[Archive Edition] A Complete Guide to Getting Started in Real Estate Investment for Beginners | How to Avoid Failure

Real estate investment is a prime example of a middle-risk, middle-return investment, making it popular among beginners aiming to build future assets. However, failing to prepare adequately at the outset can lead to irreparable losses. This article provides a systematic explanation of the specific steps beginners can take to achieve success in the shortest possible time, along with key points to avoid failure. By the end of this article, you should have a clear understanding of where to start, what to watch out for, and who to consult.

Real estate investment can seem daunting for beginners. However, with the right knowledge, preparation, and steps, you can start failure-proof real estate investment. In this article, we will systematically explain the basics, specific steps, and points to keep in mind for beginners, focusing on the theme of “how to start real estate investment.” We will provide a roadmap for beginners to achieve failure-proof real estate investment, including funding plans, key points for selecting properties, and risk management methods. Please refer to this article and take the first step toward starting your real estate investment journey.

1. Basic Knowledge of Real Estate Investment: Mechanisms, Advantages, Disadvantages, and Profit Structure

What is real estate investment? First, let's understand the basic mechanisms. Real estate investment is an investment method where you purchase real estate such as apartments, houses, or commercial properties not for personal use but to generate income, and earn profits through rental income or capital gains. In many cases, a bank loan or other financing is used to purchase the property, and after acquisition, property management is outsourced to a management company to collect rent from tenants. The monthly rent paid by tenants is used to repay the loan, while the property is held as an asset for the long term, allowing for potential future capital gains from sale. In this way, the returns from real estate investment are primarily divided into income gains (rental income earned while holding the property) and capital gains (profits realized upon sale).

Structure and indicators of returns: In real estate investment, the “yield” is a commonly used indicator to measure profitability. Yield refers to the percentage of annual rental income relative to the property price. The simple calculation of the yield is called the “surface yield,” but in practice, it is important to focus on the “net yield,” which accounts for various expenses such as management fees and taxes. Additionally, it is necessary to consider the balance between income gains (rental income) and capital gains (profit from sale). This is because the strategy varies depending on the real estate market and the type of property, with some focusing on rental income and others on future capital gains.

Advantages of Real Estate Investment

Real estate investment offers several advantages that other asset management strategies do not.

• Stable monthly income: Once rental operations are established, you can secure a stable source of income in the form of monthly rent. If rent income exceeds loan repayment amounts, you will have positive cash flow remaining, and by securing long-term tenants, you can maintain a steady cash flow. This serves as an additional income source separate from your primary job, contributing to household stability and future asset accumulation.
• Serves as a substitute for future pensions and asset preservation: Monthly rental income can serve as a means to supplement living expenses that may be insufficient with public pensions alone in the future. Additionally, owning real estate as a tangible asset provides a hedge against inflation (asset preservation).
• Serves as an alternative to life insurance: By enrolling in group credit life insurance (GCLI) at the time of purchase, if the investor passes away during the loan repayment period, the remaining debt will be paid off by the insurance, and the property will remain as an asset for the family. This serves as a substitute for life insurance benefits and can be used to support the family's living expenses.
• Inheritance tax planning: In some cases, holding assets in the form of real estate rather than cash can result in a lower inheritance tax appraisal value. Since the appraisal value of real estate is generally lower than that of cash, converting assets into real estate may help reduce inheritance tax liabilities.
• High leverage effect: Another advantage is that you can make large investments with a small amount of your own funds by utilizing loans. You can purchase and manage properties worth several times your own funds, enabling you to aim for large returns with a small initial investment through the leverage effect. For example, even with 5 million yen in cash, you can acquire real estate worth tens of millions of yen by combining loans, thereby improving asset management efficiency.

Disadvantages and risks of real estate investment

On the other hand, real estate investment also has disadvantages and risks that require careful consideration. Let's list the main ones.

• High initial and ongoing costs: In addition to the property price, purchasing a property involves significant initial costs such as real estate acquisition tax, registration fees, and brokerage commissions. After purchase, ongoing fixed costs and operational expenses such as property taxes, maintenance fees, and management costs continue to accrue. Failing to account for these expenses can result in lower-than-expected profits, so thorough financial planning and cost management are essential.
• Vacancy risk: If there are no tenants, rental income will be zero. It is not always possible to maintain full occupancy, and there is an unavoidable risk of vacancies, such as the period between tenants moving out and new tenants moving in, or a decline in demand due to economic or regional factors. Prolonged vacancies can lead to operating losses, so it is essential to create attractive properties and conduct ongoing recruitment activities.
• Tenant issues and default risk: The risk of tenants defaulting on rent payments must also be considered. If tenants fail to pay rent, the owner is responsible for loan repayments and management fees. Additionally, under Japan's Leasehold and Tenancy Act, tenants' rights are strongly protected, and landlords cannot evict tenants without valid reasons even after the lease expires. Even in cases of non-payment or disruptive behavior, legal procedures may be required to evict tenants, which can be time-consuming and labor-intensive.
• Interest rate fluctuation risk: If the loan interest rate is variable, there is a risk that monthly repayments will increase due to future interest rate hikes. Even though interest rates are currently low, future interest rate trends are unpredictable, so failing to maintain sufficient financial flexibility could disrupt repayment plans. Consider options such as fixed-rate loans or early repayment to reduce the outstanding balance.
• Risk of asset value decline: The market value of real estate and rental rates fluctuate depending on the economy and local supply and demand. There is a possibility that the property price may decline from the purchase price, or that the rental rate may need to be lowered due to an increase in competing properties in the surrounding area. It is also inevitable that the value of the property may decrease over time due to aging of the building. Real estate also has the disadvantage of low liquidity, as it cannot be easily converted into cash like stocks, and there is a risk that it may not be sold at the desired price when you wish to sell it.

