Real estate investment has attracted more and more attention in recent years as an effective means of asset building. For wealthy individual investors in particular, real estate investment is the investment method of choice for a variety of purposes , includingasset building,tax-saving measures, and inheritance measures. It has the potential to generate both stable rental income ( income gain) and gains on the sale of properties ( capital gain) due to increases in asset value, and it is also expected to provide resistance to inflation and a risk hedging effect. This article will explain in detail the specific reasons why many people choose to invest in real estate from the following perspectives.
Compared to other investment methods, real estate investment is expected to provide a stable yield in long-term asset building. Compared to high-risk, high-return products such as stock investments and FX, price fluctuations are smaller and real assets are less susceptible to economic conditions, making it possible to steadily increase assets over time. On the other hand, compared to low-risk, low-return methods such as deposits and bonds, yields are higher, and it is an advantageous investment for asset building in that it is effective as a measure against inflation.
In many cases, real estate investment can be started with a loan from a financial institution, and the ability to use leverage (the principle of leverage) is also a major attraction. By utilizing bank loans even with a small amount of personal funds, you can acquire higher-priced real estate and earn investment income. The system of purchasing real estate using loans and paying off the loans with rental income over a long period of time creates a kind of forced savings effect, leading to steady asset building. In fact, holding investment real estate for the long term increases the likelihood of eventual profit, as the monthly rental income can cover even a temporary decline in market prices. By having real estate "work" for you through long-term investment, you can expect continuous asset growth.
Real estate investment is also effective in terms of tax reduction. Under the Japanese tax system, when income from real estate rentals is in the red (expenses exceed income), there is a "profit and loss" system that allows you to offset the deficit against other income. For example, if the depreciation of real estate, interest on loans, etc. are recorded as expenses, and as a result the rental business is in the red, the amount can be deducted from employment income and other income to reduce income taxes. Since tax rates are higher for higher income earners, the benefit of this tax-saving effect is significant, and together with rental income, it leads to an increase in yield on a take-home basis.
Furthermore, the tax-saving effects of real estate investment are not limited to income tax. In some cases, reductions in registration and license tax and real estate acquisition tax are available when purchasing a property, and special measures for fixed asset tax may also be applied while the property is owned. In particular, for newly built properties and residential properties that meet certain requirements, property tax reduction measures may be applied for several years, contributing to cost reductions over the medium to long term. Also, when selling a property in the future, holding it for a long period of time provides preferential real estate transfer income tax rates (tax rates are lower in the long term than in the short term), thereby reducing the tax burden on gains on sales. Through these mechanisms, real estate investment functions as a comprehensive tax-saving measure and helps increase investment returns.
One of the major reasons for the popularity of real estate investment is that it offers a good balance between stable income gains and future capital gains. Profit from rental income from rental properties is called "income gain, " and it is a stable income that can be earned regularly every month while the property is owned. On the other hand, the profit from the sale of a property at a higher price than the purchase price is called a capital gain, which is a one-time profit from real estate transactions. In real estate investment, it is possible to earn income from both income gains and capital gains, and this is what makes real estate investment attractive in a way that other financial products are not.
First, income gains are stable. Rent income from real estate is not easily affected by the economy, and it is rare for rent income to be reduced significantly or to suddenly drop to zero. As mentioned in Section 3, unlike dividends from stocks, it is difficult to imagine a sharp decline in rent, and in the case of a single condominium or apartment, it is unlikely that all tenants will move out at the same time. This stable income gain can be used to stabilize one's life or business by providing a certain amount of monthly cash income to cover loan repayments and maintenance costs.
On the other hand, capital gains can also generate large profits depending on real estate market conditions and the scarcity of properties. Especially in Japan, where there is a strong myth of land, it is not uncommon to be able to sell a property at a higher price than when you acquired it by holding it for a long period of time in a good location. Of course, real estate prices fluctuate depending on the economy and supply-demand balance, but only real estate investment allows for flexible strategies, such as earning income gains and targeting gains on sales at the right time. In fact, many investors take a two-tier approach, aiming for capital gains from the sale of their properties, while at the same time earning income gains through rental operations during the period until the properties are sold. In this way, the ability to pursue returns from both steady income and rising asset values is a major reason why people choose to invest in real estate.
One of the strategies that high-net-worth investors emphasize in their asset management is diversification. By allocating assets to different asset classes, such as stocks, bonds, cash, and real estate, the goal is to compensate for declines in the value of some assets by investing in others, thereby steadily increasing overall assets. In fact, HNWIs with net worth of several hundred million yen rarely concentrate on a single asset class, and real estate is an important part of their portfolios. According to one study, real estate investments account for an average of 14.6% of the asset allocation of the world's ultra-high-net-worth individuals (net worth over 3 billion yen). It is said that Japanese HNWIs tend to invest particularly heavily in real estate, indicating the importance of real estate in asset protection and diversification.
