People who are successful in real estate investment do not necessarily own one property, but there are many cases where they own multiple properties.
However, some people may be worried that owning multiple properties will increase the management effort and cost.
Therefore, this time, I summarized the risks and precautions as well as the benefits of owning multiple properties in real estate investment.
I hope that this article will be helpful not only to those who are considering buying more real estate, but also to those who are thinking of starting real estate investment.
table of contents
Advantages of “multiple ownership” in real estate investment
The advantages of “multiple ownership” in real estate investment are mainly the following two points.
- You can diversify the risk of real estate investment
- Efficient real estate management
Let's take a look.
You can diversify the risk of real estate investment
In owning real estate, there are various risks such as vacancy risk, rent decline risk due to changes in the surrounding environment, and repair risk.
If you own only one property, you are solely responsible for such risks, which can lead to a decline in earnings due to disasters and vacancy risks, which can result in a significant deterioration in business conditions.
However, if you own multiple properties, you can diversify and mitigate those risks.
For example, even if some kind of trouble occurs and the profit of one of the properties is reduced, other properties may be able to make a profit, resulting in a reduction in the overall loss.
Related article:A thorough explanation of the points to purchase the second building in real estate investment!
Risk diversification tips
The following five points are tips to keep in mind when diversifying the risk of owning multiple properties.
- Divide the area of the property
- Differentiate property types
- Choose properties with different building ages
- change customer target
- Delay the purchase of real estate
This is the most important method of diversifying risk, but we recommend dividing the area (location) of the property.
If you purchased your first property in Tokyo, you may want to consider purchasing the second and subsequent buildings in other areas.By dividing the area, you can deal with the risk when a natural disaster occurs.
In addition, if properties are concentrated in only one area, it will suffer a large loss when the popularity of the area declines due to changes in the surrounding environment. neither.
In addition to diversifying risk, it is possible to respond to various demands by changing the type of property (detached house, condominium, etc.) and floor plan in addition to owning properties in different areas.
In addition, you can try to change the target of customers, or try to put some ingenuity into it, such as staggering the timing of real estate purchases and staggering the timing of large-scale repairs and renovations.
By staggering the timing of large-scale repairs and renovations, you may be able to compensate for the cost of repairing the first building with the income from the second and subsequent buildings.
Efficient real estate management
Since the experience and knowledge cultivated in the first building can be utilized in the operation of the second and subsequent buildings, real estate management can be performed more smoothly and efficiently than in the first building.
In addition, by using the contractors that you have established a relationship with in the management of the first building, you can take advantage of volume discounts and save the trouble of selecting contractors, so things will go smoothly.
Once you purchase real estate, you cannot leave it as is, and as long as you own it, you will need to maintain it, so it is important to build good relationships with various outside contractors.
Even when considering the final exit strategy, if you own only one property, you have two choices: “sell” or “not sell”, but if you own two or more properties, “keep one and sell the others”. You will have several options to choose from, such as
If the first building is generating stable profits, even if the second building does not generate the expected profits, the decision to let go can be made quickly and appropriately, enabling efficient management.
If you own multiple real estate properties, you can be certified as a business operator.
As mentioned earlier, you can spread the risk by owning multiple real estate properties.
In addition, if you own real estate that meets or exceeds the standard of "5 buildings with 10 rooms", you will be able to receive certification as a business operator.
"5 buildings and 10 rooms standard" means owning 5 or more detached houses, 10 or more rooms for sectional ownership, and 50 or more parking spaces for parking lots.
If you meet the criteria and are certified as a business, you will be able to save tax because the necessary expenses and deductions for tax returns will increase.
However, if you are investing in real estate as a side business, check the employment regulations of your main job in advance.Depending on where you work, there may be some kind of regulation or penalty for receiving certification for the 5 buildings and 10 rooms standard as a side job.
In order not to interfere with your main business, please read the employment regulations carefully and check any unclear points before considering purchasing an investment property.
Advantages of receiving business certification
There are four benefits of being certified as a business.
- Blue return special deduction
- You can use the blue business full-time employee system
- Dealing with bad debt losses due to uncollectible rent, etc.
- Dealing with asset loss such as demolition and disposal
First of all, if you are recognized as a business operator, you can receive the application of "blue return special deduction".
Before it became a business scale, the real estate income deduction amount was up to 10 yen, but if you file a blue tax return, you will be allowed up to 65 yen. If you file your return on paper without storing it, the upper limit of special deduction for blue returns will be reduced to 2020 yen.)
Since the deduction amount of 10 yen will be increased to at least 55 yen, the tax saving effect will be large.
In addition, if it is recognized as a business scale, you will be able to use the system called "blue business full-time employee".
For example, if a spouse or a relative who meets certain conditions helps with real estate management, the salary can be recorded as an expense.
Due to the basic exemption and other income deductions, it is more tax-saving if multiple people manage the property and record expenses instead of managing the property individually, so many people use it in conjunction with the blue return. .