It is important to properly understand the advantages and disadvantages and take precautions against risks. While we will discuss risks in more detail in the “Taxes, Laws, and Risk Management” section and the “Failure Patterns” section below, keep in mind that real estate investment is based on a balance between risk and return.

2. Mindset and necessary preparations before starting an investment (funding, goal setting, knowledge acquisition)

To succeed in real estate investment, it is essential to make careful preparations and adopt the right mindset before you start. Visiting a real estate company without a plan or impulsively purchasing a property that seems promising can lead to unexpected pitfalls. Here, we will explain the mindset and specific preparations that beginners should make before starting real estate investment.

Acquiring Knowledge and Gathering Information

“Is studying necessary for real estate investment?” The answer is YES. This applies not only to real estate investment but to all types of investment. Starting without sufficient knowledge is extremely risky. First, make sure to thoroughly study the basic terminology and mechanisms related to real estate investment. You can start by gathering information online or reading introductory books. Reading books helps organize information in your mind and develop your own way of thinking.

For more advanced learning, attending real estate investment seminars is also effective. Experts and experienced investors serve as instructors, sharing practical know-how, which helps connect theoretical knowledge to real-world application. However, there are also unscrupulous seminars targeting beginners, so it is important to verify the instructor's track record and the reputation of the seminar organizer in advance. Some real estate companies offer free materials or online seminars, so it is advisable to learn from multiple sources and compare options.

*Key point: Make sure you thoroughly understand basic real estate investment terms (such as yield, loans, and taxes). If you proceed without fully understanding these terms, you may end up losing a significant amount of money or being scammed. It is essential to ask experts or consult reliable sources for clarification and avoid leaving any ambiguities unresolved.

Clarify your investment objectives and goals

Before starting real estate investment, clearly define your purpose and goals by asking yourself, “Why do I want to invest in real estate?” Motives vary from person to person. For example, “I want a stable side income with low risk,” “I want to supplement my future pension,” or “I want to convert assets into real estate as a tax strategy for inheritance.” Depending on your purpose, the appropriate investment methods and property types will vary. Some may simply want to “experience real estate investment and learn about it.” Regardless of your purpose, it is essential to take the time to clarify your objectives and goals (how much profit you aim to achieve) in order to choose an investment style that aligns with your desired outcomes.

Once your goals are set, it becomes clear what type of property to invest in and how much capital is required to achieve the desired returns. For example, if your goal is to generate a monthly side income of a certain amount, you can work backward to determine the approximate property price and required return rate. Once you have established the purchase price of the property and the target income, the appropriate property type will naturally narrow down. The type of property to choose (a single apartment unit or an entire apartment building), the location (urban or suburban), and the funding plan (balance between equity and financing) will also vary depending on your goals.

Mental preparation: During the process of setting your goals, it is also important to solidify your commitment to treating real estate investment as a business. Real estate investment is not a magic formula for easy profits; it is a business, even if it is small. As a property owner generating rental income, you have responsibilities as a business owner. You will need to learn the know-how of property management and make decisions based on numbers with a cool head. Especially if you have a family, it is important to have their cooperation and consent. Since investment involves significant borrowing and risk, it is important to thoroughly explain the situation to partners and family members and obtain their understanding. It is essential to discuss these matters early on to avoid any opposition later that could derail the project.

Understanding the required funds and creating a funding plan

Creating a funding plan is the lifeblood of real estate investment. First, consider the balance between your own funds (down payment) and financing. In real estate investment, it is common to pay a portion of the property price as a down payment and borrow the remainder through a bank loan. While loans are available, it is not possible to have zero down payment. At the time of purchase, cash equivalent to approximately 10% to 20% of the property price is typically required as a minimum (due to the down payment of 5% to 10% of the property price plus various fees).

As a general guideline, it is considered safe to start investing after preparing equity capital equivalent to approximately 30% of the property price. For example, for a 30 million yen property, this would be approximately 9 million yen. The reason for this is that initial costs at the time of property purchase amount to approximately 15% of the property price, and having 30% of that amount ensures that funds remain available after paying the initial costs, providing flexibility for unforeseen expenses or short-term loan repayments. In fact, Musashi Corporation advises that “initial costs should be kept to less than half of your available assets, which means you should save approximately 30% of the property price.”

Having sufficient equity capital offers many benefits beyond the peace of mind that comes with being able to withstand risks. Not only can you handle unexpected expenses, but it also works to your advantage in loan approval. From the perspective of financial institutions, individuals with ample equity are perceived as having lower default risks and higher creditworthiness, making them more likely to receive favorable loan terms (such as loan amounts and interest rates). Some banks even have specific criteria, such as “interest rate discounts for those holding financial assets of XX million yen or more” or “loans only available to those with XX million yen or more.” By saving sufficient equity before proceeding, you can increase the likelihood of success in real estate investment.

Loan Review and Creditworthiness: In addition to personal funds, factors such as annual income, employer, and credit history also influence loan approval. It is important to understand your own creditworthiness (annual income, years of employment, other loan status, etc.). If necessary, consider consulting with a financial institution in advance for a loan consultation. Before purchasing a property, inform the bank of your annual income and the amount of your own funds to get a sense of how much financing they might be willing to provide, such as “up to approximately ○○ million yen.” This will allow you to search for properties that align with your budget.

