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Look for good properties without being misled by yields

  • Japanese real estate expertise
Look for good properties without being misled by yields

When investing in real estate, there are many people who disregard location and quality to make judgements simply based on the yield.

"Yield" is generally calculated as [Assumed fully-occupied unit rental income - Expenses, etc. = Net revenue(year) ÷ Property price].
In this context, Net revenue is referred to as NOIs (Net Operating Income).
What is considered to be expenses varies somewhat, but in most cases, the three items of Management Fee, Sinking fee (repair reserve) and Fixed Asset Tax are included in the expenses mentioned here. Many investors use and refer the NOI yield as a criterion for their investment by dividing this NOI by the property price.

Investors primally consider "how much yield do I want for property investment?" The “expected yield" that you want depends on the type of property, building age, location, etc. Naturally, those with good location and young building age will have lower yields.

Since the yield is the reverse of risk, so those with less risk have less return.
Less risk in real estate investment here means that there is less likelihood of lower rent and less likelihood of vacancy. In addition, it also means that the asset value is unlikely to decline.

For example, a high-yielding apartment may be available for sale in a local city away from the city center.
The advertisement always has the word "when it's fully-occupied". If the vacancy continues for three months, the yield for that year will decline by 1/4. Some companies that manage mainly apartments located in the city center have vacancy rates of less than 1%, and the risk of vacancy is as small as possible.

For those who are investing in real estate while their main business is a company employee, try to avoid apartments in local cities that vary in rent income and require a lot of work. I recommend to choose a stable city center apartment with less vacancy rate. For example, an apartment that can be walked from a station on the JR Yamanote Line or an apartment inside the JR Yamanote Line in Tokyo has a low vacancy rate and stable rent. I think it is suitable for those who invest in real estate for the first time.

I've heard that people who quitted their job and own several or more apartments as a business have started even from one apartment in the city center. It is recommended that you start within the range of your own risk instead of looking over the farther goal after the higher mountain.


Translated the column written by Mr. Seiji Yoshizaki, Real Estate Economist and Chief Director of Housing・Real Estate Institute


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