Let’s talk about the most popular investment options among Japanese people, such as stocks, real estate, gold, futures, FX, and cryptocurrencies. Among these, stocks and real estate are probably the most common investment choices for Japanese individuals. I feel that FX and cryptocurrencies are more akin to speculation rather than investment.
As someone who works in the real estate industry, I have been involved in various real estate investment transactions and provided advice to clients. Naturally, I have a wealth of experience and information in this field compared to the average person.
However, when friends or acquaintances who are not familiar with investments approach me for advice, I recommend stock investment instead of real estate investment.
Let me explain the reasons for this recommendation.
The Reliability of This Article
This article was written by someone with the following background:
- Over 15 years of experience in real estate brokerage at a well-known major real estate agency
- Successfully closed more than 300 real estate brokerage cases to date
- A certified 1st Class Financial Planner
- A Certified Financial Planner (CFP)
- A licensed Real Estate Transaction Specialist
Why I Don’t Recommend Real Estate Investment in Japan
I would like to clarify that the following blog post does not completely dismiss real estate investment. Please keep this in mind while reading.
Additionally, towards the end, I will discuss the benefits of real estate investment for those who still wish to pursue it, as well as some important factors to consider if you decide to engage in real estate investment.
Now, let’s go through each point and provide an explanation for better understanding.
Real Estate Investment is More of a Business than an Investment. It Can Be Quite Complicated
Real estate investment requires a considerable amount of dedication and effort. In comparison to stock investment, I believe this is the most demanding aspect. From property selection to negotiating financing with banks and dealing with sellers, you have to handle everything on your own. Of course, real estate agents provide substantial support, but ultimately, the buyer must make the final judgments and decisions.
Here are the necessary steps involved in acquiring and operating a typical income property. Please note that some of these items are generally supported by real estate agents.
[Before Acquiring a Property]
- Gathering property information (online searches, visiting real estate agencies)
- On-site inspection and selection of properties
- Verifying building regulations and lease terms
- Consultation and evaluation process with financial institutions for financing
- Submitting purchase applications
- Negotiating terms with the seller
- Preparing earnest money
- Concluding the purchase and sale agreement
- Selecting property management and insurance companies
- Proceeding with financing arrangements
- Finalizing payment and transferring ownership
[After Property Acquisition]
*Note: If you entrust property management to a management company, they will handle most of the practical aspects. However, you, as the landlord, will need to make individual decisions regarding confirmation and consultation with the management company.
- Consulting with the management company regarding repairs when tenants move out
- Addressing repairs and maintenance due to equipment deterioration
- Negotiating rental conditions with tenants
- Managing various procedures related to lease renewals
- Handling disputes and conflicts with tenants
- Engaging in daily communication with the management company and other related matters
These tasks can be extremely complex. It’s safe to say that the burden is significant unless you truly have a passion for real estate.
It’s Extremely Challenging for Novices to Obtain High-Quality Property Information
Real estate agents engage in intense battles for property information on a daily basis. Despite the advancements of the internet in modern times, the real estate industry in Japan remains relatively traditional and closed-off. Information is still exchanged analogically through connections and networks among real estate professionals. Consequently, for individuals to acquire valuable information within this realm, it becomes necessary to establish connections and networks with real estate agents.
Furthermore, even if one manages to obtain excellent property information through sources like the internet, the competition for such attractive properties becomes extremely fierce. Due to the high demand, not only is speed crucial in inquiries and information gathering, but the conditions, including the price, often become quite challenging for buyers.
It is common to hear stories where someone else submits an application just an hour earlier, or a prospective buyer who can pay in cash swoops in while financing is being discussed. While conventional business practices tend to favor the buyer, the real estate market in Japan overwhelmingly favors the seller in terms of negotiation and leverage. Under these circumstances, it is undeniably challenging to acquire good property information.
On the other hand, in the case of stock investment, it is rare to find oneself unable to purchase desired stocks. This is another significant difference compared to real estate investment.
Surprisingly Low Real Yield in Real Estate Investments
The yield mentioned in advertisements represents the gross yield, which is a simple calculation of annual income divided by the property price. However, when considering the actual net yield that you will receive, it is necessary to deduct various expenses from the rental income.
When acquiring and holding real estate in Japan, the following costs are involved:
[At the time of purchase]
- Brokerage fees
- Various expenses related to financing (if using a loan)
- Costs for property transfer registration and mortgage registration
- Stamp duty, etc.
[During ownership]
- Property management fees (if entrusting to a management company)
- Loan repayments (if using a loan)
- Repairs and maintenance costs when tenants move out
- Regular maintenance costs due to aging
- Fixed asset taxes, etc.
To give you a rough idea of the magnitude of these costs, the expenses at the time of purchase are approximately 5-8% of the purchase price, while the ongoing expenses during ownership are around 6-8% of rental income (excluding loan repayments). The loan repayment amount is usually the heaviest burden, but it varies depending on the borrowing conditions, so I won’t delve into it here.
With the recent soaring real estate prices in Japan, if you were to purchase a property with a gross yield of around 4-5% by heavily borrowing funds, it can be challenging to operate it with a profit.
On the other hand, the costs associated with stock investment are minimal, including nominal fees at the time of purchase, trust fees, and taxes. In comparison to real estate, stock investment is significantly more accessible.
“High-Yield Properties Often Face Challenges in Securing Bank Financing”
It is common to think that as long as you buy a high-yield property, it will generate profits, but there are issues with this mindset.
A high-yield property is priced low and has a high yield because there are underlying problems. It is priced in such a way to attract buyers.