Finally, do not forget to set aside contingency funds. It is important to maintain sufficient cash reserves to withstand unforeseen repairs immediately after purchasing a property or periods without rental income due to vacancies. “Having financial flexibility leads to peace of mind” goes without saying. Starting with a realistic financial plan is the key to maintaining stable operations over the long term.

3. Specific steps for real estate investment: property selection, financing, purchase, management, and exit strategy

Once you have completed sufficient preliminary preparations, it is time to proceed with the investment. The basic steps for real estate investment are as follows:

1. Property information gathering and selection – Search for properties that align with your investment strategy.
2. Consult with a real estate company and receive property recommendations – Leverage professional expertise to obtain high-quality property information.
3. Pre-approval for financing and funding plan – Undergo a preliminary review for a bank loan and finalize the budget.
4. Signing the purchase agreement and acquiring the property – Complete the contract procedures and settlement to become the property owner.
5. Post-purchase property management and operational launch – Begin tenant recruitment and management to start rental operations.
6. Consideration of exit strategy – Plan the timing and method of future property sales.

Let's take a look at each step in order.

Property selection and consultation with real estate companies

Property search is the key to real estate investment. Once your objectives and goals are clear, start gathering information on properties that meet your criteria. Property information can be obtained from real estate investment websites (portal sites), information magazines, and real estate companies. While using online investment property portals to get a sense of the market is a good starting point, it is actually quite challenging to find your ideal property using only publicly available information. High-quality investment properties are rarely listed on portals, and even when they are, professional agents often snap them up quickly, making it difficult for beginners to compete. Therefore, it is crucial to establish connections with reliable real estate companies to access promising off-market information (so-called “under-the-radar properties”).

Once you have prepared steps 1 and 2, contact a real estate company for consultation. Real estate companies are professionals in properties, so if you communicate your preferences (budget, area, target yield, property type, etc.), they will introduce you to investment properties that match your criteria. At this point, having basic knowledge and understanding of market trends will make it easier for you to assess the quality of the properties proposed. As an industry practice, high-quality property information is often not publicly disclosed and is instead directly shared with existing clients. Therefore, even for beginners, consulting with a real estate company early on increases the likelihood of obtaining valuable information before other investors.

Choosing a real estate company: The choice of which real estate company to consult is also important. Among companies that handle investment properties, there are some that may engage in aggressive sales tactics to push unsuitable properties. To determine whether a company is trustworthy, check whether it has obtained the necessary real estate brokerage license, has a good track record, and has positive customer reviews. Additionally, the response of the staff during inquiries or meetings is also an important factor. It is important to assess their communication skills, such as whether they answer questions thoroughly and make an effort to understand your investment objectives. While there may be some psychological barriers, it is important to remain flexible and consider switching to another company if you feel it is not a good fit after consulting with them.

Loan consideration and loan review

Once you find a property you like among those introduced to you, proceed to the loan inquiry and preliminary review. In real estate investment, it is common to purchase a property using a combination of your own funds and a loan, and then repay the loan with rental income. Therefore, approval for a loan from a financial institution such as a bank is essential for purchasing a property.

First, based on the information about the property you are considering purchasing, apply for a pre-approval (preliminary review) with a bank. Financial institutions will review not only the applicant's annual income and credit history but also the profitability of the property itself. The type and characteristics of the property, such as whether it is a one-bedroom apartment in the city center or a single-family apartment in the suburbs, whether it is newly constructed or an older used property, will influence the lending stance. There are multiple options such as urban banks, regional banks, and credit unions, but real estate companies often have partnerships or referral networks with these institutions, so it is advisable to consult with them.

If the preliminary review is approved, the financial institution will present loan terms such as “up to 〇〇 million yen available, interest rate of ○%, term of ○ years.” This will finalize your funding plan. If the loan amount does not cover the property price, you may need to increase your down payment or consider a different property. Conversely, borrowing the maximum amount available may result in a heavy repayment burden, so adjust the loan amount to a manageable level based on the terms presented.

Key points when signing the loan agreement: After the preliminary review, once the formal application is approved, you will enter into a formal loan agreement (loan contract) with the financial institution. You can choose between a variable-rate loan or a fixed-rate loan. A variable-rate loan has a lower initial interest rate but carries the risk of future increases. A fixed-rate loan offers stability with a fixed interest rate throughout the loan term but typically has a higher interest rate than a variable-rate loan. Choose based on your risk tolerance. Please note that real estate investment loans often have slightly higher interest rates than residential mortgages for purchasing a home. Recently, cases of improper use of Flat 35 (residential mortgage) for purchasing investment properties have become a social issue, so be sure to use loans in accordance with the rules.

Signing the purchase contract and purchasing the property

Once the loan is approved, it is time to sign the purchase contract. This is the process of formally exchanging a sales contract between the seller (or real estate broker) and you, the buyer. Before signing the contract, you will receive an important explanation of the property and transaction conditions from a licensed real estate agent, and after confirming the details, you will sign and stamp the contract. A down payment is typically required at the time of signing.

