Investing in condominiums is attractive because it provides stable earnings and is less risky than financial investments such as virtual currencies. Also, if you can get a loan from a bank, you will be able to start investing in an apartment with a small capital.
In this article, we have summarized the appeal of condominium investment in an easy-to-understand manner for investors who regularly make financial investments and investment beginners. We have explained the advantages and disadvantages of investing in condominiums, points to note, and specific points, so please refer to them.
1. What is condominium investment | Differences from apartment investment and detached house investment
First, let's talk about the basics of condominium investment.
1-1. Differences between general investment and condominium investment
Condominium investment is a type of real estate investment, and is an investment method in which a purchased condominium is operated as a rental property. One of the attractions of investing in condominiums is that you can get continuous rental income and it is easy to stabilize cash flow. In addition, if the value of condominiums rises in the future, it is possible to obtain capital gains by selling them.
Although condominium investment requires continuous maintenance, it is basically a long-term investment of several years. The low time cost is also a point because there is no need to check the chart frequently and trade like forex and virtual currency.
1-2. Differences between apartment investment/detached house investment and condominium investment
Next, we summarized the differences between real estate investment such as apartment investment and detached house investment and condominium investment.
Although there is no clear definition to distinguish between apartments and condominiums, the names are generally used according to the structure and size of the building. For example, a three-story apartment building made of wood and lightweight steel is often called an “apartment,” while a four-story or higher apartment building made of steel or steel-framed reinforced concrete is often called a “mansion.”
Therefore, when investing in a single building, the initial cost of investing in a condominium is higher than that of an apartment.
Next, the difficulty of operation is different.
Investment in apartments and detached houses is relatively easy to manage and can be managed by the owner himself, but investment in condominiums is more complicated to manage and must be outsourced to a professional real estate management company.
There will also be differences in terms of needs. Demand for detached houses can be expected from families, as many of them are for families. On the other hand, apartment investment and condominium investment are mostly for singles and young people, so we can expect demand from people living alone.
2. Advantages of condominium investment
Next, let's talk about the specific benefits of condominium investment.
- Easy to earn stable income
- Little short-term price volatility
- Leverage can be obtained by taking a loan from a bank
- If you get a loan, you can start with a small investment
- Measures against income tax, inhabitant tax, and inheritance tax
2-1. Easy to earn stable income
Among many investments, condominium investment can expect a large amount of rental income. Real estate is said to be susceptible to changes in land prices and demand, but properties in urban areas and near train stations are characterized by relatively stable demand and low vacancy rates.
According to statistics from the Ministry of Land, Infrastructure, Transport and Tourism, as of 2019, the nationwide average vacancy rate for condominiums is 6.2%, remaining at a low level.
(Source: 2018 Housing and Land Census, Approximate Number of Housing)
2-2. Little short-term price fluctuation
Financial products such as virtual currency and FX have the risk of a significant drop in value in a short period of time. However, in the case of real estate investment such as condominium investment, the short-term price fluctuation risk is much lower than financial investment.
In addition, rent income can be expected to generate a large amount of income gain compared to interest and dividends from lending, etc., which contributes to the stabilization of cash flow for investors.
2-3. You can take advantage of leverage by receiving loans from banks
Like virtual currency and FX, you can actually expect a leverage effect in real estate investment. Leverage in real estate investment means that you can get more profit with less own funds (initial investment) as well as general financial products.
Specifically, in addition to the own funds contributed by investors, the flow is to purchase properties after receiving loans from banks.
This allows you to purchase expensive properties that are difficult to purchase with your own funds. Basically, the higher the price of real estate such as condominiums, the better the conditions such as location and facilities, so you can expect more rental income.
However, as with other financial products, leverage also increases the risk of loss, so please carefully determine the leverage ratio. In addition, bank loans are subject to interest, so it is necessary to carefully investigate whether there is a prospect of maintaining profitability on an ongoing basis.
2-4. If you get a loan, you can start with a relatively small amount
If you get a loan from a bank, you can say that it is one of the merits of condominium investment that you can start with a relatively small amount.
By the way, when purchasing an investment property, you cannot use a “housing loan” and you need to use a “real estate investment loan”.
A real estate investment loan is a loan system for individuals for the purpose of purchasing investment properties. Appraisals tend to be more stringent than mortgage loans, and the repayment period is shorter than regular mortgages, and interest rates are set higher, so it is important to make a repayment plan before signing a contract.
2-5. Measures against income tax, inhabitant tax, and inheritance tax
In addition, condominium investment leads to various tax measures.
For example, “income tax” and “inhabitant tax” are usually incurred on the rental income obtained. However, if there is an initial cost for purchasing a property in a condominium investment, that cost will be recorded as “depreciation expense” every year, and you can reduce the amount of taxable income.
Depreciation is a mechanism to divide the cost of purchasing fixed assets that are assumed to be used over a long period of time into expenses according to the useful life.
Investing in real estate can also be a measure against inheritance tax.
Inheritance tax is a tax levied based on the assessed value of the inherited property, and the higher the assessed value, the greater the inheritance tax burden.
However, when property is inherited in the form of real estate, the appraised value of that property is lower than its actual market value. Therefore, it is possible to reduce the inheritance tax compared to inheriting in the form of cash etc.
