As you may know, the interest rate of housing loan is relatively very low in Japan according to the policy of government, which rate is generally around 0.2～1.0% when choosing a floating interest rate. But this kind of housing loan can be arranged only when purchasing a property for the residential purpose of the owner and cannot use the property for a rent. If the property will be rent out, the purpose of use will be treated as an investment, so the investment loan should be arranged which floating interest rate will be generally around 2.9～7.9%, instead of the lower interest rate housing loan.
Currently, the capitalization rate of investment property in the prime area of Tokyo is 2 to 4%. So when using an investment loan, there will no yield gap. Yield gap is a term used in real estate investment to describe the difference between the yield on a property and the yield on an investment loan. For example, suppose the yield on an investment loan is 2%, and the yield on a rental property is 4%. The yield gap in this case would be 2% (4% – 2% = 2%). This means that investors are willing to accept a 2% lower yield on an investment loan in exchange for the higher yield on a rental property.
Yield gap can be used to compare the relative attractiveness of different real estate investments. A higher yield gap indicates that the investment is riskier, while a lower yield gap indicates that the investment is less risky.
It’s important to note that yield gap is not the same as capitalization rate, which is another measure of the return on investment in real estate. Capitalization rate is calculated by dividing the net operating income of a property by its market value. Yield gap, on the other hand, compares the yield on a property to the yield on a risk-free investment.
Capital gains or Income gains
When you will decide which investment property to purchase, you need to clarify which will you target, capital gains or income gains.
Capital gains refer to the increase in the value of a capital asset when it is sold. In other words, it is the profit earned from selling an asset for more than its original purchase price. Almost any type of asset you own is a capital asset, including real estate. Capital gains are realized when you sell an asset by subtracting the original purchase price from the sale price.
Income gains refer to the profit earned from renting out a property. This type of gain is also known as rental income. Rental income is the amount of money received by the owner of a property from tenants who occupy the property.
In summary, capital gains are the profits earned from selling an asset for more than its original purchase price, while income gains are the profits earned from renting out a property. Both types of gains are taxable, but the tax rates vary depending on the holding period of the asset, the individual’s income level, and the type of property owned.
Apartment buildings or Condos
Real estate investment can be a lucrative way to generate income and build wealth. When it comes to investing in real estate, there are two primary options: apartments and condos. Here are some pros and cons of each:
Pros of Apartments buildings:
An apartment building typically has multiple units, which means multiple streams of rental income. This can help to diversify your investment portfolio and reduce risk. If there are 10 units in the apartment, there will be no big impact when 1 or 2 residents move out.
Cons of Apartment buildings:
You may have to deal with many difficult tenants or tenants who don’t take care of the property. You may have to take care of the troubles with neighbor lands, or the trouble between tenants.
Pros of Condos:
Easier to manage:
Condos are generally easier to manage than apartment buildings. This is because you only have to worry about the exclusive area of individual unit that you own, rather than the entire apartment building.
Cons of Condos:
Less rental income:
Condos typically have only one unit, which means only one stream of rental income. If 1 resident move out from condo, the income will be zero. This can make it more difficult to diversify your investment portfolio and reduce risk. And there will be a monthly payment for common area management fee and repair funds, which should be paid by the owner from the rental income.
In summary, apartment buildings owning multiple units can help to reduce vacancy risk. However, all the responsibility and risks of the building should be taken care by the owner. On the other hand, condos are generally easier to manage since there is a committee composed by all owners, but they have less rental income. Ultimately, the choice between investing in an apartment building or a condo depends on your investment goals, risk tolerance, and financial situation.
If you have any further questions or requests, please feel free to contact to the following e-mail address.
【REDS】Real Estate Distribution System (REDS) Japan
Hiroki Kano (Mr.)
We are pleased to support you in English.