In this article, we will explain the types of real estate investment recommended for beginners.
"Beginner" here means the person who buys income properties for the first time in the Tokyo metropolitan area.
There are many types of real estate investment.
Condominiums, apartments, and single-family homes are generally known, but there are also auctions, hotels, and buildings. It seems that there are investors who specialize in accident properties and love hotels. Although it is possible to make a profit for each, we recommend low-risk condominiums for those who are investing in real estate for the first time.
There are buildings and commercial facilities for real estate investment, but this is not recommended for beginners because it is often done by a specialist and the risk is high. Buildings and commercial facilities are affected by the declaration of a state of emergency, and roadside stores in prime locations in central Tokyo are crushing. Because everyone spends their time at home and doesn't come out to the city. Some people acquire such properties at a low price during this period, but we do not think that it is recommended for beginners.
On the flip side, it also means that there is a high possibility that real estate can be obtained cheaply at this time. Real estate transactions are bilateral transactions, so if the seller is in a hurry and there is no other buyer, you can buy cheaply. There are many investors who decide that it is the time to purchase investment properties in Tokyo. For example, APA Group seems to be buying hotels in prime locations that have fallen into poor performance.
While the risks of commercial real estate is increasing, the number of contracts for residential real estate in the Tokyo metropolitan area is the highest ever for both condominiums and pre-owned houses, and the number of contracts and prices have increased by double digits despite the corona disaster. (Monthly bulletin market watch for March 3rd year of Reiwa by Real Estate Information Network for East Japan)
I think that investing in an apartment or a pre-owned house after understanding the advantages and disadvantages is an option. In central Tokyo, the population is large and the average income is high, so it is relatively easy to find a resident and the risk of vacancy is low. In addition, since you can choose the resident, you can reduce the resident risk. Investment in condominiums in central Tokyo is recommended for beginners.
You can get real estate in a prime location in the city center at a low price
It is not common to run an apartment in a prime location in the city center. It is because big companies own the prime lands. However, if you invest in a condominium, you can acquire real estate in a prime location in the city center at a relatively low cost. If it is old, it starts from the 10 million yen level, so it can be said that the hurdle to obtain is not so high.
The asset value of condominiums is increasing year by year
The prices of condominiums are increasing year by year. According to the Ministry of Land, Infrastructure, Transport and Tourism, the real estate price index for condominiums in 2021 was 157.0, which is 1.57 times that of 2010. We believe that real estate prices in prime locations in central Tokyo will continue to rise for a while. It is because life is finite. We can increase our wealth, but we cannot increase our limited time of life. High-income and wealthy people place particular importance on the value of time and tend to spend less time commuting. Therefore, we predict that the condominiums inside the Yamanote Line, will continue to rise for a while.
Low vacancy risk and easy to find tenants
In the case of a condominium in the city center, the risk of vacancy is low and it is easy to find a resident. This is because people's time value is increasing and more and more people do not want to spend time commuting. The average annual income in Tokyo is high, and more and more people are thinking that the time spent commuting is a loss. It is not difficult to find a resident in a condominium if the location and price are right.
Low liquidity risk and easy to find buyers
It is easier to find a buyer of a condominium. Since the risk is lower and it is easy for a first-time investor, it will sell immediately if the selling price is right. One of the merits of investing in a condominium is that it sells relatively easily.
Easy to manage
In the case of an apartment, the owner may arrange cleaning of common areas and large-scale repairs, but in the case of a condominium, the management association will do it. You have to pay the management fee and the repair reserve every month, but it doesn't take time and effort to manage.
Condominiums in central Tokyo tend to have higher prices and lower yields. There is an advantage that tenants and buyers can be found relatively easily and it is easy to make a profit on sale. Instead, it slows down the recovery of the invested capital.
Repair reserve and management costs are required
Condominiums require monthly repair reserves and management fees. This is a reserve fund for future major repairs and condominium management costs. There are often managers in condominiums. Personnel costs, cleaning costs, elevator maintenance costs, etc. are included in the management costs. These costs are generally paid to the management association.
