What kind of investment is real estate investment? How is it different from stocks and FX?
This time, we will explain the characteristics and benefits of real estate investment, comparing it with other types of investment forms, for those who want to start or learn about asset management.
1. The main purpose of real estate investment: income gain and capital gain
Real estate investment is an asset management method that involves purchasing real estate such as condominiums, apartments, detached houses, and commercial facilities, with the primary goal of earning rental income or profits from sales. Real estate that can be invested in can be for residential, commercial, or office use, and the profitability varies depending on the location and type of property. In this article, we will focus on apartment buildings and condominiums, which are the types of real estate that we handle frequently.
The main sources of income from real estate investment can be divided into two main categories:
Rental income (income gain): Renting out your property allows you to receive stable rental income every month.
Capital gains: This is a method of selling a property when it has increased in value, and making a profit from the difference between the purchase price and the selling price.
Income gain (profit from management) / capital gain (profit from sale) are general concepts of profit in the overall investment. In real estate investment, the rental income from tenants is the income gain.
As with other investment methods, the main goal of real estate investment is to maximize these two types of income and make as much profit as possible.
The lease contract period is usually two years. Generally, the possibility of a sudden drop in rent is extremely low, so you can receive a steady income every month for several years.
2. How is real estate investment different from stocks and FX?
Real estate investment, stocks, and FX (foreign exchange margin trading) are all used as major asset management methods, but each has its own characteristics. Below is a table summarizing the characteristics and advantages of real estate investment, stock investment, and FX for each item, along with an overview.
| Features | Real Estate Investment | Stock investment | FX |
| Leverage effect | high (It is possible to purchase a property for approximately 10 times your annual income) | moderate (Leverage possible with margin trading) | Very expensive (Up to 25 times or more is possible) |
| Stability | high(Rental income is relatively stable) | Moderate (depending on stock price fluctuations) | Low (exchange rates fluctuate greatly) |
| Profitability | Moderate (income + capital gains) | high(Dividends + Profit on Sale) | high(Leverage Profit) |
| risk | Vacant properties and disaster risks, etc. | Affected by corporate performance and economic trends | Impact of exchange rate and interest rate fluctuations |
| Trouble | Property management and maintenance 必要 | Corporate information gathering and market analysis are necessary | Economic indicators and political trends need to be monitored |
| Real Assets | Yes(Can be held as a physical asset) | None (held as securities) | None (holding as a currency pair) |
Leverage effect
Leverage is the principle of a lever. Like lifting a big object with a small force, the leverage effect is the ability to get a big return from a small investment.
In real estate investment, the prices of properties are often high and a corresponding amount of capital is required, but by utilizing loans, it is possible to manage larger properties and you can expect efficient asset formation. It is possible to purchase properties up to about 10 times the price of your annual income.
The biggest feature of FX is that the leverage effect is very large. It is said that up to 25 times the amount of trading is possible, so for example, even with an investment of 10 yen, it is possible to trade 250 million yen, but the profits when successful and the losses when unsuccessful are often enormous.
Stability
As mentioned above, real estate investment provides stable rental income, and although there is a risk of vacancy, the characteristic is that income fluctuates less than other asset management methods.
In addition to the risk of reduced income due to vacant rooms, there are also risks associated with physical assets, such as damage and loss due to fires, earthquakes, etc. With insurance and proper management and operation, it is possible to hedge against certain risks.
On the other hand, in stock investment, prices are constantly fluctuating depending on business performance, the economy, and supply and demand conditions, and in FX, stability varies depending on the currency. In addition, FX has a greater leverage effect than real estate investment, making it possible to trade large amounts with a small amount of capital, but this also means that losses when a trade fails can often be enormous.
Profitability
There are two sources of income: income gains (rental income) and capital gains (sales profits), and the appeal of real estate investment is the stable income it generates, especially when held for a long period of time. However, because of the large leverage effect, stock investment and FX can be expected to produce higher returns with a smaller investment amount.
Trouble
Property management, repairs, and tenant correspondence are required, but you can reduce the hassle by outsourcing this to a management company.
When it comes to stock investment and FX, it is necessary to conduct market analysis on a daily basis and keep a close eye on economic indicators and political trends in order to manage the investment appropriately.
It is a real asset
Real estate is a tangible, physical asset that is unlikely to become worthless like stocks or foreign exchange, and has the advantage of being resistant to inflation.
Summary: Characteristics of real estate investment
As mentioned above, real estate investment is characterized by its less volatile price fluctuations compared to stocks and FX, and the ability to expect stable profits through rental income. In addition, because it is a real asset, it has certain strengths against economic shocks and inflation. Although its short-term profitability is inferior to the above two, its appeal is that it has a certain degree of stability, as it is said to have "middle risk and middle return."
3. For those who value stability! Why we recommend real estate investment
As we have said before, real estate investment is especially recommended for those looking for a stable income.
Reason 1: Stable cash flow from rental income
The biggest attraction of real estate investment is the prospect of rental income. As long as there are tenants, you can earn a certain amount of income every month, which can be used for living expenses and loan repayments.
Reason 2: Risk hedging through property and land values
Since the property itself has asset value, it can be converted into cash in the event of selling. In addition, land and buildings rarely become worthless, so they also function as a hedge against inflation.
Reason 3: Long-term asset formation is possible
Real estate investment allows you to manage large assets with little of your own capital by leveraging loans. Another attractive feature is that as you pay off your loan, your assets will essentially increase.
In particular, by utilizing a real estate loan, it is possible to purchase a property that is about 10 times your annual income. For example, if you have an annual income of 500 million yen, you can invest in real estate of about 5000 million yen, allowing you to use your cash on hand efficiently.
Reason 4: Tax savings
With real estate investment, you can reduce your taxable income by recording expenses such as depreciation, loan interest, repair costs, and management fees. Especially for those with high annual incomes, the tax savings on income tax and local taxes are significant, and you can expect an increase in your take-home pay.
In addition, it is also effective as a measure against inheritance tax, as the assessed value of real estate is lower than that of cash and financial assets, making it possible to reduce the burden of inheritance tax.
Real estate investment is suitable for those who value stability and want to manage their assets with reduced risk. It is the perfect choice for those who want to steadily increase their assets, rather than aiming for large profits in a short period of time like with stocks or FX.
I would be very happy if this book inspires even a few people to think, "I want to start investing in real estate!" or "I want to get more serious about it!"
We handle a large number of used properties in the price range of 3,000 million to 2 million yen. We also offer free individual consultations with our specialist staff, so if you have any questions or would like to discuss the management method that best suits you, please feel free to contact us!
At Richroad Co., Ltd., we offer comprehensive support to a wide range of people, from complete beginners to experienced investors, on all aspects of real estate investment, from property selection and loan consultations to post-purchase management and renovations.
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