"Loss of bad debt due to uncollectible rent" can be included in the necessary expenses for the year when it becomes uncollectible.
You can also include the full amount of the loss in your expenses for "asset loss due to demolition, disposal, etc.", but if you cannot deduct it from your income for the year, you can carry it forward over the next three years.
Disadvantages of owning multiple properties and obtaining business certification
We will introduce the disadvantages of real estate investment on a business scale.After comparing the merits and demerits, please use it as a basis for deciding whether or not to receive business certification.
There are also some disadvantages of being certified as a business:
have to pay business tax
If the above-mentioned 5 buildings and 10 rooms are met and business certification is obtained, it is considered that there is rental income on a business scale.
Therefore, 290% individual enterprise tax is imposed on the amount exceeding 5 million yen (before special deduction for blue return) of income (*Unlike the criteria for determining the scale of business for income tax, it may differ depending on the region. there is).
However, up to 290 yen can be deducted from individual business tax, and business tax can be reduced as an expense, so it may not be a big disadvantage. Knowing the whole picture, not just one drawback, will help you make the right decisions.
You will not be able to receive spousal exemption.
If you are certified as a business operator and your spouse or relatives who meet certain conditions are paid salaries and are considered to be "blue business full-time workers", you will not be able to receive exemption for spouses or exemptions for dependents.
The spousal deduction (13 to 38 yen) and the dependent deduction (38 to 63 yen) are not applicable, so be aware that the payment that exceeds the deduction amount is a prerequisite for tax savings.
If you are certified as a business operator and your total income exceeds 1,000 million yen, you will not be eligible for spousal exemption.
Adjusting the balance of income and expenditure including tax is also necessary in real estate investment.
Requires double-entry bookkeeping
If you receive business certification, 65 yen will be deducted as a blue return special deduction, but you will need to make a double-entry bookkeeping.
Double-entry bookkeeping requires two forms, such as an income statement and a balance sheet, so it may feel more cumbersome than single-entry bookkeeping with a white return.
However, there are accounting software that can be used online now, so bookkeeping is much easier than before.Let's take advantage of it and make tax processing as painless as possible.
Risks and precautions of owning multiple properties
So far, we have focused on the benefits of owning multiple real estate properties, but there are also risks associated with owning multiple properties.
The main risks are:
- Risk of borrowing too much
- Loans cannot be obtained smoothly
- Increased maintenance and maintenance costs
Risk of borrowing too much
Of the risks that multiple ownership poses, the most important thing to watch out for is over-borrowing.
In order to invest in multiple properties, the amount of borrowing will naturally increase because it is often necessary to take out a loan each time.Be careful not to expand your investment scale just by momentum.If you try to own multiple properties before the management is stabilized, only the amount of debt may swell.
A forward-looking strategy is important in real estate investment, so be sure to simulate from various perspectives and be aware of the balance between the amount of debt and income.
Loans cannot be obtained smoothly
If you repeatedly invest in real estate in a short period of time, financial institutions may be afraid of excess debt and may not be able to receive loans.
The most important thing is to stabilize the management of existing investment properties.In order to receive a new loan without delay, it is important that repayment progresses to some extent and the loan balance is reduced.
Also, depending on the amount of debt and business conditions, it may take time for assets to increase, so consider the repayment period when planning your investment plan.
Some people may want to buy a high-yield property and rush to pay off their debt, but this is not recommended.
High-yield properties often have low property prices, and as a result, collateral valuations are often low.Such property will be difficult to get a full loan.
Those who have just started real estate investment should aim for solid and stable management without rushing.It is important to keep your feet firmly on the ground.
Related article:Is it difficult to review the loan for the second purchase of real estate investment?Explaining the points of the repayment ratio
Increased maintenance and maintenance costs
As the number of properties you own increases, so does the maintenance and maintenance costs.
If the management of the owned property is neglected, it will not only increase the risk of complaints from tenants and develop into trouble, but also reduce the attractiveness of the property and cause vacancies to prolong.
Especially for those who are investing in real estate as a side business, it is also important to reduce the hassle of managing themselves as much as possible in order to devote time to their main business.
As a concrete measure, there are methods such as finding a real estate management company that meets your needs and having them manage it appropriately.It is important to create an environment where you can leave the things you can entrust to the real estate management company and focus on other things.
Related article:[Real estate investment] What is the property purchase strategy?Explain benefits, risks, and appropriate timing
Summary
This time, we have explained the reasons why “multiple ownership” is ideal in real estate investment, along with the benefits and cautions.
It is no exaggeration to say that finding a good real estate management company is the first step to success, as managing and managing multiple properties increases.
Also, in order to proceed with the financing of the second building, it is very important to properly monetize the first property.
In that respect, it is necessary to think about long-term management of real estate investment with an eye on the future.
At Rich Road Co., Ltd., we will consistently support all aspects of investment real estate, from complete beginners to experienced people, from a wide range of real estate selection, loan consultations, post-purchase management, and renovations.
