In real estate investment, there are many people who are considering buying a second or third building when the first building is operating on a wave.
However, when buying more properties,
I'm curious about the pros and cons
I don't know when to buy more
Isn't it dangerous for a novice investor to buy more?
Don't you have any doubts?
This time, as a strategy for buying more properties, I summarized the benefits and risks, as well as the appropriate timing.
table of contents
What are the benefits of buying more in real estate investment?
It is natural that rental income will increase as the second and third buildings are purchased in real estate investment, but what other merits are there?
There are four main advantages of buying more in real estate investment.
- Leverage experience with properties you already own
- You can disperse the cost of vacant rooms and equipment deterioration, disaster risk, etc.
- From simple interest to compound interest
- Makes it easier to choose to sell your property
Let's take a closer look at each one in detail.
Leverage experience with properties you already own
When purchasing the second building, you can make use of the knowledge and experience you have cultivated in the first building.
As a result, the hurdles to purchase will be lowered, and you will be able to manage your investment smoothly.
Also, at the stage of searching for a property, it is possible to start investing in real estate under better conditions because you know the points and cautions that you should keep in mind when purchasing the first building.
Related article:What is the reason why "multiple ownership" is ideal for real estate investment?
You can disperse the cost of vacant rooms and equipment deterioration, disaster risk, etc.
Owning multiple properties spreads out all costs and disaster risks.
For example, even if the building is destroyed due to an unexpected disaster such as an earthquake or fire, if you have a second building in another area, it is possible to cover it there.
Also, even if there is an impact on income and expenditure due to vacant rooms or deterioration of equipment, the second building will be able to make up for it.
From simple interest to compound interest
“Simple interest” means that interest is earned only on the principal deposited, and in terms of real estate investment, it refers to a state in which real estate income can only be obtained from one property.
On the other hand, “compound interest” refers to a mechanism in which the interest attached to the principal is incorporated into the principal, and the interest is also added to the next interest rate.In other words, the more principal you have, the faster your assets grow.
Compound interest in real estate investment refers to using the rent income obtained from the first building as a down payment for the second and third buildings, and it can be said to be a great advantage in terms of profitability.
Of course, you can use the profit from the first building to pay off the loan early or pool it as a surplus, but it is better to use it for the down payment of the second building, which will result in more efficient real estate investment. Masu.
I tried to describe a simple simulation so that you can easily imagine how much difference there is between "simple interest" and "compound interest" in real estate investment.
[Assumptions] Property purchase price is 4,000 million yen, annual rental income is 200 million yen, and annual yield is 5% (maintenance costs, taxes, etc. are all taken into account).In order to make it easier to understand this time, we compared only the yield.
・Simple interest
If you own only one building, your annual profit will be 1 million yen x 1% = 200 yen.
Therefore, if you hold it for 15 years, the cumulative profit will be 10 yen (15 yen x 150 years).
・In the case of compound interest
Compound interest assumes that the property grows by one every five years.
If the conditions are the same as for simple interest, the conditions are as follows.
| Elapsed years | Number of owned properties | Single year profit |
| 5 | 2 of | 20 million yen |
| 10 | 3 of | 30 million yen |
| 15 | 4 of | 40 million yen |
| Cumulative profit | 360 million yen |
Since each new purchase of a property increases the profit after that year, it can be seen that the cumulative profit will be a relatively large amount as a result.
Easier to take the option to sell the property
Eventually, when considering the "exit strategy" of owned real estate, if there is only one target real estate, there will be two choices: sell or not sell.
On the other hand, if you own two or more real estate properties, you will be able to consider various options, such as selling only one building after considering their income and expenditure situation and surrounding circumstances.
Related article:A must-see for owners who want to sell real estate!Introducing the procedure for selling real estate
Risk of buying more in real estate investment
There are also some risks involved in buying more real estate investments.
I've highlighted four major risks here.
- Higher risk of investment failure
- higher fixed costs
- Increased impact of fluctuations in real estate values
- Complicated cash flow calculations
Higher risk of investment failure
While you can make decisions about where to invest based on the knowledge gained from the first investment, managing multiple properties becomes more complex.
Therefore, it is important to create a situation where you can move quickly even in unforeseen situations, such as by using a management company.
In addition, even if we diversify our investments so that we do not go bankrupt together, if there is a major economic fluctuation, it will inevitably have a huge impact on all the real estate we own. put it in a corner.
higher fixed costs
If you purchase and manage multiple properties, not only will it take more time, but maintenance costs will also increase.
In addition, since it is common to borrow funds from a bank when investing in real estate, the amount of repayment will also increase while the monthly income increases.
Therefore, if the occupancy rate drops as a result of an increase in vacant rooms, the possibility of bankruptcy is not zero.
Therefore, it is most important to operate with an emphasis on cash flow until the management of the second building stabilizes.
If cash flow is positive, it can be used to cover risks when interest rates rise and can be used to pay taxes such as property taxes.
Increased impact of fluctuations in real estate values
Real estate investment is not an investment that produces results in a short period of time, but rather an investment that aims to earn profits over the medium to long term.
Therefore, it can be said that one of the risks is that it is difficult to judge whether an area that was popular at the time of purchase will continue to be popular several decades later.