When investing in a condominium, it is necessary to check the financial status of the management association before buying. I purchased the condominium last year and the financial condition of the management union was very good, which was one of the factors that made the purchase decision.
High yield and fast collection of funds
Apartments generally have higher yields and fast fund collection. The surface yield of the one-building apartment I bought last year is 11.5%, and I feel that the speed of recovering the invested capital is fast.
Free to use
Since you own the land and the building, you can freely use the vacant room. I personally use a room in the one-building apartment I bought last year. If you no longer use it, you can rent it out again.
It is also possible to increase profitability by placing vending machines in common areas.
When the building is old, you can turn it into a vacant lot and build a new apartment, or you can build a house to live on your own. Unlike investment in condominiums, all land and buildings are your own, so you can use them freely.
The value of land is evaluated by financial institutions
Buildings are depreciated year by year, but land is not. Since financial institutions evaluate the property of land, they are more likely to mortgage the land and lend it. For example, it is possible to obtain a loan in such a form when a large-scale repair work is required.
Vacancy risk is high and it takes time and money to recruit residents
When it becomes vacant, it often takes time and money to recruit. Vacancy is easy to fill if you pay a high advertising fee (AD) to the management company or intermediary, but it can still take time. You can reduce the risk of vacancies by actively contacting the intermediary company and proposing a month's worth of free rent. Vacancy rates tend to be lower for properties closer to the city center. One-building apartments have high yields and fast fund collection speed. Therefore, it is important to avoid using rent as much as possible when there is no vacancies. The investors need to spend money on advertising expenses (AD) and remodeling expenses when vacant rooms become available.
Liquidity risk is high and it may take time and money to sell
Apartments tend to take a longer time to sell. Since the average selling price and risks are high, the entry of beginners is less than that of condominiums. The buyers are generally professional investors, therefore, they won't buy at a higher price. Lowering the price will increase the chances of finding a buyer. In the case of a one-building apartment, I think it is better to have a strategy of collecting cash with high-yielding rent income rather than making a profit on sale.
Remodeling and renovation costs
In the case of a one-building apartment, large-scale repair and renovation costs will be incurred. For example, painting the exterior of an apartment or replacing a water pump. It costs around 300,000 yen to replace the cloth and floor and clean it in a 1K room. It costs money when it gets old, so we recommend that you do not waste money and do not touch the rent as much as possible.
Tenants tend to live for a long time
In general, it is often the family with children or pets who rent a house, and they tend to live for a long time. It is easy to monetize if the tenant lives for a long time.
Single-family homes are not often supplied as rental properties, so there is little competition. Therefore, it tends to be easier to find someone to borrow. One of the merits is that it is easy to find a tenant even if the house is a little far from the station.
Free to use
You are free to use it because you own the land and the building. You can rent it out and earn rent income, or you can live on your own. It is also possible to clean the garden and increase the competitiveness of the rental property. You can also build a new apartment if there is no problem with the regulations and location.
The value of land is evaluated by financial institutions
Ownership of land makes it easier to get a loan from a financial institution. In case of emergency, you can get a loan with the land as collateral.
Many options for sale
In the case of a pre-owned house, not only real estate investors but also the general public can buy it. Sometimes the tenant offers to buy the house in which they live in.
Remodeling and renovation costs
As with a one-building apartment, large-scale repair work costs and renovation costs will be incurred. It's important to keep cash on hand without wasting money.
At the end
Real estate investment can be profitable if the location and price are right. The above advantages and disadvantages are examples and differ depending on the property. Every property has its advantages and disadvantages, so it is important to understand the risks, negotiate the price with the seller, and purchase at the right price and conditions.
We stand in the position of the buyer and negotiate for the benefit of the buyer. If you are interested in real estate investment in the Tokyo metropolitan area, please feel free to contact us.
Click here for Real Estate Investment Consultation
Please consult Time Inc. for investment properties in Tokyo