Hi guys, I want to share you of "Rental Yield" that I'm learning in Japan's property investment. It's a bit long but hopefully everyone reads this can guide me as a starter.
When purchasing an investment property, it is important to calculate the "rental yield" to find out in advance how much profit the property will generate. However, it's difficult to know how much value is good enough to calculate the yield. In addition, there are 2 types of yields, "Gross Rental Yield" and "Net Rental Yield". Understanding the calculation method and concept of each, and learning how to select properties for investment based on yields is important. I'm also learning that yield is another important indicator of a property's profitability. I've read in a book that Real Estate Investment in Japan is often referred to as a "Scientific Investment" because it can be managed with profitability that is close to the simulation of earnings based on prior calculations of yields.
Therefore, it is important to examine this "yield" in advance and choose a property with high profitability. The yield also should tell me how many years it will take to recover the money I have invested. For example, in the case of a 10% yield, it takes 1 year to recover the money invested. A yield of 10% means that 10% of the investment has been recovered in the first year, and 10% + 10% = 20% in the second year. Calculated in this way, a yield of 10% means that I can recover the investment in 10 years. In other words, if the yield is X%, it can be calculated using the formula: number of years to collect = 100 ÷ X. The smaller this number is, the faster I can recover your investment, and for this reason, I need to make the yield as large as possible. Calculation of Gross Rental Yield, known as gross in the industry, is simply calculated by the rent and property price as shown below and is used to easily determine the profitability of a property. A Surface Yield = Annual Rental Income / Property Price.
*Example: if the annual rental income is 1 million yen and the property price is 10 million yen, the surface yield is 10%.
Calculations of Net Rental Yield is based on the gross yield formula and is calculated by subtracting the actual expenses from the annual rental income and adding the property price plus expenses at the time of purchase of the property. Net Rental Yield = (annual rental income - expenses) / (property price + expenses at time of purchase). The numerator is the actual money remaining on hand on an annual basis, and the denominator is the total amount at the time of purchase of the property. This allows the profitability of a property to be calculated in more detail than the surface yield. Therefore, even if I obtain a good value for the surface yield, it's possible that the Net Yield is unexpectedly low due to unexpected expenses.
In Japan, the ideal yield varies depending on whether the property is new or used, the bank's interest rate at the time, and the real estate market conditions, but if the real yield on any property is 10% or more, the property is reasonably profitable and the cash flow is sufficient in many cases. If the rate of return is lower than 10%, the amount of money that remains in my pocket per year will be in the range of several hundred thousand yen to around one million yen, which is not that large amount of money.
On the other hand, if the yield is as high as 20% or 30%, it's highly likely that the property has inherent risks in property management as described below. So if I have never invested in real estate before, it is a good idea to look for a property with a yield of 10% to 20% as a rough guide. Yields vary greatly depending on whether the property is used or newly built. In the case of new construction, it is extremely common for both surface and real yields to be less than 10%. The reason for this is that the price of the property is very high. The price of a newly built property before I buy and the price of a newly built property soon after I buy that property can differ by almost 30%. This is commonly referred to as the new construction premium, and the moment I put your stamp on the contract and the property becomes used, that premium is removed and the price of the property drops by 30%.
New construction properties are bought with the new construction premium, which means that property prices are high and yields are difficult to obtain. The surface yield is often around 7% and the real yield around 5%. However, new construction has many advantages that used properties do not have. Since new properties have a full useful life, tax savings can be realized by expensing depreciation. Depreciation can be applied not only to the property but also to fixtures, such as air conditioners, so if those fixtures are also new, the tax savings can be even greater.
On the other hand, used property does not provide the same tax savings as new property because many years have passed since it was built, so it's useful life may be less, or in some cases, almost zero. It is safer to stay away from properties with too high a yield because the risk is quite high?? Anyways, I understand there's difference in yields between used and new properties, so I should consider each eparately. Especially for pre-owned properties, be aware that properties with yields that are too high may be risky properties. Yield is an important indicator, so I am going to start using the calculations I learned and see if I can analyze some properties here in Japan ! #realestateinvestment #startingout #startingoutJapan #internationalinvestment #realestateinvestmentJapan
