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7/26/2020

Point of Real Estate Investment and Risk Management in Lessee and Market

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What is the risk of lessee and market?

We explained that the rent income from real estate involves four risks: vacancy, early cancellation, rent decline, and delinquency. This time, we will explain what kind of risks are involved in terms of the lessee's attributes, type, and market.

Relationship between lessee attributes and risk

The tenant attributes of real estate for rent can be broadly classified into three categories: “residential”, “office”, and “store”. In real estate investment, the magnitude of risk varies depending on the lessee's attributes. We will explain the risks associated with attributes from the perspective of stable income.
Lessee Attribute
Risk Factors
Risk Level
Store
Withdrawal due to poor sales, rent delinquency. Risk of fire when handling fire
High
Office
Withdrawal due to poor sales, rent delinquency. Improvement of business performance, office relocation due to increase in personnel, etc.
Medium
Residential
Transfer to a property with better conditions, transfer due to work transfer, rent delinquency, etc.
Low
The above is a general comparison that does not take individual circumstances into consideration. Stores and offices are subject to the risks of withdrawal and relocation, depending on location conditions and economic conditions. In addition, if there are vacancies, we must search for a store or company that meets the conditions, taking into consideration the location and other factors. Therefore, it can generally take some time to secure a new tenant. Naturally, residences are affected by location and economy, and there is a risk of vacancy, but since it is essential as a home of life, new lessee can be found unless rent conditions such as rent are set unreasonably. The cycle of finding new tenant is generally shorter than in offices and stores. From this point of view, by the stability of rent income, it can be said that the risk of residential is lower than stores and offices.

Relationship between type of lessee and risk

As mentioned above, the risk of income differs depending on the lessee's attributes, but in addition, the risk level also changes depending on the “business type”, “scale” and “quality” of the lessee in each attribute.
Lessee Attribute
Lessee Type
Lessee Type
Lessee Type
Lessee Type
Lessee Type
Risk Level
Store
Retail store
Service industry
Light meal business
Restaurant business
Special food and beverage business
High
Office
Stable company
-
Growing company
-
Sluggish company
Medium
Residential
Civil servant
Stable company employee
Student
Self employed
Unemployed
Low
Risk Level
Low  →  →  →  →  →  →  →  →  →   →   →   High
Again, this is just a general idea, and of course it depends on the individual case. As for offices, it is important to consider how the company is generating stable income and the occupation where stable income can be obtained. In terms of stores, restaurants are generally said to be at higher risk from the perspective of fire risk. In this way, the risk varies depending on the attributes and quality of the lessee. In other words, cultivate a sense of risk by imagining the possibility of obtaining stable income and the different probabilities.

Supply and demand and risk of real estate for rent (Condominiums for sale also become competitors)

If the rent obtained from the investment target real estate is higher than the market price in the neighborhood, there is a high possibility that the rent will have to be reduced at the same level as the market price at the timing of contract renewal or replacement of the borrower. Therefore, even if the yield at the time of property purchase is high, the rent may be reduced in the future due to replacement of the lessee or negotiations for rent reduction, etc., and as a result, the yield may decrease.
Picture

Number of rental units and risk (the more rental units, the smaller the risk)

The degree of risk also changes depending on the number of real estate units you invest. If the number of rented units is large, the ratio of one rent to the total rent is small, so even if one vacant unit is vacant, the impact on rent income will be small. Conversely, if the number of rented units is small, the ratio of one rent to the total rent will be large, so if vacant, the impact on rent income will be large. In other words, the impact of vacancy per unit increases as the number of rental units decreases, and the impact decreases as the number of units increases. As shown in the table below, even if the investment amount and the yield are both the same, the income and yield when there are vacant rooms will differ due to the difference in the number of rental units.
Purchase Type
Single Floor Plan
Family Floor Plan
Investment Amount
100,000,000 yen
100,000,000 yen
Monthly Rent per Unit
50,000 yen
100,000 yen
Number of Units
12 units
6 units
Annual Rent
7,200,000 yen
7,200,000 yen
Yield at Full Occupancy
7.2%
7.2%
Number of Vacant Units
2 units
2 units
Annual Rent
6,000,000 yen
4,800,000 yen
Yield in 2 Vacant Units
6.0%​
4.8%

Summary

We explained the risk related to income in two times, the last time and this time, but it does not mean that the risk is bad because it is high or low. If the risk is high, you can buy cheaply and get a high yield accordingly. In addition, if the risk is low, the yield will inevitably be low, so you may not be able to expect high profits, but stable operation may be possible. First of all, it is important to understand the risks and develop a sense and image that you can make an investment commensurate with the risks.
When investing in real estate, it is important to understand the intuition of the land, the unique circumstances of the real estate, demand, and major trends. However, starting with a small investment and gradually increasing it, you will be able to accumulate know-how and select the appropriate property from various investment targets. We also accept questions related to investment, so please feel free to contact us.

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Real Estate agent in Kyoto, Buy and Sell, Leasing, Renovation and Construction, Management for Investment and Vacation Property, Professional Services for International Customers. We deal in KyoMachiya houses, detached and attached Houses, new and old Condominium Apartments, Block of Apartments and Buildings for Commercial, Residential and Investments use, Manage and Support Operation and New Development of Guesthouse, Ryokan and Hotel, Total Supports for Land and Buildings Real Estate in Kyoto.
Yours sincerely, Founder Ken Hayashi
Real Estate Broker Company License No. Kyoto-Fu Governor ( 1 ) 14044 , ​Member of Kyoto Association of Residential Land Building Business
  • Home
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    • How to and Procedures >
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      • Important Points Explanation
      • Real Estate Sales Contract
      • Property Condition Confirmation
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        • Idea of Lease Agreement
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