Demerit of Real Estate Investment
Vacancy and Arrears
There is no guarantee that your property is always full because people move in/out.
If the property you purchased stays vacant, then you are not going to receive any rental income and you won’t get the desired return. Also if you don’t select tenants thoroughly, you might run into a risk of arrears.
When arrears happen, it will take time, money, and energy to solve the problem.
→Solution: Understand thoroughly rental needs. Use a sublease system.
Risk of Natural Disaster
Natural disasters such as a fire, earthquake, and typhoon can harm your properties.
Repair costs will incur when there is a damage.
→Solution: Get a fire insurance or earthquake plan.
Comparing to regular financial products like stocks, Real Estate Investment has lower liquidity.
Unlike saving or stocks, you cannot turn your property into cash in a day. It needs at least a month or more to sell at the market value. You can cash out quicker by selling it to real estate brokers but the price tends to be lower than the market value. You should be aware that it takes time to sell real estate.
→Solution: Purchase real estate with spare money. Stock up cash in case of emergency.
A real estate property ages and this’s inevitable.
If you don’t do anything about it or watch it get older, vacant rooms will increase and your rental income will decrease. There needs to be repair on a property to keep it in the nice condition.
→Solution: Avoid to purchase too old properties. Set aside and stock up some repair fee from rental income.
Looking back on the “bubble”, the government is now trying to put restraint on real estate prices.
As for profit from “flipping” by individuals, 39% effective tax rate if it’s a short term transfer under 5 year period or 20% effective tax rate if it’s a long term transfer over 5 years will be applied. Since Japan applies progressive taxation, the higher rental income from real estate you get, the more tax you need to pay.
→Solution: Own properties as a corporation. Have a consultation with an accountant to save on tax.
Many Types of Costs
There are many types of costs and payments needed in Real Estate Investment.
Maintenance costs for repairs/reforms on properties, brokerage fees at purchase, and tax are also included in this.
The chapter 3 explains costs in more detail.
→Solution: Stock up some money for those costs.
Not Strong to Loan Interest Rate Increase
An increase of a bank loan interest rate along with economic inflation may be a cause to bring real estate prices up.
However, if the interest rate goes up, amount of loan repayment also goes up, which causes your profit going down.
→Solution: Make a prepayment when interest rate is in the up trend. Borrow with fixed interest rate.
RIsk of Bank Loan Policy Change
Real Estate is not inexpensive shopping and it costs at least several million JPY.
There aren’t many investors who pay just cash to purchase. So many cases investors borrow money from a bank. However the price of a property varies based on this bank loan.
How easy/difficult it would be to obtain a loan from a bank relies heavily on its timing.
Things like Monetary tightening by Financial Services Agency would dramatically change the loan policies with financial institutions. When banks want to give out a loan, the price of a real estate property rises because there is an increase of people who are able to purchase with the loan which causes more demands than supplies of real estate. On the other hand, when there is a few loan giving, the price drops because there are only a few people to purchase.
→Solution: Pay attention to bank loan policy changes. Purchase in cash.
Risk of Idel
If you haven’t studied Real Estate Investment thoroughly, you are going to have to listen to exactly as real estate agents says. They earn money when a deal is closed so they basically focus on making it happen. As a result, you may end up purchasing a property that may put you in a trouble down the line. Anther case seen often is that a owner purchased a nice investment but as a result of idle, there are lots of vacant rooms in his/her property and the owner ends up selling it due to unpaid loan repayments. You should know more about Real Estate Investment not to fall into this kind of bad situations.
We’ve seen many demerits of Real Estate Investments but there are always good solutions to those.
Controlling the risks and choosing the right ways to minimize them would be the key to success.