The success or failure of real estate investment is said to be determined almost entirely by “property selection.” In fact, it is no exaggeration to say that property selection holds the key to the success of real estate investment, and some even go so far as to claim that 80% of real estate investment is decided by property selection. For beginners, the most important thing is to choose the right property, and if you make the right choice, the likelihood of major failure is low. However, if you make a mistake in property selection, the risk of significant losses increases. Real estate is a high-value asset that cannot be easily replaced once purchased, so it is important to select carefully.
Furthermore, the real estate market in the Tokyo metropolitan area is currently undergoing a turning point after years of upward trends. The average annual price of used condominiums in the Tokyo metropolitan area was 47.47 million yen in 2024, a 1.1% decrease from the previous year. This is the first decline in 11 years since 2013. On the other hand, the price of used condominiums in the 23 wards of Tokyo increased by 9.4% from the previous year, and there is a clear difference between the city center and the wider metropolitan area. As such, there are differences in market conditions depending on the area, with prices remaining high in the city center and entering a period of adjustment in the suburbs. When selecting a property, it is necessary to consider the characteristics of the area and market trends, and careful selection is required now more than ever as the market environment changes.
The following are examples of common mistakes made by beginners in real estate investment when selecting properties.
In addition to the above, common mistakes include “purchasing without thoroughly researching the property” and “starting without consulting family members.” What is crucial is to make investment decisions independently and create a realistic plan that accounts for worst-case scenarios.
Let's now explain the specific steps for beginners to select properties for real estate investment without making mistakes, in order. The three key points are “① Location Analysis,” “② Yield and Cash Flow Calculations,” and “③ Management and Exit Strategy.” Let's examine each one in turn.
In real estate investment, location is the most important factor. Properties located in urban centers tend to have high rental demand and low vacancy risks. On the other hand, properties in suburban areas may be affordable but have weaker rental demand and higher vacancy risks, so careful consideration is necessary. Even within the Tokyo metropolitan area, areas such as the Tokyo city center and major station areas continue to see population inflows and strong rental demand, while suburban areas and regions with poor convenience face risks of population decline and rising vacancy rates. Properties within walking distance of a train station (generally within 10 minutes) are popular with tenants and tend to have shorter vacancy periods, so beginners should first target areas near stations with high demand. For example, areas near universities, stations with good access to office districts, and areas undergoing redevelopment are likely to have stable rental demand.
When analyzing location, it is important to research the population trends and rental needs of the area. Consider whether the population is increasing, if there are universities or companies nearby that attract target demographics such as singles or families, and whether the property's features (layout, amenities, size, etc.) align with the needs of potential tenants. For example, areas with many singles may be suitable for one-room or 1K-type units, while areas with many families may prefer 2LDK or larger floor plans. Additionally, it is essential to check whether the expected rent is in line with the market rate for similar properties in the surrounding area. Setting the rent too high compared to the market rate may make it difficult to secure tenants, while setting it too low may result in missed revenue opportunities.
For beginners, a typical property type is a used condominium unit (a single unit within a condominium building). Condominium unit investments can be started with a small amount of capital and are relatively easy to manage, making them popular as an entry point for those new to real estate investment. Among these, used one-room condominiums are particularly suitable for beginners because they are cheaper than new constructions and do not have the “new construction premium,” making it easier to achieve a decent return on investment. While the buildings are older, their prices reflect the depreciation of the structure. However, if the property is in a prime location, the value of the land and location remains high, even as the building ages, making it less prone to significant declines in asset value. In fact, some used apartments in prime locations, such as those near stations, maintain high asset values even after 20 to 30 years. In the Tokyo metropolitan area, the used condominium market has seen continuous price increases in recent years, with both new and used properties showing an upward trend (and being less prone to significant price declines), according to survey reports. By selecting such properties, you can maintain rental demand and asset value over time, making stable long-term management more achievable.
After narrowing down the location of the property, the next step is to analyze profitability. Specifically, use “yield” and “cash flow simulation” to evaluate whether the property is worth investing in from a numerical perspective.
Yield is the ratio indicating how much annual rental income (profit) can be obtained relative to the property price. The gross yield (surface yield) displayed is a simple indicator calculated as annual rental income divided by the property price, but it does not account for expenses such as management fees, repair reserves, or fixed asset taxes. Therefore, when making investment decisions, it is essential to focus on the net yield, which accounts for these expenses. When reviewing property advertisements, it is important to calculate the net yield after deducting expenses on your own, rather than relying solely on the gross yield. If the proposed simulation does not include expenses such as taxes, management fees, or maintenance costs, it is crucial to request a cash flow simulation that incorporates “taxes,” “maintenance costs,” and “management fees.”
What is a general benchmark for the yield of investment properties in the Tokyo metropolitan area? Generally, the surface yield for one-bedroom apartments in central Tokyo is around 4%. According to a survey by the Japan Real Estate Institute (October 2022), the average yield for one-bedroom investments was approximately 3.9% in the Tokyo Minami area, 4.1% in the Tokyo Higashi area, and 4.8% in Saitama and Chiba. The average yield for one-bedroom properties in major cities is generally around 4–5%, with yields increasing to over 5% in more rural areas. This reflects the fact that while property prices are lower in rural areas, leading to higher yields, there is also a higher risk of vacancies. Therefore, the structure is such that properties in urban areas have lower yields but are more stable, while properties in rural areas have higher yields but also higher risks. Beginners should not blindly pursue “high yields” but rather focus on balancing yields and risks. Properties advertising extremely high yields often have some underlying issues, such as being located in areas with low demand, so caution is advised.