After signing the contract, you will proceed with the final loan agreement and settlement preparations until the property is handed over. On the day of property handover (settlement date), you will pay the remaining balance, transfer ownership through registration, and receive the keys to the property. At this time, be sure to complete all necessary procedures, such as paying real estate acquisition tax, covering registration fees, and enrolling in fire insurance. Required documents for the purchase include your registered seal, seal certification, and identification documents (such as a driver's license), so prepare these in advance.

Once the property purchase is complete, you officially become the owner (landlord). At this point, it is important not to relax and promptly establish the necessary systems for rental management. For example, if purchasing a used property, there will be administrative tasks such as changing the name on the lease agreement with the previous tenant and transferring the security deposit. If the property is vacant, you must begin recruiting the next tenant as soon as possible. Be sure to purchase fire insurance and earthquake insurance (this is often a condition for obtaining a loan).

Property management and operation after purchase

Once you have acquired the property, it is time to start rental management. Specifically, you will begin the daily operational phase of recruiting tenants, collecting rent, and paying off loans and other expenses. One of the major decisions to make when starting operations is how to manage the property.

• When outsourcing to a management company: Many salaried investors and novice owners entrust property management to professional real estate management companies. By entering into a management contract with a management company, you can delegate daily management tasks such as advertising for tenants, conducting property viewings, drafting and executing lease agreements, collecting rent, handling complaints, and arranging building cleaning, inspections, and repairs. Property management companies are professionals in managing real estate, so they can handle tasks more efficiently than self-management. They can also quickly address issues that may be difficult for owners to handle on their own, leveraging their extensive experience. While management fees typically amount to a few percent of the rent, they save time and effort while providing specialized support. For properties located far away or for those with busy schedules, entrusting management to a reliable company is a practical choice. When entrusting management, it is important to confirm the scope of services that can be delegated and the fees involved, and to compare multiple companies carefully. Choosing a company with a strong track record in tenant placement can reduce vacancy periods and improve revenue, while selecting the wrong management company could negatively impact revenue.
• Self-management: Owners can handle tenant recruitment, lease agreements, rent collection, complaint resolution, cleaning, and inspections on their own. While this approach can save on management fees and allow for more flexibility in handling details, it requires specialized knowledge and the ability to respond 24/7. This option is generally not recommended for beginners, except for those with experience in the real estate industry or property management, those managing large-scale properties where efficiency can be improved, or those with the time flexibility to dedicate to the task. Most importantly, without a network of contacts or expertise, there is a risk of being caught off guard in handling issues. For beginners, it is safer to initially entrust management to a property management company and consider self-management once you gain experience.

Tenant recruitment and rental management: Once the management structure is decided, begin tenant recruitment. When a unit becomes vacant, list the property with a real estate agency (brokerage firm) to secure the next tenant as soon as possible. Setting rent too high compared to the local market can lead to prolonged vacancies, so it is important to set an appropriate rent level. The condition of the property and interior also affect tenant recruitment. For older properties, consider renovating the interior or updating facilities to maintain competitiveness. While repairs due to aging are unavoidable, setting aside a repair fund in advance allows you to respond calmly. Setting a security deposit can also cover the costs of restoring the property to its original condition when tenants move out.

After operations begin, regularly check whether revenues are in line with plans and whether expenses are excessive. If rent arrears occur, promptly follow up and, if using a rent guarantee service (rent guarantee company), promptly request the guarantee company to handle the matter. If vacancies persist, consult with a broker to revise recruitment conditions or implement measures such as increasing advertising fees (AD). These small improvements can make the difference between success and failure in rental property management.

Exit Strategy Planning

In real estate investment, the “exit strategy” is also crucial. An exit strategy refers to the plan for how to ultimately dispose of (sell) the property and recover the investment. In the investment world, it is often said that “the success of real estate investment is determined at the exit,” highlighting the importance of this strategy.

While the ideal scenario for investors is to “buy low and sell high,” there are several key points to consider when aiming to sell a property at a high price smoothly. First, it is essential to choose properties with an exit strategy in mind. Before purchasing, consider whether the property will be easy to sell in the future. For example, properties in areas with stable demand or those with modern amenities and a short construction history tend to attract buyers more easily. Additionally, condominiums are often easier to sell as they circulate more readily among investors. On the other hand, unique properties in suburban areas or large properties with low liquidity may take longer to sell. It is often said that considering the exit strategy before purchasing is an essential step to avoid failure in real estate investment.

Furthermore, timing the sale is also a key strategic factor. “When to sell” is a difficult question, but the basic approach is to aim for when the real estate market is on the upswing and prices are likely to be higher than at the time of purchase. Additionally, there are other considerations, such as selling before the property's yield (profitability) declines due to its age, or timing the sale when the remaining mortgage balance has decreased, making it easier to realize capital gains. Another option is to sell before major repairs or other significant costs are anticipated. Considering these factors, it is advisable to have a general plan, such as “sell after X years” or “sell when X% of the mortgage is paid off,” as part of your investment strategy.

Why an exit strategy is important: Real estate investment only determines the final profit or loss when the property is sold. Even if the property generates a profit throughout the investment period, a significant decline in value at the time of sale could result in losses that wipe out previous gains, leading to a net loss. Conversely, even if there are some vacancies or expenses during the investment period, a significant gain from the sale could result in a successful outcome. Therefore, it is important to consider “how to sell at the highest price and at the appropriate timing” from the outset of the investment.

Considering an exit strategy leads to making investment decisions based on the total return from the time of purchase to the time of exit. For example, it is effective to conduct research beforehand, such as “If I assume that I will sell this property in X years, what is the expected yield at that time based on the property's age?” Check similar properties listed on real estate investment websites to see the prices and yields at which they are being sold, and use this as a reference for future sale prices.

