Investment for Achieving FIRE - Real Estate Edition | 3 Appeals and Points to Note in Real Estate Investment
As a tool aiming for FIRE (Financial Independence, Retire Early), I believe real estate can be an attractive option.
The fact that I myself have been able to achieve a FIRE lifestyle is largely thanks to the rental income from real estate investments.
Since FIRE aims for a financially independent lifestyle, income other than a salary is required.
While stock dividends and bond interest are common investment methods to obtain regular cash income besides real estate, real estate investment, in particular, has many attractive points.
Why is real estate investment good?
In this article, I will talk about the unique appeals and points to note regarding real estate investment.
What is Real Estate Investment?
Real estate investment is an investment method where you purchase real estate and earn revenue by renting or selling it.
Broadly speaking, there are two main forms:
1. Income Gain Investment
A method of renting out the purchased real estate to obtain monthly rental income.
You earn what is known as unearned income (passive income). Apartments and detached houses are the targets.
2. Capital Gain Investment
A method of purchasing real estate and selling it when its value has risen to make a profit.
Market trends and regional development status affect the success or failure of the investment.
(I have summarized income gains and capital gains in the following article, so please refer to it.)
What you need to know about income gains and capital gains to achieve FIRE – Julius Co., Ltd.
Appeals of Real Estate Investment
Since it is an investment, naturally there are risks, but why is it worth trying?
I would like to explain the appeal of real estate investment as a tool for aiming toward FIRE.
• The sense of security that rental income comes in based on a lease agreement.
• Rental income is less susceptible to market influences.
• There is room for the investor to devise ways to generate profit.
1. The sense of security that rental income comes in based on a lease agreement
I believe that "Real estate is not so much an investment as it is the management of a real estate rental business."
First, it can be said that the demand for residential real estate rental is solid. Few people would say they don't need a house to live in just because the economy is bad.
Money is generated based on a lease agreement with the tenant, so from this perspective, it is not an investment.
Investment in real estate is necessary as the initial investment part of a normal business.
Usually, contracts are for two years, and once signed, rent is basically transferred every month.
It is a so-called subscription contract, and because the tenant pays rent regularly, it brings stable revenue to the landlord.
However, it is important to meet the tenants' needs, such as "appropriate rent" and a "good living environment."
Unlike securities investments such as stocks and bonds, you are required to provide a solution (residence) that matches the customers' (tenants') needs. It is a business itself.
2. Less susceptible to market influences
The price movements of financial assets like stocks and bonds are easily affected by the global economic environment.
Recently speaking, in a bear market like 2022, assets would have decreased in most cases.
When falling into such a global recession, it can take several years for stock prices to recover. Incidentally, it took just under five years to recover from the Lehman Shock (2008 Financial Crisis).
On the other hand, while the real estate market does move, it has less volatility than the financial market.
Also, when selling, it is an individual business negotiation between the seller and the buyer, so there is room for price negotiation.
Furthermore, a major appeal is that the rental income coming from real estate does not suddenly halve next month.
Rent is less susceptible to the situation of the global economy or downward phases of the stock market.
Actually, in my real estate operations, the damage was very small even during the COVID-19 pandemic, which disrupted economies worldwide.
3. There is room for the investor to devise ways to generate profit
In real estate, failures in selecting properties are relatively rare.
In the case of stocks, whether it is an index fund or individual stocks, after choosing the brand, you basically leave it up to market movements. Therefore, stock selection is extremely important.
In contrast, since real estate has a strong aspect of rental business management, even after choosing a property, you can devise ways to make a profit, such as increasing the property value and rental income through renovations, or changing the recruitment conditions for tenants to increase the occupancy rate.
In other words, there is room for the investor to intervene in the success or failure of the investment. If you don't make a mistake with the location, there are few cases where you lose heavily.
Conversely, if you make a mistake with the location, you will struggle. In Japan, where the population is declining, the location conditions of real estate are extremely important.
Points to Note When Starting Real Estate Investment
I have listed the good aspects of real estate investment, but naturally, difficult points also exist.
• A lump sum of funds is necessary.
• Business sense is required.
• Necessary expenses are incurred for operation.
I would like to talk about these points as well.
1. A lump sum of funds is necessary
While stock investment can be started with a small amount of funds, real estate investment requires a certain amount of lump-sum money.
There are ways to keep initial costs down, such as utilizing full loans, but that requires its own know-how. You need to strive to gather information while accumulating experience.
2. Business sense is required
Rental income from real estate is not generated just by buying the real estate. It is generated only after a tenant is secured.
In other words, because you have to manage a real estate rental business, management skills such as finding tenants are required. For that, communication skills are necessary.
3. Necessary expenses are incurred for operation
Because real estate is more of a management business than an investment, necessary expenses are incurred.
For example, as expenses required regularly, there are "Fixed Asset Tax" (and City Planning Tax... an additional tax applied only to real estate within urbanization promotion areas) and "Rental Management Fees."
In addition, as expenses incurred temporarily, there are "Repair Costs" and "Various expenses when moving in and out."
(I have summarized the point that real estate investment is, in reality, a real estate rental business in the following article, so please refer to it.)
Summary
I think real estate investment is excellent as a tool for achieving FIRE.
However, you must consider whether it suits you or not.
If it is stock investment, you can execute it alone as long as you have a computer or a smartphone.
On the other hand, in real estate investment, whether you are buying a property or finding a tenant, face-to-face negotiations are basically required.
In other words, please recognize that there are many situations where communication skills are tested.
I believe the probability of success will increase if you understand the characteristic that "Real estate is not so much an investment as it is the management of a real estate rental business."
If you are aiming for financial independence, investment plays an important role.
It doesn't have to be limited to real estate, but if you can find a tool that suits you and master it, the path will open up. (Text by Julius)
About the Author Kenji Kamioka
CEO, Julius Inc. / FIRE Practitioner
Kenji Kamioka is a former IT executive who spent 30 years in the corporate world, with over 10 years working across Asia. His life changed when he read Rich Dad Poor Dad.
Realizing the trap of the "rat race," he started building assets in real estate and stocks while still working. It took him 10 years, but he successfully achieved Financial Freedom and graduated from the salaryman life.
He established his own asset management company to optimize tax efficiency and now dedicates his time to teaching others how to escape the corporate cage.
His advice is not theoretical but based on the gritty reality of achieving FIRE.Credentials: AFP (Affiliated Financial Planner), Certified Real Estate Transaction Agent.
Book
❶『令和のサラリーマンの為のFIREのススメ』(Amazon電子書籍）
❷『FIRE Recommendation for Office Employee』(Amazon Kindle）
