance costs.
Investments that focus on income gains are generally said to be low-risk, low-return investments. While it is difficult to generate flashy profits, it is characterized by the fact that it is easy to obtain stable income over the long term. Because it is not easily affected by fluctuations in market prices, beginners may feel secure in the fact that "monthly rent accumulates steadily," just like dividends from stocks. However, one thing to keep in mind is the risk of vacancy and falling rents. If you buy a property with the expectation of an income gain, but no tenants come to rent it, your income will be zero. In particular, if you seek too high a yield and choose a property with poor demand, you will end up with nothing. Some experts say that beginners should first focus on "properties that provide stable income gains. Therefore, it is important to choose an area with solid rental demand even for local properties, and even for suburban properties, it is important to check the surrounding competition and future population trends. Even if vacancies occur, make a plan to deal with them by revising rent settings or remodeling, and select a property that can withstand long-term management.
Summary of key points (focus on income gain): Focus on steady profit from monthly rental income. Tend to select high-yield properties in suburban and regional areas. Although low-risk and stable income can be targeted, if you choose the wrong property, you may suffer from vacancies, so it is essential to assess demand trends and select solid properties.
Long-term stable holding is a strategy of holding real estate for a long period of time and seeking to maintain and increase rental income and asset value in the future. While similar in some respects to strategies that emphasize income gains, the long-term holding strategy is characterized by a strong focus on " managing assets as if they were growing, rather than rushing to sell them for profit. This strategy is often chosen to generate monthly rental income in lieu of a pension, or to pass on assets to one's children or grandchildren.
If long-term ownership is the premise, it is important to choose an area where stable demand can be expected over the long term. Specifically, metropolitan areas that are less susceptible to population decline are a safe choice. Areas such as central Tokyo, its suburbs, and the centers of government-designated cities are likely to maintain a relatively high population, and rental needs are likely to remain strong. Properties in such areas may have lower yields, but they are suitable for long-term investment as vacancy risks are easily minimized. In fact, some people who are afraid of vacancies say that investing in central Tokyo is suitable for those who are afraid of vacancies. Also, by choosing a newer property or a quality property with a strong brand name, it is easier to maintain a stable income without becoming obsolete over time. For long-term holdings, it is necessary to make efforts to maintain asset value by systematically performing maintenance and renovation of the property.
In the case of long-term stable management, there is no need to rush for capital gains, which provides a sense of security that is less susceptible to current conditions. Even if the real estate market temporarily deteriorates, you can continue to hold on to your property and wait for the next boom. However, if you hold properties with low yields for a long period of time, the return on invested capital may be small and you may lose opportunities. Therefore, there are two types of long-term holders: those who buy properties in the suburbs with high yields and turn them around over a long period of time, and those who hold properties in prime locations in the city center steadily. In any case, a reasonable financial plan is essential for long-term holdings. With an eye on long-term loan repayment, make sure you have sufficient cash on hand, and design a cash flow plan that can withstand rising interest rates and periods of vacancy.
Summary of key points (long-term stable holding): A strategy to invest in solid areas such as metropolitan areas with the aim of long-term asset growth. The emphasis is on stable income and maintaining asset value, rather than being influenced by short-term gains. It is a promising option for beginners to start with peace of mind. In this case, it is recommended to choose properties in central Tokyo or popular areas with low vacancy risk.
Even after gaining a deeper understanding of area selection and investment strategies, there are still various concerns that come with the stage of actually purchasing a property. Therefore, real estate investment beginners can take the first step with more peace of mind by utilizing the support of a reliable real estate company. Experts are well versed in market trends and the future potential of an area, and they can suggest areas and properties that meet the investor's objectives from a neutral standpoint.
INA, for example, provides services as a general real estate company that operates real estate sales and rental management businesses in a wide range of areas from the Tokyo metropolitan area (Tokyo, Kanagawa, Chiba, Saitama) to the Kansai region (Osaka, Kyoto). INA has a diverse track record, ranging from luxury condominiums to single-family homes and income-producing properties, and its strength lies in its customer-first, dedicated, and meticulous support. One person in charge handles everything from the introduction of investment properties to contracts, financing consultation, and post-purchase management, allowing even beginners to proceed with smooth communication. In addition, our AI-based property proposal system enables us to promptly present the best candidates, including not only publicly available information but also privately held properties. INA also has a department specializing in contracts and rights, and it is also reassuring to know that the safety of transactions is ensured through professional property inspections and contract checks.
INA also offers post-purchase rental management services ("INAA Rental Management"), providing total support from the purchase of the property to its operation. This reduces the anxiety that novice real estate investors often face in dealing with tenants and dealing with vacancies. In addition, we also offer a service that makes loan inquiries to multiple financial institutions on your behalf, and can assist you in finding the most suitable loan. In this way, by choosing a company that provides one-stop support from pre-purchase to post-purchase as a partner, even beginners will be able to safely advance their investment while steadily deepening their knowledge.
Conclusion: Choosing a real estate investment area is a difficult decision for beginners, but if you compare the characteristics of each area with your investment objectives as described in this article, you will naturally find your direction. Central Tokyo vs. suburbs vs. Kansai vs. rural areas vs. redevelopment - each has its own merits and demerits, and each is compatible with a different investment strategy. First of all, you should select an area after deciding on the axis of your investment strategy, whether to attack the market with a high yield or to protect it with an emphasis on stability. However, since the market is constantly changing and expertise is required, consulting with a trusted real estate professional when in doubt is a shortcut to success. If you act based on correct information and strategies with the help of professionals, even beginners will be able to start real estate investment with peace of mind. Please make sure you are well prepared and steadily realize your ideal real estate investment step by step.