Hello.
This is Masanori Obara’s Real Estate Academy note campus.
This time, I will talk about “failure” in real estate investment.
In this article, I will organize the failures that tend to occur before and after buying a property, while sharing my own failure story from my first building and what you should do to prevent failure.
Real estate investment failure rates and the meaning of “failure”
I think some of you may have become anxious after hearing that “many people fail at real estate investment.”
First, I will organize how many people actually fail,
and what we call “failure” in the first place.
◾️ About 40% of people have experienced failure
In a member survey by Kenbiya, 40.7% of respondents said they had “experienced failure in real estate investment,” while 59.3% said they had “never experienced failure.”
Whether you see the figure of about 40% as high or low depends on the person.
However, what I think is important is that many of those who failed experienced failures that could have been avoided with prior knowledge and preparation.
◾️ “Risk” and “failure” are different things
Real estate investment has various risks, such as vacancies, repairs, natural disasters, and rising interest rates.
These cannot be completely eliminated. However, if you anticipate them in advance and incorporate them into your numbers, you can minimize the damage. In other words, if you prepare, they are things you can control to some extent.
On the other hand, buying at a high price, unreasonable borrowing, and fraudulent financing are not “risks” but “failures.” This is because they are major judgment errors that are difficult to recover from once committed.
Risks are things to prepare for and manage. Failures are things to avoid from the start.
Thinking about these two separately is the starting point for preventing failure.
I have summarized my thoughts on risk in the following article.
▼ Stories about risks you should know before starting real estate investment
Failures before purchasing a property and how to prevent them
Failures before buying a property are often caused by “entrusting your judgment to others.” Here, I will introduce common failures before purchase, divided into four categories.
1. Being at the mercy of agents and sales talk
The most common failure before purchase is the case of buying at the mercy of an agent.
The income and expenditure plans presented by agents tend to be optimistic, with rents set aggressively and vacancies not taken into account. People end up believing them as they are.
There are also cases where people are swayed by sales talk such as “it will save on taxes” or “it will serve as a pension substitute,” or are pressured to make an immediate decision by being told “if you don’t decide today, someone else will take it,” leaving them no time to think calmly.
The countermeasure is to rebuild the income and expenditure simulation yourself.
Also, after clarifying your investment goals for yourself, do not make a decision on the spot, but take it home to think about.
Truly good properties rarely disappear just because you took one night to think about them.
The common points of properties that beginners should avoid are summarized in the following article.
▼ Common points of properties that beginners should not buy as their first building
2. Overlooking location and parking
A failure in choosing a location is buying a property in an area where there is no rental demand.
Even if the yield looks high, vacancies will not be filled in areas where there are few people to rent in the first place. You need to research population trends, vacancy rates, and where tenants come from before buying.
Another thing that is easy to overlook is parking. In rural areas, it is not uncommon for one household to own two cars.
Just not having enough parking makes it difficult to secure tenants. It is safer to confirm that you can secure at least one space per unit, and preferably two.
3. Buying at a high price and unreasonable borrowing
If you buy at a price higher than the market rate, you will have almost no money left on hand.
Before buying a property, it is important to research the surrounding market and set your own criteria for when to buy, such as “I will buy if it meets these conditions.”
Another thing, unreasonable borrowing also leads to failure. If you buy with a full loan that requires almost no self-funding, your monthly repayments will become heavy, and there is a risk that you will not be able to keep up with repayments if even a few vacancies occur.
The countermeasure is to keep the repayment ratio low and put in a substantial amount of self-funding.
How much self-funding you should prepare is explained in the following article.
▼ The difference between those who can start with 1 million yen in self-funding and those who are at risk
4. Mistakes in financing strategy and fraudulent loans
Mistakes in financing strategy will have an effect after you buy your first building.
If you use up your credit on the loan for the first building, you will not be able to get the next loan approved and will not be able to expand your scale. It is important to understand the characteristics of each bank and draw up a financing scenario with a long-term perspective.
The conditions for people who can get loans are explained in the following article.
▼ Conditions for people who can get loans for real estate investment
Another thing, fraudulent loans are not a failure, but a crime. For example, cases where a housing loan is used for an investment property.
If you are approached with a fraudulent scheme, please refuse it absolutely.
Failure after property purchase ① Income is lower than expected
Failures after purchase can be broadly divided into two categories. One is that income is lower than expected. The other is that expenses are higher than expected.
First, let’s look at failures where income decreases.
◾️ Tenants cannot be found at the assumed rent, or rent decreases
The assumed rent presented by the agent was higher than the market rate. As a result, tenants are not being secured as expected. This is a common failure after purchase.
Before buying, check if the assumed rent is reasonable by checking the surrounding market rent on rental information sites or by interviewing local real estate companies directly.
Also, rent will inevitably decrease little by little as the building ages. It is important to create a long-term simulation assuming that rent will decrease.
◾️ Not prepared for vacancies
If you build a repayment plan on the premise that the property will remain fully occupied, repayment will become difficult if even a few rooms become vacant at the same time.
It is realistic to assume an occupancy rate of about 90-95%. On top of that, you need to keep reserve funds on hand to cover repayments even if vacancies continue.
I also write about how to think about income and expenditure in the following article.
▼ What is the minimum yield for real estate investment? Thinking with the numbers of properties actually purchased
◾️Rent arrears, midnight departures, and stigmatized properties
Even if there are tenants, income may decrease. This includes cases of rent arrears, tenants leaving in the middle of the night, or the property becoming a stigmatized property.