3. Disadvantages of condominium investment
There are three main disadvantages to investing in condominiums, which I will introduce below.
- You can't earn income if there are vacancies
- Burden increases due to rising interest rates
- Increased repair costs
3-1. Income depends on vacancy rate
Since the source of income for condominium investment, excluding sales, is rental income, the amount of income fluctuates greatly depending on the vacancy rate of the condominiums owned.
As mentioned above, the vacancy rate of condominiums is low even from a nationwide perspective, but there is a possibility that the vacancy rate will rise due to changes in rental demand and trends in the real estate market.
Depending on the situation, it may be necessary to take measures to reduce the risk of vacancies by creating attractive conditions for tenants, such as conducting appropriate tenant research and enhancing facilities.
3-2 There is also a risk that the burden amount will increase due to interest rate hikes
In addition, when investing in condominiums using loans with fluctuating interest rates, monthly loan repayments increase due to rising interest rates, and there is a risk of pressure on investment cash flow and lower profit margins. Especially in 2023, interest rate trends will be unstable, and many condominium investors will feel uneasy.
In addition, since rising interest rates mean higher funding costs, general investors tend to be less willing to invest in real estate, which tends to lead to a decline in real estate prices.
Conversely, however, lower interest rates often have a positive effect on investors, as they contribute to improved cash flow, profit margins, and higher real estate prices. Consider future interest rate fluctuations and determine when to buy from a long-term perspective.
3-3 Increase in repair costs
In addition, condominiums require regular repairs and renovations due to aging of buildings, natural disasters, damage to rooms, etc., so repair costs tend to increase over time.
Repair costs to the extent arising from aging and normal use must be borne by the owner. Investors should prepare an operation plan in anticipation of repair costs.
According to data from the Ministry of Land, Infrastructure, Transport and Tourism, the average annual repair cost for condominiums over 20 years old was about 280,000 yen per unit.
(Source: Ministry of Land, Infrastructure, Transport and Tourism Housing and Land Statistical Survey)
4. Points to note when investing in condominiums
There are two things to keep in mind when investing in condominiums: stagnant rent and declining population.
First of all, the biggest thing to watch out for is rent arrears, where tenants do not pay rent. In the short term, the property owner's income will decrease, which will have a negative impact on cash flow. In addition, if there is a long-term delinquency, legal procedures will be required to collect the rent, which will cause a waste of effort and time.
In order to avoid rent arrears, it is important to first select tenants. Specifically, keep three things in mind:
- Income, previous job, previous place of residence
- Clarification of rent payment methods and responses to non-payment
- Communicate regularly with residents
In addition, due to Japan's declining birthrate and aging population, there is a risk that demand for condominiums will decrease due to population decline. The declining population also has disadvantages such as difficulty in securing tenants and a decrease in rental income.
In this way, condominium owners need to take measures to secure tenants.
For example, let's provide properties and set rents that meet needs, such as elderly care facilities, condominiums for foreign students, and popular land in Tokyo. In addition, it is important to devise ways to increase the satisfaction of residents, such as improving facilities and enhancing management services for residents.
5. Points for condominium investment
Finally, I will introduce four points for condominium investment.
- Consider investing in new condominiums rather than second-hand condominiums
- Studio apartments around Tokyo
- careful financial planning
- Prepare for the risk of disasters and accidents
5-1. Consider investing in new condominiums rather than second-hand condominiums
If you can invest a certain amount of money as an initial investment, consider investing in a newly built condominium instead of a second-hand one.
Second-hand condominiums depreciate as they age, but new condominiums maintain their asset value at a high level. In addition, you can expect higher rental income due to the latest equipment, high future demand, and low maintenance costs.
In addition, new condominiums provide longer-term rental income than second-hand condominiums, so it will be useful for securing income gain in anticipation of retirement and as an inheritance property.
5-2. Investing in studio apartments around Tokyo is also an option
Buying a single building is not the only way to invest in a condominium. If you buy a one-room condominium, you can invest in a condominium with a much lower initial investment.
If you are investing in a one-room apartment, there is a great advantage in choosing a property suitable for living alone in the Tokyo area. In Tokyo, where many people and companies gather, there is a high need for living alone for higher education and employment, so vacancies and risks can be reduced.
On the other hand, one-room condominiums for families have good yields because they can set high rents, but you should be careful about stores where the risk of vacancies is high due to declining marriage rates and declining population.
5-3. Make a careful financial plan
You can start investing in condominiums with a relatively small amount of your own funds by obtaining a loan, but you must make a careful financial plan.
- Purchase costs
- management fee
- repair costs
Create an income and expenditure plan that includes items such as , and plan to maximize the probability that your investment will generate returns. Also, if you get a loan from a financial institution, be sure to understand the borrowing rate and repayment period.
5-4. Prepare for natural disaster risks
Condo investors must always prepare for natural disasters. If the property is damaged, it will cost a lot of repair costs, and in the worst case, you will be forced to sell the property because you will not be able to repay the loan. Please take measures by choosing land with low disaster risk and taking advantage of insurance.
6. Investing in condominiums as a means of investment
In this article, I explained the advantages and disadvantages of condominium investment.
Unlike financial investments such as virtual currency, the merit of condominium investment is that you can expect stable earnings and long-term operation considering your own old age.
Why not start investing in condominiums with this article as a reference?