When looking at real estate property advertisements, there are many properties with high yields of 10% or more.However, as a common failure example, I often hear that a large amount of money has been spent while operating it after purchasing it with confidence because of the high yield.This is because we only looked at the surface and misjudged whether it was really profitable.Let's learn how to choose a property with a high profit margin in the true sense without being swayed by advertising numbers.Since it is a second-hand property, there are already tenants, but some rooms are vacant.The rent currently obtained is the current rent income, and the rent income when the property is fully occupied is the estimated rent income when the property is fully occupied.In many cases, yields are calculated assuming full occupancy, so do not judge immediately by looking only at the numbers on the advertisement.This time, we will explain the guideline and points to be careful from the basic knowledge of the yield of real estate investment.
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Most of the yields in real estate investment advertisements are surface yields
In most cases, the number that appears in advertisements is the gross yield, which is the rental income divided by the property price. If you can get 4000 million yen in profit every year from a 400 million yen property, the nominal yield is 10%, so the advertisement will say that the yield is 10%.
As a point to note, the yield in real estate investment can be divided into three: assumed yield, surface yield, and real yield.
- Assumed yield is the yield in the fully occupied state.
- The surface yield is the yield that reflects the current real estate situation, and is "current rental income / property price x 100"
- The actual yield is the yield that reflects expenses, etc. on the surface yield.
In reality, you will not be able to get all of the 400 million yen because you will have to pay management fees, taxes, and real estate acquisition tax and registration fees at the time of purchase.In other words, it is necessary to think in terms of real returns.
As an example of calculation when annual expenditure is 100 million yen, rent income (400 million yen) - annual expenses such as repair costs and taxes (100 million yen) ÷ property price (4000 million yen) = 7.5%, the real yield is 7.5%.
Examples of real estate investment expenses
The following is a summary of the main annual expenses when starting real estate investment, so please refer to it.
- Management expenses/repair reserves (management and maintenance expenses for common areas)
- Real Estate Acquisition Tax (You will receive a tax notice about XNUMX months to XNUMX year after you acquire the property.)
- Registration license tax (a tax paid to the government during the registration process)
- judicial scrivener fee
- Stamp tax (required for sales contracts, contract contracts, receipts, etc.)
- Brokerage fee to real estate brokerage company
- property fee
- Fixed property tax (the amount obtained by multiplying the fixed property tax assessment value by the standard tax rate of 1.4%)
- City planning tax (for properties located in so-called “urbanized areas” within city planning areas)
- Fire insurance, earthquake insurance (compensates for “movable property” such as furniture and fixtures in the building)
- Repair expenses, renovation expenses (Minor repair expenses such as floor replacement, cloth replacement, house cleaning, etc. Let's set aside a little from the income)
Related article:What is the initial cost of real estate investment?Thorough explanation of the breakdown
There may be a hidden reason behind the high yield
Looking at a real estate portal site, I found a second-hand apartment that boasts a high yield of 13%.I immediately contacted the seller and purchased it.However, when I opened the lid, the number was the number when the room was fully occupied.In fact, about 4% of the vacancies had occurred, and it seems that they were recruiting tenants at low rents in order to increase the occupancy rate just before buying and selling, and the level was 20% lower than that of the area. It was obviously just padding the numbers.Moreover, despite the fact that it is a large-scale property, we also found that even if we make a low estimate for the repair cost of the outer wall, it will cost at least 500 million yen.Even though the property is already barely managed, if there are more vacancies in the future, the rent income, let alone the repair costs, will be in danger.
When choosing a property, it is necessary to pay particular attention to things such as the fact that the building is old and the exterior walls and rooms need renovation, areas with low rental demand, poor access, and the surrounding environment is not good.Also, it is better to avoid properties with leasehold rights.The reason is that since the land is rented, the monthly expenditure will increase as a land fee, and a renewal fee may be charged when the contract is renewed.In addition, it is necessary to obtain the consent of the landlord at the time of sale, and a name change fee will also be required.
Furthermore, we have no choice but to avoid this because we cannot get loans for properties built according to the old earthquake resistance standards (the standards that were applied in building certification until May 1981, 5).It is difficult to find a buyer at the time of sale even if you buy it because the yield is high and it is cheap.Properties that are far from stations that are 31 minutes or more on foot, and properties that have been involved in accidents should also be avoided.If there is no rental income, there will be no money or children, so you should avoid properties and areas where tenants generally do not gather.
Due to the declining population, rental demand in rural areas is declining, so it can be said that it is smoother for beginners to start real estate investment especially in the city center where there is a large population.In addition, if the location is unfavorable, the building is old, the tenant is dependent on tenants from factories or schools, or the property has an accident, it can be said that the risk of vacancy is likely to be high.
Related article:The most scary vacancy risk in real estate investment.What are the measures and characteristics of properties that tend to be vacant?
Approximate return on real estate investment
So what is the target rate of return?The average yield of popular wooden apartment buildings in the Tokyo metropolitan area is "newly built: around 5% to 6%, used: 6% to 8%". 8% is considered high enough.However, since the situation of each property and the surrounding environment are different, it is not possible to say unconditionally, "A certain percentage or more is no problem!"Even if the yield looks low, if the conditions are good, you can save expenses, which may lead to an improvement in yield.
A note on high yields
In addition, as properties that should be avoided even if the yield is currently high, there are land leasehold properties (the landlord has a monthly land fee and a renewal fee is required when renewing the land lease contract), properties built according to the old earthquake resistance standards, There are properties with management fees and reserves for repairs that are higher than the market price, and properties that are too far from the station.These are difficult to find buyers when considering the sale of real estate investments.
By the way, according to the 41st Real Estate Investor Survey (as of October 2019) published by the Japan Real Estate Institute, the yields of rental housing in central Tokyo are as follows.
- Studio: Jonan area (Meguro Ward, Setagaya Ward): 4.2%, Joto area (Sumida Ward, Koto Ward): 4.5%
- For families: Jonan area (Meguro Ward, Setagaya Ward): 4.3%, Joto area (Sumida Ward, Koto Ward): 4.5%
reference:Results of the 41st Real Estate Investor Survey (as of October 2019)
In urban areas where property prices tend to be high, prices tend to be lower than in rural areas.In anticipation of expenses such as entrusting management to a management company, it is advisable to select a property that is 2% to 3% higher than the average, so in the case of a second-hand whole apartment, it is good to choose around 6% to 8%. I guess.
Since the properties posted on the portal site are posted through the eyes of real estate brokers, it is better to be careful about properties with too good conditions.In other words, there are some properties that have a backside, such as "If you do not meet this condition, it will not sell."
Don't be fooled by the yield, choose a property after comprehensively confirming the location, age of the building, whether the property has been damaged, whether it is earthquake-resistant, whether the tenants are dependent on a single requirement (factory or university), etc. would be good.Also, it is difficult for beginners to comprehensively research information by themselves, so it is even safer to consult with a real estate investment professional.Even if you are a beginner in real estate investment, if you are a sincere contractor, you should be able to explain in detail at the interview.
Related article:[Yield of real estate investment] What is the standard?Thorough explanation of the calculation method!
Summary
- Advertisement figures are surface yields obtained by dividing the rental income by the property price.
- Also check "current rent income" and "estimated rent income at full occupancy"
- There is a reason for the high yield
- The standard yield of real estate investment is around 6% to around 8%, but it is necessary to comprehensively judge the location, age of the building, whether the property has been damaged, earthquake resistance, whether the tenants are dependent on a single requirement, etc. is important
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.