If arrears are prolonged, legal procedures may be required. If a tenant leaves in the middle of the night, the owner may end up bearing the cost of unpaid rent and restoration to original condition.
An effective countermeasure is to use a guarantee company. Recently, many management companies make joining a guarantee company mandatory. At the same time, it is also important to make tenant screening stricter.
For stigmatized properties, there are preparations such as introducing monitoring services or taking out insurance that covers the costs of special cleaning.
Failure after property purchase ② Expenses are higher than expected
Next is the failure where expenses increase. Costs that are difficult to see at the time of purchase will affect you later.
◾️Repair costs, natural disasters, and unexpected expenses
Buildings deteriorate over time. Repairs to exterior walls, roofs, and equipment can sometimes cost a large amount at once. It is important to understand the timing of repairs before purchasing and set aside funds for them.
Damage caused by typhoons and earthquakes is also a cause of high repair costs. In addition to fire insurance and earthquake insurance, check whether wind and flood damage are covered.
Fixed costs such as property taxes and insurance premiums can also be higher than expected. It is safe to set aside about 10% of rental income as a reserve for repairs and vacancies to avoid panic.
◾️Pitfalls of management companies and subleasing
There are cases where the compatibility with the management company is poor and vacancies are prolonged due to inadequate response. First, try to improve the situation in cooperation with the management company, and if that does not change, consider switching.
Also, if a management company goes bankrupt, the rent they were holding may not be remitted. Countermeasures include choosing a company with stable finances or considering a system where you can receive rent directly.
You also need to be careful with master leases. You may be notified of a significant rent reduction a few years after signing the contract. Before signing, be sure to check the conditions for revisions and the range of potential reductions in detail.
◾️Rising interest rates and falling property values
If you have a variable-rate loan, your repayment amount will increase suddenly when interest rates rise.
Countermeasures include reducing the principal through early repayment or considering refinancing to a fixed-rate loan. It is also important to check your remaining cash flow in the event of an interest rate hike before purchasing.
Declines in property value also occur depending on the building’s age and area demand. Youneed to think about selling at the time you buy the property. Methods such as buying at a target price or increasing your equity ratio by making a down payment are effective.
I have written about exit strategies in the following article.
▼ For real estate investment, decide on your exit before you buy
Furthermore, other failures include spending too much time on DIY, which affects your main job, or being overwhelmed by dealing with neighborhood troubles. Determine the scope of DIY and decide which parts to leave to professionals. For neighbors, greet them politely before construction or moving in. Such basics will pay off later.
My own failure story — I underestimated financing on my first building
So far, I have introduced common failures. From here on, I will talk about my own failure story.
◾️ I was confident in my ability to evaluate properties
When I bought my first building, I was working at a real estate investment company.
Therefore, I had a certain amount of confidence in my ability to see the property itself.
I started buying thinking, “This should be easy,” but where I cut corners was in studying financing. I left the loan conditions exactly as the agents told me.
◾️ I borrowed at a 4.5% interest rate with a 10-year repayment period
As a result, for my first building, I borrowed under the conditions of a 4.5% interest rate and a 10-year repayment period.
Considering my financial profile at the time, these were impossible conditions. I should have been able to negotiate better terms, but because I was indifferent to financing, I signed the contract as it was.
This is not a story about being deceived by an agent. It was my own failure, as I did not check for myself, did not negotiate for myself, and judged only by what was visible.
The more confident a person is in the property, the less attention they pay to other factors like financing and the exit strategy. It wasn’t that I failed because I lacked knowledge, but rather that the cause was overconfidence—the belief that “I’ll be fine.”
I have written about this story in detail in the following article as well.
▼ Because I was confident in my “evaluating ability,” I didn’t study financing
3 things you want to do before purchasing to prevent failure
The failures we have looked at so far have common points. Based on that, I will introduce three things you should do before purchasing.
1.Create your own income and expenditure simulation
Do not blindly trust the materials provided by the agent. Re-enter the numbers yourself to verify the income and expenditure. This alone can prevent many failures before purchase.
If you cannot create a simulation yourself, you will not be able to judge where the projections are being overly optimistic.
2. Check if you remain in the black even if bad conditions overlap
Vacancies increase, rent decreases, interest rates rise, repair costs arise. Even if bad conditions overlap simultaneously, will you have money left over after paying off the loan?
Checking this “worst-case scenario” with numbers before purchasing is the best way to prevent failures after purchase.
3. Think ahead to selling and your next loan
When buying, people tend to think about “how much can I buy it for?” But what you really need to think about is “how much can I sell it for?” and “will I qualify for the next loan?” By looking at both the exit strategy and financing, you can avoid situations where you become stuck.
Summary
About 40% of people have experienced failure in real estate investment.
However, most of these can be prevented with prior knowledge and preparation.
Prepare for and manage risks. Avoid failures from the start. Thinking of these two things separately is the starting point.
Before purchasing, do not leave the judgment to others. After purchasing, check if you remain in the black even under bad conditions. And, look ahead to when you sell and your next loan.
The keys to preventing failure are “making your own judgments” and “looking at worst-case scenarios with numbers in advance.”
Here, I have organized common failures. If you would like to check all 24 items along with countermeasures, they are summarized in our official column.
▼ [Archived Edition] 24 Examples of Real Estate Investment Failures and Countermeasures Summary [Explained by Professionals]
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