However, overly focusing on the exit strategy can lead to a trade-off where you end up targeting only properties that are easy to exit, such as prime downtown properties, which are popular and thus overpriced, resulting in lower yields. Ultimately, it comes down to balancing your desired return on investment and acceptable risk. Consider both the ease of exiting (sellability) and the profitability during operation, and choose properties that suit your needs, holding and selling them strategically.

4. Common mistakes made by beginners and how to avoid them

There are several common mistakes that beginners tend to make in real estate investment. However, by being aware of them in advance and taking precautions, you can prevent these mistakes from happening. Here are some typical examples of mistakes and how to avoid them.

• Failing to account for post-purchase costs: A common mistake among beginners is focusing solely on the purchase price and loan repayment amounts, while overlooking various expenses that arise after purchase. Fixed asset taxes, urban planning taxes, fire insurance premiums, maintenance costs, management fees, and other expenses incurred beyond the purchase price must not be forgotten. Failing to account for these expenses when creating a cash flow plan may result in little to no profit or even a loss.
• Prevention: Before purchasing, identify annual maintenance costs and taxes, and create a plan with sufficient cash flow. List all expenses that will arise after acquiring the property and incorporate them into your income and expense simulation. Additionally, it is advisable to keep several months to half a year's worth of loan repayment amounts as working capital.
• Underestimating the importance of choosing a real estate management company: Neglecting post-purchase management can lead to deteriorating returns.
• This is especially true when outsourcing to an external real estate management company, as the choice of company can determine the success or failure of your rental business. Management companies vary in their ability to attract tenants, handle issues, and manage repair costs. Choosing carelessly could result in vacant units, lost rental income, or a steady stream of complaints due to poor service. Preventive measures: Research the track record and reputation of management companies, compare the services and fees of multiple companies, and select carefully. Before signing a contract, it is important to confirm the scope of management (whether it covers everything from tenant recruitment to complaint handling), the company's track record in maintaining occupancy rates, and its emergency response capabilities. Partnering with a reliable management company can reduce vacancy risks and help achieve stable operations.
• Falling for sweet loan offers (illegal loans): Be cautious of companies that entice you with claims like “You can buy a high-priced property with zero down payment” and then ask you to falsify your annual income or savings to secure a loan. Participating in fraudulent activities that deceive financial institutions can lead to legal troubles, such as being required to repay the loan in full upon discovery. In recent years, the misuse of residential mortgages (such as Flat 35) intended for residential purposes for the purchase of investment properties has also become a problem. Precautions: “If it sounds too good to be true, it probably is”. Firmly reject any offers of illegal loan schemes. Focus on increasing your own capital to meet the review criteria of financial institutions and choose properties that you can afford without resorting to illegal means.
• If you are unsure whether the loan terms you are receiving are appropriate, consulting a trusted third party (such as another financial institution or a financial planner) can be effective.
• Starting without family consent: There have been cases where individuals began high-value real estate investments without informing their spouse or other family members, leading to disputes later on. Particular caution is needed when taking out new investment loans while still repaying a mortgage or when investing shared assets. Preventive measures: Establish cooperation with your family early on. It is important to have open discussions about the investment amount and risks and to obtain their understanding and cooperation. To alleviate your family's concerns, it is also effective to show them your plans and simulations and explain them, or to start with a small amount and gradually expand. If your family supports you, you will feel more confident and be able to focus on your investment.
• Don't choose a property based on impressions rather than numbers: It is common to confuse the search for a home to live in with the search for an investment property and make mistakes by choosing a property based solely on feelings or appearance, such as “the atmosphere is nice” or “I like the interior.” However, in real estate investment, the profitability of the property is what matters most. If you choose a property based on your personal preferences, you are more likely to fail to achieve the expected returns. Preventive measures: When selecting an investment property, maintain a data-driven approach. Thoroughly verify key metrics such as the rental income potential relative to the purchase price, surrounding rental market rates, future demand projections, yield, and ongoing costs. It is crucial to maintain the discipline to reject properties that fail to generate sufficient cash flow in simulations, even if they appear visually appealing.

By understanding these common pitfalls and taking proactive measures in advance, even beginners can take a step closer to “failure-proof real estate investment.” Real estate investment is a series of decisions made after thorough preparation. The key to success lies in making decisions based on data, while remaining cautious but not overly timid.

5. Basic Knowledge of Taxes, Laws, and Risk Management

Real estate investment requires not only knowledge of revenue but also knowledge of taxes and laws. It is also important to have a basic understanding of how to manage risks appropriately. This section explains the basics of tax and legal matters that beginners should know, as well as key points for risk management.

Basic Knowledge of Taxes Related to Real Estate Investment

Various taxes are incurred in real estate investment. Tax costs directly affect net income, so it is important to understand in advance what taxes will be incurred and when. The main taxes are as follows.

