Real estate investment is one of the investment methods that can be expected to provide stable income. However, many beginners are unable to take the plunge due to the perceived high barrier to entry. Here we explain the characteristics, mechanisms, and precautions for beginners who want to start real estate investment.
Why Is Investment Necessary for Retirement?
The main reason investment is necessary is that average wages have remained largely flat for many years while consumption tax increases and rising prices have continued. According to the National Tax Agency's "Survey Results on Private Salary Realities," the average salary in 2019 was approximately ¥4.36 million—far below the peak of ¥4.67 million in 1997. In the current situation where wages cannot keep up with rising living costs, wealth accumulation through investment has become an important option.
How Does Real Estate Investment Work? Income Gains and Capital Gains
The profits from real estate investment can be broadly divided into two types.
Income Gains
Income gains are ongoing income earned by holding assets. In real estate investment, this corresponds to rent received from tenants. Since a fixed amount comes in every month, it is attractive as stable passive income. However, long-term investment also carries unexpected risks, so it is recommended to have an expert as a partner.
Capital Gains
Capital gains are the profit from selling real estate you own. You purchase at a low price and sell when the value increases to make a profit. In recent years, large increases in value are difficult to expect unless the property has an exceptionally good location, so operate with consultation from someone with specialized knowledge.
What Are the Benefits of Real Estate Investment?
Real estate investment has unique advantages not found in other investments. Here are the main benefits.
Inflation Hedge
Real estate is an asset that is resilient against inflation. When prices rise, rent market rates and property prices also increase, making it easier to maintain asset value compared to relying solely on bank deposits. Even during deflation, the decline in rent rates is relatively small, which is also a benefit.
Leverage Effect
By using bank financing, you can achieve investment returns beyond your own capital. For example, by purchasing a ¥15 million property with ¥2 million of your own capital and earning ¥80,000 monthly rent income, you can recover your own investment in about 3 years.
Substitute for Life Insurance
Real estate investment loans include group credit life insurance, so in the event of an emergency the remaining loan balance is waived, leaving your family with a debt-free income-generating property.
Pension Supplement
After the loan is paid off, rent income can be directly added to living expenses. Owning two studio apartments with ¥80,000 monthly rent each would be a significant support for retirement funds.
Management Delegation Reduces Effort
By delegating to a property management company, you can entrust tenant recruitment and problem handling. Unlike stock investment, no portfolio review is needed, and as long as there are no issues, little active management is required.
What Are the Disadvantages and Risks of Real Estate Investment?
It is important to start with an understanding of not just the benefits but also the risks.
Interest Rate Rise Risk
With a variable rate loan, rising interest rates may increase the total repayment amount. By choosing a loan with the "5-year, 1.25-times rule" applied, sudden large increases in repayment amounts can be suppressed.
Rent Delinquency Risk
If delinquency occurs, income stops and there is a risk of turning to a loss. Prevent this by introducing automatic debit for rent payments and tightening tenant screening.
Repair Costs
Repair costs due to age-related deterioration are unavoidable. The repair reserve fund for a studio apartment is approximately ¥3,000 per month, and large-scale repairs for an entire building are estimated at ¥750,000–¥1,000,000 per unit.
Natural Disaster Risk
Joining earthquake insurance and confirming flood risk using hazard maps in advance are essential. Since August 2020, presenting flood hazard maps during important explanations has been mandatory.
Vacancy Risk
Continued vacancies require loan repayment from personal funds. Effective countermeasures include minimizing initial costs, selecting well-located properties, and enhancing security facilities.
Key Points for Beginners to Avoid Failure
Here are the important points beginners should keep in mind for successful real estate investment.
- Carefully judge the timing of property acquisition: Be careful of the risk that high-amount financing prevents you from borrowing again later
- Plan an exit strategy: Whether to sell or inherit—check statutory useful life and assessed land value trends
- Compare multiple real estate companies: You can't form judgment criteria from just one company
- Never engage in improper financing: Improper use of housing loans carries the risk of being required to repay all at once
- Obtain family consent: Share loan amounts and property information to eliminate anxiety
- Make decisions based on data: Focus not on appearance but on numbers such as location, rent setting, and population trends
- Reinvest profits: Don't use for living expenses—keep for unexpected expenditures
What Is the Process for Acquiring Real Estate?
Actual acquisition proceeds through the following steps.
- Information gathering: Acquire basic knowledge through books, websites, and seminars
- Area selection: Check population trends, urban development plans, and disaster risks
- Property selection: Understand characteristics of new vs. used, apartments vs. condominiums and choose accordingly
- Cash flow simulation: Estimate all costs including rent decline, repair costs, and vacancy periods
- Preliminary review: Undergo financing screening from financial institutions
- Negotiation with seller: Negotiate a price reduction to obtain favorable terms
- Contract, settlement, and handover: Scrutinize the contract, confirm the property status, and complete
Frequently Asked Questions (FAQ)
Q. How much initial capital is needed to start real estate investment?
About 10–20% of the property price is a guideline for initial capital. Using financing, there are cases where you can start from approximately ¥2–3 million.
Q. What property type is recommended for beginners?
For beginners who want to limit risk, used studio condominiums in urban areas (strata-titled ownership) are considered relatively easy to start with.
Q. Which is better, real estate investment or stock investment?
Real estate investment offers stable rent income and leverage effects, but has lower liquidity. Choose based on your goals and risk tolerance.
Q. What are the benefits of delegating to a management company?
Operations such as tenant recruitment, rent collection, and problem handling can be entrusted entirely, enabling even salaried workers with main occupations to operate without difficulty.