What is noteworthy about the role that real estate plays in asset diversification is its price movement characteristics. As mentioned above, real estate prices do not fluctuate as wildly on a daily basis as the stock market, and are less affected by economic fluctuations. When stocks or currency markets are in a downtrend, real estate prices do not necessarily fall immediately in step with them, but rather, over the long term, they move in their own cycle. Therefore, incorporating real estate, an asset with different price movements, into a stock-centered portfolio reduces overall volatility (fluctuation risk) and makes it easier to obtain stable investment results. In fact, a survey shows that approximately 86% of high-net-worth investors with financial assets of 100 million yen or more diversify their investments across multiple assets, including stocks and bonds, as well as real estate. Thus, real estate is one of the asset diversification methods preferred by high-net-worth individuals, and plays an important role in contributing to portfolio stability and risk diversification.
Real estate is also highly valued as an "inflation-resistant asset" and a "contingency risk hedging instrument. In general, the value of financial assets such as cash and deposits diminishes as inflation (price increases) progresses, but the value of real assets such as real estate does not decline easily even when prices rise. In fact, it has been historically confirmed that when the economy heats up and prices (Consumer Price Index) rise, real estate prices and rents tend to rise accordingly. For example, during past periods of high inflation in Japan and the U.S., the correlation between housing prices and prices remained high, indicating that real estate provided an excellent hedge against inflation. For this reason, many high-net-worth individuals and investors include real assets such as real estate in their portfolios as a way to prepare for inflation risk.
In addition, real estate is a reassuring asset from a risk hedging perspective. Even when the stock market plummets due to corporate performance or world affairs, real estate prices are extremely unlikely to plummet overnight, and daily price fluctuations are mild. For example, even if a major economic shock or corporate scandal is reported, the reaction is not as instantaneous as that of stock prices, and in the case of rental real estate, monthly rental income does not disappear immediately. Rather, real estate is attractive as a "defensive asset" because it continues to generate a certain amount of value and income even during economic downturns. In addition, when land prices and rents rise in tandem with inflation, the value of real estate holdings does not decline in real terms, but can even increase the overall value of the asset. Thus, owning real estate is a kind of risk hedge that protects assets from inflation and mitigates the risk of market fluctuations. From a long-term perspective, many investors recognize that replacing real assets with real assets such as real estate is more effective in preserving assets than continuing to hold large amounts of cash.
Real estate can also be a useful tool in passing on assets to the next generation. In terms of inheritance measures, cash and listed stocks are 100% valued at market value in terms of inheritance valuation, while real estate is valued at lower than the prevailing market value because it is based on roadside land prices and property tax assessment values.
From the standpoint of business owners, real estate can also be used as a business succession strategy. If the valuation of the company's shares or business assets is high, a large inheritance or gift tax burden may be incurred when the shares are transferred to the successor or inherited. Therefore, if a corporation or an individual purchases real estate prior to the business succession and incorporates it into the asset structure, it can be expected to lower the assessed value of the assets as a whole. By replacing cash and deposits with real estate, the value of the corporate owner's shares (net asset valuation) will be reduced, which may result in a lower tax burden at the time of succession. In addition, there is a system called "Special Exception for Small Building Lots, etc." that can be applied if certain requirements are met. This is a preferential system that allows for a 50-80% reduction in the assessed value of land used for business or residential purposes when it is inherited, and is worth considering for wealthy individuals who own many assets. For example, if the land is used as rental real estate in advance, the special exception can be applied to the land at the time of inheritance as residential land used for business loans, etc., and significant tax savings can be achieved.
In this way, real estate is a very effective means of preparing for future inheritance and business succession. By shifting assets to real estate before one's death, one can not only leave them as physical assets to bequeathed to one's family, but also smoothly pass on one's property with a lower assessed value for inheritance tax purposes. In fact, many wealthy people who invest in real estate purchase properties with a view to preserving assets and ensuring a smooth handover to the next generation. Inheritance and succession are fields that require specialized knowledge, but by skillfully incorporating real estate, tax burdens and risks can be controlled, and valuable assets can be passed on to the next generation while being protected.
As described above, real estate investment is chosen for a wide range of reasons, including its effectiveness in asset building, tax-saving merits, dual income and capital gains, asset diversification effects, inflation countermeasures and risk hedging functions, and usefulness as an inheritance and business succession strategy. As described in each section, real estate investment is attractive not only for its ability to generate profits, but also for its ability to function as a comprehensive means of protecting and nurturing assets and passing them on to the next generation. Not only for the ultra-high-net-worth individuals, but also for those looking to build an asset portfolio with an eye on the future, real estate investment is highly significant.
Of course, there are some points to keep in mind when investing in real estate, such as the liquidity of properties, the time and effort required to manage them, and management risks. However, these risks can be adequately controlled by selecting the right properties and getting advice from experts. From a long-term perspective, real estate investment can be a powerful option for solid and diversified asset management. We hope that you will take full advantage of the multifaceted merits of real estate in accordance with the size of your assets and your investment objectives.