• Taxes incurred at the time of purchase: When acquiring real estate, you will be subject to “real estate acquisition tax” (a tax notice will be sent by the prefecture after purchase), “stamp duty” affixed to the sales contract, and “registration license tax” for registration by a judicial scrivener. Additionally, for newly constructed properties or those sold by developers, consumption tax is levied on the building portion. Be mindful of these initial tax burdens in addition to the property price.
• Taxes during ownership: While owning real estate, you must pay “fixed asset tax” and “urban planning tax” annually to the municipality. These taxes are calculated based on the assessed value of the land and buildings and constitute part of the fixed costs in rental operations. Furthermore, income tax and resident tax are imposed on “real estate income” (the amount remaining after deducting expenses from rental income). If the scale is large enough to be considered a business operation, it may also be subject to “individual business tax.” Additionally, while loan interest is deductible, principal repayments are not, so it is important to calculate the “net amount after taxes” by combining depreciation expenses and other factors.
• Taxes incurred at the time of sale: If you sell a property and realize a profit (capital gain), capital gains tax is imposed on the capital gain. Capital gains tax is the total of income tax, resident tax (and special reconstruction income tax), and the tax rate varies depending on the holding period of the property: approximately 20% for long-term capital gains (holding period over 5 years) and approximately 39% for short-term capital gains (holding period of 5 years or less). Additionally, at the time of sale, you will need to pay brokerage fees and stamp duty, and registration fees for the cancellation of a mortgage by a judicial scrivener will also apply. Do not focus solely on the sale proceeds; instead, calculate the final profit by deducting these tax burdens to determine the net amount.

Since taxes are incurred at each stage of acquisition, ownership, and sale, it is important to incorporate tax burdens into your financial planning. For example, consider the timing of cash outflows for purchase-related expenses and fixed asset taxes when preparing funds, and ensure that all deductible expenses (such as depreciation expenses, loan interest, management fees, maintenance costs, fire insurance premiums, and fixed asset taxes) are properly claimed on your tax return to minimize taxes. Real estate investment has many items that can be deducted as expenses, so proper accounting can help minimize taxable income after deducting taxes from rental income (tax savings). Seek advice from tax professionals as needed to ensure legal and optimal tax payment and tax savings.

Key legal points to know

Real estate investment involves various laws. It is difficult to cover all relevant regulations, but it is important to understand the key points.

• Land Lease and Tenancy Act (Law Concerning Lease Contracts): The most important law for rental management is the Land Lease and Tenancy Act. This law protects the rights of tenants (lessees) and sets detailed rules for lease contracts. For example, under a standard lease contract, the contract is automatically renewed upon expiration, and the tenant can continue to live in the property. The owner must have a valid reason (unavoidable circumstances) to terminate the contract, and even if relocation expenses are paid, the tenant may not necessarily be required to vacate the premises. As such, tenants are granted strong legal protections, so it is important to note that landlords cannot simply evict tenants because they are “unpleasant” or for other arbitrary reasons. Rules regarding rent increases and contract termination are also restricted by law. To avoid disputes, it is advisable to consult a professional and ensure that the lease agreement complies with the Land and Building Lease Act.
• Building Standards Act and Urban Planning Act (regulations regarding buildings and land use): When renovating or changing the use of a purchased property, compliance with laws such as the Building Standards Act and Urban Planning Act is required. Real estate is subject to regulations such as designated land use zones, floor area ratio, floor space ratio, and height restrictions. For example, constructing an apartment building without permission in an urban development adjustment area or renovating a building without meeting seismic standards may result in corrective orders or cease-and-desist orders from the local government. It is also important to be aware of local ordinances and other regulations specific to each municipality. Illegal construction not only significantly reduces the property's value but may also render it ineligible for rental in the worst case. Before purchasing a property, investigate any legal restrictions and ensure that the property can be operated in compliance with the law.
• Civil Code and Real Estate Brokerage Act (rules for contracts and transactions): Sales contracts and lease agreements are contracts under the Civil Code, so provisions regarding contractual non-conformity liability (formerly known as warranty for defects) and breach of contract apply. When purchasing a used property, confirm the period and scope of the seller's contractual non-conformity liability and understand how issues will be addressed if they arise. Additionally, when dealing with real estate companies, ensure that the rules of the Real Estate Brokerage Act (such as the obligation to provide important information and written documents) are being followed. Dealing with unscrupulous companies could lead to contractual disputes, so it is crucial to review all contract documents in detail and clarify any unclear points. If necessary, it is advisable to have a professional (such as a lawyer or judicial scrivener) review the contract before signing.

Furthermore, there are various laws to consider depending on the property and the circumstances of the tenants, such as the Fire Services Act (obligation to install fire extinguishers and fire alarms), the Housing Safety Net Act, and the Elderly Housing Act. It is difficult to understand all of these on your own, so it is important to collaborate with a reliable management company or expert in practical matters to appropriately respond to legal revisions and regulations.

Basic Risk Management

As mentioned earlier, real estate investment involves various risks. However, by anticipating these risks in advance and implementing appropriate countermeasures, it is possible to mitigate and control them. Here, we will outline the major risks and their management strategies.