For example:
- Properties with significantly old construction
- Buildings in violation of regulations
- Properties with major defects
These are common cases based on experience. The biggest problem with these properties is that banks are reluctant to approve loans for them, even if you intend to utilize financing. If you purchase with cash, it may not be an issue, but when you try to sell the property in the future, you will face similar problems, making it extremely difficult to find buyers, resulting in significantly reduced prices.
Real estate agents always consider the resale value. It’s not just about buying; it’s about how much loss or profit you can expect when you sell the property. I believe this perspective is crucial for the general public as well.
“Risk of Vacancy, Rent Decline, and Accidents Should Not Be Taken Lightly”
One commonly overlooked risk is vacancy risk. The rental income of an investment property relies on having tenants. However, tenants will inevitably move out at some point. While it would be ideal to quickly find new tenants for vacant units, real estate is not always that straightforward.
In prime locations in the city center, vacancy risk is indeed lower. However, such desirable rental properties are often expensive and acquiring them can be challenging. Additionally, if the previous tenant left the unit in a poor condition or if repairs and renovations are required, new tenants cannot move in until those tasks are completed, resulting in a loss of rental income during that period.
Some people always assume their property will be fully occupied, but such a scenario is unrealistic. There will always be periods of vacancy. These vacancies naturally reduce the overall yield.
Furthermore, as buildings age, newer rental properties with updated facilities emerge in the surrounding area, leading to a relative decline in rental prices. This is another aspect that should be taken into account.
Lastly, there are unfortunate cases where a property becomes associated with accidents or incidents. This is not just a fictional concept from manga or TV; it is a real issue that can occur. If there has been a suicide or other tragic event inside the property, both the rental income and property value will significantly decrease, and it would be illegal to conceal such information when renting or selling.
It’s essential to recognize that all of these factors are beyond one’s control.
“Selling Real Estate Can Also Be Quite Challenging”
Selling an aging investment property while the tenants are still residing in it is much more challenging than selling a regular residential property.
With a typical property on land with an old house, it can be easily demolished, leaving the land vacant for the buyer to utilize as they please. However, in the case of a property with tenants, demolition is not an option, and you need to find a buyer who is willing to purchase the property as it is. If the building is relatively new and qualifies for bank financing, finding a buyer is feasible. However, for properties with a considerable number of years since construction, it becomes more difficult to find cash buyers.
Furthermore, the valuation of a property with tenants is based on its yield rather than the surrounding land market or building appraisal, unlike regular residential properties. As a result, the sale price is generally set lower than that of residential properties.
It’s important to note that tenant eviction is much more challenging than most people imagine. In Japan, tenants are protected by law, and you cannot forcefully evict them without a valid reason. Simply wanting to sell the property is not considered a valid reason for eviction. In cases where negotiations with the tenant become difficult, you may need to seek legal assistance or bear the burden of paying relocation fees.
In this regard, stocks offer much higher liquidity compared to real estate. Stocks can be sold and converted to cash anytime the market is open, providing greater flexibility and ease of transaction.
For Those Determined to Pursue Real Estate Investment
While I have discussed the challenges of real estate investment thus far, there are also notable advantages to investing in real estate. These include the ability to leverage bank financing more easily compared to stocks and the relatively stable price movements. While it is possible to use leverage through margin trading in the stock market, it tends to be riskier due to the higher volatility compared to real estate. Real estate investments offer a middle-risk, middle-return profile, which can be appealing.
For those who still desire to engage in real estate investment, they may be drawn to these advantages or simply have a genuine interest in real estate.
For those considering real estate investment, I, as a real estate agent, would like to offer some simple advice.
Avoiding Properties in Rural Areas
One of the most challenging situations for real estate agents is dealing with properties in rural or suburban areas that are difficult to sell.
In Japan, the population is heavily concentrated in urban areas, which poses a high risk of property devaluation in the outskirts. Additionally, finding buyers for these properties is extremely challenging.
Individual buyers are usually not interested, so we primarily handle these cases as purchase deals with professional real estate agencies. Naturally, the selling price is significantly lower than the original purchase price.
As mentioned before, real estate is all about resale value. It’s important to consider whether the property can be sold at the same value or higher in 5 or 10 years.
Even if the immediate rental yield seems attractive, investing in properties in rural or suburban areas without a clear exit strategy can lead to regrets in the future.
It’s crucial to adopt a fundamental approach of acquiring properties in desirable locations that everyone wants.
Approach Real Estate Investment with a Well-Planned Financial Strategy and Preparation
Real estate investment requires a larger initial investment compared to stock investment. As mentioned earlier, having the financial means is crucial when it comes to purchasing properties in desirable locations. It’s important to not only save up your own funds but also consult with financial institutions beforehand to determine the amount of financing you can obtain based on your financial profile.
Once you have a clear understanding of your budget, you can preselect the best areas within that range.
When it comes to buying real estate, you should never start with an easy-go-lucky approach. It will inevitably lead to failure. I’ve seen many people make that mistake. While there are indeed real estate investors who have started with a strong momentum and smoothly progressed, to be honest, their success is often influenced by factors like timing and luck.
Never forget that beneath the successful real estate investors, there are countless failed attempts. The failure in real estate investment can have a significant economic impact, and in some cases, it can be irrecoverable.
Conclusion: Final Thoughts on Real Estate Investment
While I have discussed the practical weaknesses of real estate investment from the perspective of a real estate agent, it’s important to note that there are also fantastic aspects to real estate investment. With a proper understanding of the risks involved and adequate preparation, there is certainly a path to success. I have no intention of completely dismissing real estate investment.
In any form of investment, it is crucial to assess the specific characteristics and take calculated risks accordingly.
I hope that this discussion has provided some insights into your investment strategy.
Thank you for reading thus far. I appreciate your time and attention.
