In recent years, the interest in "investment" has been on the rise. Real estate investment, in particular, has attract many investors attention. However, this investment is often associated with concerns about potential scams and the large amounts of capital involved, which can deter potential investors.
From my own working experience and learning from other colleagus, I found out that indeed, not everyone is suitable for real estate investment. I will write a two-part artical to point out several key traits and reasons that might make individuals hesitant about diving into the world of real estate investment. Please see if they suits you.
When it comes to real estate investment, many people often think it carries high risks, potential scams, and substantial financial commitments, leading to hesitation or discouragement from friends and internet. Most of these concerns stem from a lack of familiarity with how real estate investment works. These reasons can typically be categorized as follows:
- Uncertainty Due to Lack of Understanding: People tend to feel uneasy about the unknown, and investments are no exception. Many individuals hesitate to invest in real estate because they are not familiar with how the market operates.Taking Japan's real estate market as an example, let's provide a brief overview of its current status and operational model. In the investment market, properties commonly traded include residential homes, office buildings, hotels, and commercial accommodation facilities, land, logistics facilities, and more. Compared to real estate prices and investment returns (rental yields) in other countries, Japan offers relatively favorable options, making it an attractive choice for international investors. When it comes to real estate transaction models, The most straightforward transaction model involves purchasing real estate and generating rental income. Some investors focus on buying and selling properties to make a profit. These are just basic explanations to help understand how this market operates. There are many more details to explore, but starting with a fundamental understanding of a market's operations can gradually alleviate concerns and negative perceptions.
- Resistance to Property Loans: Most individuals who invest in high-value assets like real estate or vehicles often utilize loans, either partially or fully. Loans are a common means of facilitating transactions. In the case of real estate investment, investors often use property loans to reduce the burden of paying a substantial amount of cash upfront.When real estate investors take loans from banks, they apply for real estate investment loans, which differ from residential loans. The repayment is typically equal to or a little less then the monthly rent paid by tenants. With proper financial planning, real estate investors (landlords) are usually not significantly affected by this in terms of their daily expenses.Additionally, with mandatory life insurance, in case a situation arises where the borrower cannot repay the loan due to a major accident, illness, disability, or even death, the remaining balance can be settled through the insurance, preventing sudden financial hardship for family members. Furthermore, the real estate acquired through the loan can become a permanent asset to be inherited by family members after the loan is paid off. This is one aspect that separates real estate investment from other forms of investments. In most traditional investments like stocks, startups, or trading, investors typically use their own available cash for investments. Real estate investment often involves bank loans, allowing individuals to initiate investments without a significant cash reserve.While some individuals may remain hesitant about taking on loans, seeking professional advice and conducting an asset allocation analysis and planning before investing can offer a logical approach to financial management and entry into the real estate investment market.
- Uncertainty About the Future: Many individuals invest in real estate to generate long-term passive income through rental income. They often plan to use this rental income as a form of retirement income once their property loans are paid off. At this point, many people begin to worry about what will happen over the next several decades. Will the process be as smooth as anticipated, with rental income continuing until retirement, and will the accumulated funds be sufficient for retirement? These concerns are normal, but the turth is no one can predict the future and the uncertainty about the future is not exclusive to real estate investors. Morever, ensuring housing is a fundamental requirement in modern life. Though we cannot predict the future with certainty, society has a huge amount of experience in the field of housing over years of social evolution. Thus, to some extent, we can make predictions and judgments based on that. Investors should seek appropriate help and resources in line with their individual circumstances and needs.
- Concerns About the large Investment Amount: Real estate investment often raises concerns about what happens if the investment does not pay off. In the case of rental properties in Tokyo, for instance, a property price is around 20 million JYP, and the rental yield is approximately 4%. This yield might not be considered particularly high given the capital involved. However, one important principle of real estate investment is to "focus on stable long-term profits." The return on investment in real estate is closely linked to property prices and market demand. For instance, properties in suburban areas are generally cheaper and may offer a higher rental yield. However, it's important to note that real estate investments are closely tied to population changes. If an area lacks a sufficient population to support the demand for real estate, vacancy rates can soar.In the case of Japan, due to an aging population and declining birth rates, the population in suburb areas has been steadily decreasing, while the population in major cities like Tokyo continue to raise. Therefore, when viewed from a long-term perspective, although urban property prices are higher, there is relatively strong demand.Real estate investment values stable financial returns over short-term high profits. With this perspective, investors can operate their investments with confidence.
- Concerns About Potential Losses: For those who have no concept of investment, feel anxious, and clueless, investing might seem like an overwhelming endeavor. However, it's important to know that investment is a learnable skill.In the case of Japan, based on government surveys, the concept of wealth accumulation among the Japanese has traditionally been centered around "savings." Accumulating assets in cash has been the most common method. While this approach might have worked during Japan's high-growth period around 1960s. However, keeping money in a bank in the current economic environment won't yield much interest, making it difficult to increase one&s saving.That's why the Japanese government strongly promote the idea that citizens should learn to flexibly manage their assets and actively invest in 2022.While it's true that investment always carries risks, these risks and the right investment approach and concepts can be learned through the appropriate channels. Instead of approaching "investment" with a negative mindset, embracing the opportunity to learn the correct knowledge and methods can open up new financial prospects.
This concludes the primary reasons why most potential investors are not sutibale for investing in real estate. In the next part, I will discuss which groups of people are better off not investing in real estate.
Investing in the real estate market has always followed the principle of "the earlier you enter, the more you benefit." Those investors who ventured into the market before the JYP exchange rate dropped have already recouped their property acquisition costs through the previous rounds of property prices rising.
