In recent years, interest in real estate investment has been growing both in Japan and abroad, and according to JLL, real estate investment in Japan in 2024 will reach approximately 5.5 trillion yen, up approximately 63% from the previous year, attracting worldwide attention. The Nissay Research Institute also reports that "domestic real estate transactions in 2024 will increase by 20% year-on-year to the highest amount since the Lehman Shock. While the era of low interest rates continues for savings and deposits, real estate is attracting the attention of investors, including beginners, because of the stable return expected in the form of rental income.
Typical Investment Products and Their Characteristics
Investment products include stocks, bonds, and investment trusts (funds), each of which has different risk/return characteristics. In general, stocks offer high returns in the form of capital gains and dividends from corporate growth, but they are high-risk, high-return investments in which the share price fluctuates greatly depending on corporate performance and economic fluctuations. Bonds, on the other hand, are relatively safe because they lend money to the government or a company, earn interest at a fixed rate until maturity, and the principal is returned upon redemption, but the returns are lower. On the surface, price fluctuations are milder than those of stocks. Mutual funds are products that bundle together multiple assets such as stocks and bonds, and while they allow for easy diversified investment since they can be managed by professionals from a small amount, they also require management fees. Based on the characteristics of each type of investment, it is necessary to select an investment portfolio that matches your risk tolerance.
| Investment Products | Assumed yield (annualized) | Price fluctuation risk | Liquidity | Inflation resistance | Leverage utilization | Approximate initial investment |
|---|---|---|---|---|---|---|
| Equity | 5-8% of total | High | High | △ (e.g., margin trading) | △ (Margin trading, etc.) | From tens of thousands of yen |
| Bonds | 1-3% (e.g., margin trading) | Low | Medium | △ | ×x | From tens of thousands of yen |
| Mutual funds | 3～6% (3～6%) | Medium | High | Negative | ×x | 10,000 yen and up |
| REIT | 4～6 | Medium | High | ○ (CFDs, etc.) | (CFDs, etc.) | Tens of thousands of yen |
| Real estate (cash) | 4～7% (CFDs, etc.) | Low to medium | Low | ◎ (Financial Institution Loan) | ◎ (Financial Institution Loan) | Millions of yen～ |
*Yields are general assumptions and may vary depending on market conditions and products.
Advantages of Real Estate Investment
Stable income (income gain) - Real estate investment is an investment method in which condominiums or apartments are purchased and continuous income (income gain) in the form of "rent" is earned. As long as there are tenants, you will receive rent income every month, and unlike financial instruments, you can expect "income in kind" that is not easily affected by price fluctuations. For example, a property with a high occupancy rate will continue to provide a stable income, which is useful for future asset building as a supplement to salaries and pensions. On the other hand, there is a risk of income interruption if the property becomes vacant, so care must be taken to ensure that the property is located in a high-demand area and that it is managed for occupancy.
Asset Preservation and Inflation Resistance - Because real estate is a real asset, it is said to easily maintain its value even under inflation. Since the value of the property itself is tangible, it is easy to raise rental income when prices rise, which can be expected to protect the real asset value over the long term.
Leverage - Another feature of real estate investment is the ability to invest more than one's own capital by utilizing loans from financial institutions. This is called the leverage effect, which means that even with a small amount of capital on hand, you can purchase a high-value property and obtain a high yield, thereby greatly improving the efficiency of your investment. For example, if you buy a 50 million yen property with 10 million yen of your own capital and obtain an annual yield of 6%, you will earn a larger profit than you originally expected. However, it is important to note that the more leverage you use, the more loan repayments and interest expenses you will incur.
Cautions on Leverage (Negative Leverage)
One of the risks of using leverage is the "reverse (negative) leverage effect," in which the interest burden exceeds the earnings. Specifically, this is when the loan interest rate exceeds the investment yield, which may result in a loss when the loan interest is subtracted from the rental income. For example, when the loan interest rate is 5% and the property's yield is 3%, the interest paid is greater, resulting in a loss. Since interest rates have been on the rise in recent years, it is important to pay attention to interest rate trends when borrowing and simulate the assumed yield and repayment burden well in advance. Vacancies and falling rents can also cause negative leverage, so a financial plan with a sufficient margin is required.
| Item | Positive Leverage | Negative leverage |
| Purchase Price | 50 million yen | 50 million yen |
| Self-financing | 10 million yen | 10 million yen |
| Borrowing interest rate | 1.5% 4.0 | 4.0% (4.0%) |
| Assumed Surface Yield | 6.0% 3.0 | 3.0% Annual rental income |
| Annual rental income | 3 million yen | 1.5 million yen |
| Annual interest payment | 600,000 yen | 1.6 million yen |
| Net income (before tax) | 2.4 million yen | -100,000 yen |
| Yield on equity | 24.0% -1.0 | -1.0 |
Advice for beginners
Real estate investment is not a short-term pursuit, but rather a long-term investment. Since purchasing a property involves various costs such as brokerage fees, taxes, and repair expenses, make an investment plan while checking the income and expenditure over a long span of 10 to 20 years. Location selection and income/expense simulation are especially important for beginners. It is necessary to check with your own eyes the rental demand and future demographics of the area where the property is located, the age of the building, and the surrounding environment, and carefully determine whether the rental income can be expected to be commensurate with the property's price. In addition, basic measures for beginners include preparing initial expenses, securing a reserve fund for vacancy risk, and using a reliable management company.
Attractiveness as a medium- to long-term asset building
As described above, compared to stocks and bonds, real estate investment is characterized by the ease of earning stable rental income (income gain) and maintaining asset value by continuing to hold properties. If leverage is used appropriately, it is possible to invest more than one's own funds, and can be expected to serve as a pension replacement or a pillar of income after retirement. On the other hand, there are risks such as vacancy and negative leverage due to rising interest rates, so careful property selection and income/expense management from a long-term perspective are essential. Beginners can make effective use of real estate as a medium- to long-term asset-building tool by positioning it as part of their investment portfolio, especially while learning the basics.