In addition to economic and trend fluctuations in land prices, there is also the risk of unexpected disasters such as earthquakes and tsunamis.
No one knows what the future holds, but with the understanding that real estate values fluctuate, try to choose a property with the lowest possible risk.
Complicated cash flow calculations
As I briefly touched on earlier, the more real estate you buy, the more you will have to borrow money from banks and financial institutions, so the management and operation of your funds will become more complicated.
Pay attention to managing your "cash flow", especially until your real estate investment hits a wave.
Cash flow is the flow of cash, and it is used to figure out how much money is left at hand by subtracting expenses from income obtained from rental income.
Whether the cash flow is positive or not is a measure of whether the real estate is operating soundly, so please be aware of keeping the cash flow positive first.
On top of that, it is also important to try not to lower the rent as much as possible, and to take out a loan with the lowest interest rate possible when purchasing real estate.
When is the right time to consider buying more in real estate investment?
If you want to buy more in real estate investment, it won't be a story in the first place if you can't get permission to loan from banks and financial institutions.
Therefore, it is more important than anything to create a situation in which the other party can think that “this person will be okay to lend”.
In order to purchase the second property safely, it is best to keep the first property in the following conditions as much as possible.
- low vacancy rate
- cash flow is positive
Of course, it is also necessary to see through the mood of the real estate market, but if the above conditions can be met, there is no particular optimal timing for additional purchases.
Here, in addition to the "vacancy rate" and "expense ratio" that you want to keep in mind when operating the first building, we will briefly introduce free cash flow that you should be aware of.
Related article:[Real estate investment] What is the property purchase strategy?Explain benefits, risks, and appropriate timing
Pay attention to vacancy rate and expense ratio
The vacancy rate is an extremely important indicator for banks and financial institutions to decide whether or not to lend.
If the vacancy rate is high, it will be difficult to expect rental income, which is the key to real estate investment, and the lender will judge that the risk of default is high.
The vacancy rate is calculated using the following formula.
Vacancy rate = (number of vacancies x vacancy period) / (total number of rooms x 365 days)
For example, if there are 10 units in total and 2 of them have been vacant for 2 months (62 days), the vacancy rate is as follows.
(2 units x 62 days) ÷ (10 units x 365 days) = about 3.4%
It is up to each financial institution to judge whether the vacancy rate is high or low, but try to keep the rate as low as possible throughout the year.
In addition to the vacancy rate, it is also necessary to pay attention to the “expense ratio”.
The expense ratio is calculated as "necessary expenses / rent income", and if the expense ratio is extremely high, it may be better to review the breakdown once.
Necessary expenses include the following items, but please be aware that loan repayment costs and depreciation expenses are not included.
- Consignment management fee
- repair costs
- Utilities expenses
- Brokerage fee
- Fire insurance premium expense ratio
Secure free cash flow
In apartment management and real estate investment, it is also important to secure "free cash flow" (= money that can be used freely).
Flow cash flow is calculated by subtracting investment cash flow from operating cash flow.
The higher the free cash flow, the more comfortable the operation is.
Please be diligent and keep in mind that we can continue to operate soundly and comfortably.
In addition to paying attention to the vacancy rate, expense ratio, and free cash flow when purchasing additional properties, you should also prepare a management system for existing properties to maintain the asset value without declining.
Some people may have heard the opinion that "It is not recommended for beginners to buy more real estate", but that is not the case.
When purchasing the first building, it is important whether or not the second and subsequent buildings are considered, and it is not dangerous just because you are a beginner investor.
However, since beginners have no experience with troubles in real estate management, it is not a good idea to buy a second building without letting go.
As I mentioned earlier, it is important to fully understand the risks involved in purchasing a second building before making a purchase.
Choose a property with different conditions
As can be said not only for real estate investment but also for other investment methods, it is extremely important to keep in mind "diversified investment" when owning multiple real estate properties.
For example, if you purchase your first property in central Tokyo, you may be tempted to choose the densely populated Tokyo for your second property, but that is not recommended.
If a large-scale disaster were to occur in the city center, the risk of both properties collapsing would be extremely high.
Therefore, it would be better to search for the second property in a different area from the first property from the viewpoint of risk management.
In addition to the area, it is also necessary to pay attention to the “age of the building”.
Since real estate inevitably deteriorates over time, it is necessary to make a large contribution of funds for large-scale repairs in the future.
At that time, the closer the age of the first and second buildings is, the more likely it will cost you a large amount of money in a short period of time.
Purchasing a property with a certain age gap will help you avoid such risks.
Find a trustworthy property management company
As the number of properties you own increases, so does the need to manage them.
Regardless of the person who specializes in real estate investment, most people are doing real estate investment on the side of their main business.
Therefore, as the number of owned properties increases, the basic stance is to ask a reliable management company for the parts that can be outsourced.
Not only when trouble occurs, but also for minor problems that occur during normal management, you will be able to respond quickly and appropriately by using a management company.
It is important to find a company that meets your needs after comparing several property management companies.
Related article:How to choose a management company that is important for real estate investment?Points to identify a reliable contractor
Summary
This time, we introduced the benefits, risks, and appropriate timing under the title of the strategy to increase the purchase of real estate investment.
When considering additional purchases, it is of course important to find a good property, but it is also important to find a reliable management company to expand the scale of your business.
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.