After confirming the yield, verify the realistic profitability through an actual cash flow simulation. Calculate the net cash flow by subtracting expenses such as loan repayments, management fees, maintenance reserves, rental management fees, property taxes, and fire insurance premiums from the monthly rental income. It is important to factor in the possibility of vacancy periods. Do not assume full occupancy at all times. Instead, anticipate the possibility of a few weeks to one month of vacancy per year and estimate rental income conservatively. For example, consider 95% of annual rental income as actual operating income to incorporate a safety margin. Additionally, keep interest rate risk in mind. If the loan has a variable interest rate, calculate the increased repayment amounts in the event of future interest rate hikes for peace of mind.
After conducting the simulation, confirm that the net cash flow after loan repayments is positive (i.e., the cash flow is in the black). If the simulation shows that monthly outlays are necessary, the investment may result in increasing losses over the long term. This is particularly true for newly constructed one-room apartments, where outlays (deficits) are assumed from the outset, as future rent declines or interest rate hikes could further worsen the financial outlook. For beginners, it is preferable to choose properties where the income and expenses break even or are positive from the start, and to establish a budget plan with sufficient margin to sustain long-term ownership.
Finally, confirm the property's management system and future exit strategy. Real estate investment is not a one-time purchase; it requires long-term management and operation. Properties that are not properly managed will see their asset value and profitability decline rapidly. Additionally, there is a possibility that you may eventually sell the property to realize profits or restructure your assets, so it is important to consider the ease of sale and future value of the property before purchasing.
First, regarding the property management system, in the case of condominium unit investments, we check the overall maintenance and management status of the property. Specifically, we verify whether the homeowners' association is functioning properly, whether major repairs are being carried out as planned, and whether the repair reserve fund has sufficient funds. In Japan, there is a saying that “you buy the management of a condominium,” highlighting the importance of proper management. Regular repairs and appropriate maintenance are key to maintaining asset value. Condominiums where the homeowners' association and management company collaborate to maintain the building in good condition tend to maintain a comfortable living environment over time, resulting in higher evaluations in the used market. On the other hand, condominiums with poor management and insufficient repair reserve funds may face difficulties in implementing major repairs in the future, potentially leading to asset value depreciation due to building deterioration. Be sure to obtain important matter investigation reports and verify the management status before purchasing.
It is also important to consider the management of rental operations after purchasing the property. For properties located far away or for salaried investors, it is common to entrust rental management to a reliable management company. By outsourcing management to a company, they will handle tenant recruitment, contract procedures, rent collection, complaint handling, and move-out procedures, allowing you to manage the property efficiently even if you have a full-time job. Management fees typically amount to around 5% of the rent, but this cost is essential to reduce vacancy risks and ensure long-term stable operations. It is important to choose a local real estate company with strong tenant recruitment capabilities or a management company with a proven track record.
Next, confirm your exit strategy (sale plan). Consider your long-term goals, such as how long you plan to hold the property, whether you intend to sell it in the future to realize profits, or continue holding it for long-term rental income. For beginners, the strategy of holding the property long-term and generating rental income is common, but it is important to keep in mind whether the property can be sold in the market when the time comes. If you are considering selling in the future, factors such as whether the area has high liquidity (whether buyers are likely to be found) and whether potential buyers can be expected when the property ages further should be considered. In major areas of the Tokyo metropolitan region, properties near stations tend to have high demand even when used, making them easier to sell at appropriate prices. In fact, in the used condominium market in Tokyo's 23 wards, there are cases where newly built properties are being traded at prices comparable to when they were first constructed, indicating the strength of demand in central Tokyo. Factors such as the long-term appeal of the location, the structural safety of the building, and whether it meets the new seismic standards all serve as underpinnings for asset value. Additionally, if there are plans for new railway lines or large-scale redevelopment in the area, an increase in land prices in the surrounding area can also be expected.
Furthermore, for single-family homes or entire apartment buildings, exit strategies become even more important. As the building ages, options such as demolishing and selling the land, or rebuilding, may arise. For older wooden apartment buildings, many cases ultimately result in sale based on land value (land price), so it is advisable to understand the proportion of land value at the time of purchase. Generally, properties with a higher land value ratio are considered more likely to maintain their asset value. On the other hand, properties without land ownership rights, such as leasehold properties, or properties that cannot be rebuilt are extremely limited in terms of exit options, so beginners should avoid them.
In summary, the three key factors for maintaining and enhancing asset value are “location,” “building,” and “management.” A good location ensures long-term demand, a solid building structure ensures a long physical lifespan, and proper management ensures comfort and market value over time. Properties that meet all three criteria become increasingly rare over time and may even see an increase in asset value. Beginners should aim for properties that will remain desirable in the future, focusing on long-term perspectives rather than short-term returns.
Finally, we summarize the key points beginners should check when selecting properties in a checklist format. Reviewing the following items before purchasing a property can help prevent major oversights and mistakes.
By addressing these checkpoints one by one, even beginners can avoid major mistakes and start real estate investing on a solid foundation. Real estate investing is a long-term asset management strategy. Through careful property selection and thorough preparation, you can build a reliable asset that generates stable returns for years to come.