• Vacancy Risk: The risk of no tenants being found, resulting in a loss of rental income. Countermeasures: Research demand trends and select areas with stable rental demand, such as locations near stations or with good access to amenities. Design floor plans that align with market demand, such as 1K to 2LDK units. Enhance the property's appeal through equipment upgrades or appropriate renovations to maintain competitiveness. Additionally, adjust rental terms flexibly and collaborate with property management companies to minimize vacancy periods.
• Rent Default Risk: The risk that tenants fail to pay rent. Countermeasures: Conduct rigorous tenant screening as a fundamental measure. Verify income, employment status, and past payment history, and require a guarantor if necessary. Recently, it has become common to use a rent guarantee company. By having tenants join a guarantee company, landlords can receive advance payment in case of non-payment, significantly reducing their risk. Some cases require both guarantee company enrollment and a guarantor as conditions at the time of contract signing. It is also important to promptly follow up on delinquencies and prevent them from becoming prolonged.
• Repair risk: The risk of repair costs arising due to building deterioration or equipment failure. Countermeasures: Set aside a monthly repair fund to prepare for major repairs. Also, anticipate some costs for restoring the property to its original condition when long-term tenants move out. Additionally, check the property's repair history and building condition before purchase to determine if major repairs are needed in the near future. Conduct regular inspections and planned maintenance, and address any signs of deterioration early to prevent sudden major breakdowns.
• Interest Rate Hike Risk: The risk that interest rates may rise, increasing repayment burdens, when using a variable-rate loan. Countermeasures: Choose a fixed-rate loan from the outset or make efforts to reduce the principal through early repayment. Even if you are using a variable-rate loan, simulate whether repayment is feasible under a scenario where interest rates rise by 1–2% in the future. If necessary, prepare for interest rate fluctuations by making partial prepayments or refinancing. Stay informed about interest rate trends and economic news, and consider switching to a fixed-rate loan or other flexible options as needed.
• Asset value and rent decline risk: The risk that property prices or rental rates may decline due to the passage of time or changes in market conditions. Countermeasures: Choose areas where land prices are unlikely to decline and regions less affected by population decline. Research the surrounding area to ensure there are no competing properties. Additionally, efforts to maintain or enhance property value are crucial. Regular renovations or remodeling can help preserve the property's appeal and mitigate rent declines. If the real estate market deteriorates significantly, it may be necessary to continue renting rather than forcing a sale and wait for the market to recover.
• Disaster risk: The risk of property damage caused by natural disasters such as earthquakes, fires, and typhoons. Countermeasures: It is essential to have fire insurance and earthquake insurance. In the event of damage, insurance can cover some of the costs. Additionally, when selecting a property, check hazard maps to choose land with low flood or tsunami risks, and opt for buildings constructed to the new seismic standards for earthquake resistance. Efforts to eliminate risks during property selection are also effective. Since Japan is prone to earthquakes, consider whether the property has been reinforced for earthquake resistance, and if it was built under the old seismic standards, whether the price reflects the corresponding risk. Establishing communication networks and procedures for confirming the safety of residents with the property management company in the event of a disaster is also part of risk management.

In this way, identifying potential risks and preparing contingency plans for each is the foundation of risk management. While “zero risk” is impossible, it is possible to keep risks within an acceptable range. By utilizing insurance, preparing funds in advance, seeking expert advice, and gathering information on a daily basis, you can aim for stable investment management while controlling uncertainty.

6. Collaboration with Experts and Effective Use of Property Management Companies

To succeed in real estate investment, it is important not to try to handle everything on your own but to seek appropriate assistance from experts. Here, we will explain how to collaborate with experts in real estate investment and how to effectively utilize management companies.

Benefits of consulting with real estate professionals

When beginners start real estate investment, the presence of professionals in various fields is reassuring. First, real estate company representatives or real estate investment consultants can provide comprehensive advice, from property selection to loan consultations. If you have any questions or concerns, feel free to ask them. A trustworthy company should explain risks and drawbacks in detail.

It is also beneficial to consult with financial planners (FPs) and tax accountants, who are experts in money matters. For example, tax accountants can provide specialized advice on filing real estate income tax returns and tax saving measures. There is a lot of knowledge that you need to know about taxation, such as how to file a blue tax return, how to calculate depreciation, and tips for recording expenses. If you hire a tax accountant, they can handle the complicated tax return process for you, which is reassuring for those who are busy with their main job.

Furthermore, the advice of a lawyer or judicial scrivener is useful for reviewing contracts when purchasing a property and dealing with legal issues. If there are any unclear points in the contract, you can request a professional review in advance, and if a dispute arises with a tenant, you can consult a legal expert at an early stage to minimize damage.

Additionally, you can request an inspection of the building's condition from an architect. Conducting a building inspection before purchasing a used property can help you identify potential future repair risks. It is also wise to seek opinions from architects or construction companies and obtain renovation estimates as needed.

By collaborating with experts in various fields such as real estate, finance, law, and construction, you can identify risks and areas for improvement that you may not notice on your own. Especially for beginners, it is easy to find yourself in a situation where you “don't know what you don't know,” so it is recommended to actively seek the expertise of professionals. “Consulting a real estate investment company when in doubt” is also an option. Many companies now offer free consultations for beginners, so make good use of them.

Key points for utilizing property management companies

As mentioned earlier, it is common to entrust the management and operation of properties to a real estate management company. By effectively utilizing a management company, owners can focus on strategic decision-making and expanding their property portfolio. Here are some key points to consider when utilizing a management company.

