Real estate investment is an investment method in which you acquire rental properties such as apartments or condominiums and earn income from rent. Because you can start with a small amount of equity by using an apartment loan, many investors put it into practice. In this article, we explain everything from how real estate investment works to its benefits and risks in an easy-to-understand way.
How does real estate investment work? How do you generate income?
Real estate investment is a structure in which you purchase an apartment or condominium and earn income from the rent paid by tenants. Investors hold the property as the owner and are responsible for rental management tasks such as recruiting tenants, collecting rent, arranging repairs, and handling complaints. In most cases, efficient management is possible by outsourcing these tasks to a property management company.
What are the benefits of real estate investment? Stable income and tax-saving effects
The main benefits of real estate investment are as follows.
- Stable rental income: Because housing is a daily necessity, it is less affected by market fluctuations than stocks and similar assets
- Expected yield of 4% or more: High profitability can be expected in popular areas or convenient locations
- Tax-saving effect: Losses from real estate income can be offset against other income, reducing the tax burden
- Leverage effect: Apartment loans allow investments larger than your own equity
What are the risks and disadvantages of real estate investment? Points to watch out for
On the other hand, you need to understand the following risks.
- Vacancy risk: When tenants cannot be found, income drops to zero while management fees and the burden of loan repayments continue
- Maintenance and management costs: Management fees, repair reserve funds, and fixed asset taxes are incurred for as long as you own the property
- Low liquidity: Selling takes time, so you cannot quickly convert it into cash
Basic terms used in real estate investment
- Rental management: A service to which you can outsource overall management duties such as tenant recruitment, rent collection, and complaint handling
- Management company: A company that specializes in condominium management
- Management fee: Cost required to maintain the building
- Repair reserve fund: A fund accumulated regularly for the repair of common areas
- Fixed asset tax: A local tax imposed on real estate owners
Frequently Asked Questions (FAQ)
Q. Can beginners start real estate investment?
Yes. By using an apartment loan, you can start even with limited equity. However, the keys to success are choosing the right property and the right management company.
Q. What is the typical yield of real estate investment?
It varies depending on the property and location, but the expected yield is generally 4% or more. It tends to be slightly lower in popular central-city areas and higher in regional areas.
Q. How can I reduce vacancy risk?
It is important to choose properties in convenient locations, set appropriate rent levels, and entrust management to a reliable management company.
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