• Select a reliable management company: First and foremost, it is important to choose the right management company. Management content and service quality vary depending on the company, so it is important to compare and evaluate them carefully. Specifically, check their tenant recruitment capabilities (advertising networks and track record of securing tenants), management fee levels, reputation for handling tenant issues, emergency response system, and reporting frequency. Companies with a large number of managed properties and a proven track record may be reassuring, but if they have too many properties under their management, individual properties may receive insufficient attention. Therefore, compatibility with the assigned staff and attention to detail should also be considered. It is advisable to obtain proposals from multiple companies and compare their services and costs before making a decision. Property management contracts are typically renewed annually, so you can change companies if it doesn't work out (but be sure to note the notice period for termination).
• Maintain close communication with the property management company: Even though you've entrusted them with management, the owner and property management company are partners. Receive regular reports on the property's condition and communicate your requests and policies. Sharing your management policies, such as “I would like to consider lowering the rent if the property remains vacant for X months” or “I would like to obtain multiple estimates before deciding on repairs,” will make it easier for the management company to respond. Conversely, the management company may provide you with market information, such as “A new apartment building has been constructed in the area, increasing competition.” Close information sharing and trust lead to accurate operational decisions.
• Understand the scope of management services: Clearly define what the management company will handle under the contract. Generally, this includes rent collection, complaint handling, regular cleaning, and arranging for property restoration, but the specifics may vary depending on the plan. Confirm details such as whether 24/7 emergency response services are available, how they handle rent delinquencies (e.g., collection efforts or coordination with guarantee companies), whether they handle renewal contract procedures, and whether they handle settlement procedures upon tenant move-out. This will prevent you from being caught off guard later with questions like, “Was that the owner's responsibility?”
• Performance-based incentives: Offering incentives such as increased management fees or bonuses at renewal to outstanding management companies that maintain long-term occupancy rates can be an effective strategy. Management companies are also businesses, so appropriate recognition that motivates them can strengthen the cooperative relationship. However, the foundation should be a contract with market-appropriate fees to build a mutually beneficial relationship.
• Consider changes as needed: If you are dissatisfied with the management company's response or if their performance deteriorates, do not hesitate to consider changing them. Research the benefits and drawbacks of changing management companies and the specific methods involved, and maintain the flexibility to switch if you can receive better services. Of course, there is a risk of temporary disruptions in tenant support when switching to a new company, so make a comprehensive judgment.

By entrusting the property to an appropriate management company, they can efficiently resolve issues that are difficult for the owner to handle on their own using their professional experience. For example, they can quickly respond to issues such as water leaks at night or complaints from neighbors. The owner can also avoid being overwhelmed by management tasks, allowing them to focus on their main business or manage multiple properties with greater flexibility. “Leave it to the experts and focus on strategic decisions”—this is also a key tip for successfully launching real estate investment.

7. The importance of continuous learning and improvement for success

Finally, we would like to touch on the importance of continuous learning and improvement as an essential attitude for success in real estate investment. Investing is not something you start and finish; it is something you continue for a long time to achieve results. Adapting to changes in the environment and continuing to grow yourself will make a big difference.

Stay up to date on market trends: The real estate market is constantly changing due to economic conditions, policies, demographic trends, and other factors. What was common knowledge a few years ago may no longer apply today. Therefore, it is important to stay informed about the latest market trends. For example, keep your antennae up for information on interest rate trends, real estate price indices, changes in popular areas, tax reforms, and other factors. By staying up to date with the latest information, you can make more appropriate investment decisions and increase your chances of success. Specifically, it is effective to regularly read real estate-related news sites and industry reports, and attend seminars and study sessions to hear from experts. Additionally, participating in investor communities (such as owner's associations or online forums) allows you to exchange information with peers and stay updated on trending areas and trends in real time.

Continuous learning: Real estate investment is complex, and new knowledge and expertise continue to emerge. The purchase of your first property is not the end goal—it is just the beginning. Use the experience gained through ongoing management to improve your next decisions, and continue learning. For example, if you struggled with vacancy rates in your first property, choose properties with higher demand for your next purchases. If maintenance costs exceeded expectations, prioritize the condition of the building when making future purchases. By implementing a PDCA cycle, you can continuously improve your decisions. In fact, those who have been investing successfully for a long time have learned from their failures and implemented strategies to prevent them from recurring.

Benefits of continuity: Real estate investment is a long-term game. The longer you continue, the greater the benefits you can achieve. One is the compound effect, where rental income is reinvested to grow your asset base exponentially. Another is the positive investment cycle, where a track record makes it easier to secure financing and access better property information, creating a virtuous cycle. Above all, by repeatedly learning from failures, the accuracy of investment decisions improves, enabling more stable and efficient management. This is why those who start early and continue for a long time gain more knowledge and build greater wealth.

Regular reviews: To ensure continuous improvement, it is also necessary to regularly review your investment portfolio. At least once a year, conduct a comprehensive review of your income and expenses, assess the return on each property, review loan balances, future maintenance plans, and reevaluate exit strategies. Depending on the situation, it may be necessary to sell unprofitable properties and replace them with others. It is important to manage your portfolio with the mindset of always keeping it in the best possible condition.

Maintaining motivation: Maintaining motivation is also a challenge in long-term real estate investment. Many successful investors seem to have clear goals (such as achieving financial freedom or owning a certain number of properties) that they always keep in mind, and they continue to learn and take action with that as their driving force. Interacting with like-minded peers can also be a source of inspiration. Having a network of people you can consult with when you encounter difficulties can prevent you from feeling like you are fighting alone. Fortunately, today's environment makes it easy to share information through social media and communities, so be sure to take advantage of these resources.

In this article, we have provided a detailed explanation of how to start real estate investing, from the basics to specific steps and important considerations. By not neglecting the preparatory steps before starting and taking steady progress one step at a time, even beginners can achieve success in real estate investment. Start small, gain experience, apply what you learn to future endeavors, and approach asset building with a long-term perspective. Through continuous learning and improvement, real estate investment will undoubtedly become a powerful ally in achieving your goals of stable future income and asset growth. Begin taking the necessary steps today to work toward your future objectives.