Real Estate Investing in Condominiums - characteristics, merits and risks!

What are the merits of Investing in Condominiums?

Investing in condominiums means to buy a single unit in a condominium, not the whole building itself.
This means that you can make a real estate investment at a substantially lower cost than buying a whole building.
We will explain the merits of condominium investing below.

There is no need to manage the building or common areas

If you buy a whole condominium building, there is the need to maintain and manage the common areas of the building.
However, if you invest in only a single unit, there is no need to manage such things.

Repair costs can be spread out

The Reserve Fund for Repair costs of a whole condo building must be borne by the owner.
However, if you are a single unit owner, the repair costs can be spread out with other owners in the building, so the burden is less than if you bought a single building.

Mitigate risk

Which do you think is less risky - buying 10 units in one single building or buying 10 units in buildings spread out over different areas?
For example, in the event of a natural disaster, you can mitigate the risk factor if your investments are spread out over a wide area.
Sometimes there is some factor in the apartment itself that causes a large number of vacancies.
When that happens, there is a risk that the owner may be forced to lower the rent on all units in the building.
If you spread your investments out over a wide area, you can mitigate risks in the event that one area operates more poorly than others.

Low investment cost

The merit is that it is cheaper to invest in one single unit than paying for a whole building.
For those investors who are hesitant to invest a huge amount, it is less risky and feels safer to invest in a single unit condo.

Easy to respond to risks such as rising interest rates

Another merit to investing a smaller amount into a single unit condo is that you can mitigate risks if interest rates were to suddenly rise.
For example, if you had invested across a wide area, than you could perhaps sell half of your holdings and thus lower your risk.
Another advantage is that it is easier to find buyers for single units than it is for whole buildings.

What are the risks and demerits of investing in single unit condominiums?

There are many upsides to investing in single unit condos however they also have their risks and disadvantages.
We explain some of them below.

Low returns

Compared to whole building investments, the return that you get upon investing in single unit condos is lower.
For example, let's simulate the earnings of buying a whole building for 90 million yen and investing in a single unit condominium for 20 million yen.
Both have yields of 10%.

●Whole Building：90 million yen ×10％＝Annual revenue of 9 million yen
●Single Unit：20 million yen ×10％＝Annual revenue of 2 million yen

As you can see, the initial investment amount of a whole building is larger however the annual earnings is substantially larger.

No authority over the management of the building

Previously we talked about how one didn't have to be bothered with maintaining the building and or its common areas, however on the flip side, that means that you don't have a say in its management either.
For example, if you want to paint the outside of the building, there is no guarantee that your wishes will prevail.
Also, say you want to allow pets to make your property more desirable for tenants, it will be difficult to change the rules for the whole building.
The advantage of not having to be bothered with maintenance is also its drawback as you can't easily change things to your liking.

You may not be able to get financing

In order to get financing for real estate investments, the evaluation process includes not only your own personal finances but the viability of the real estate property.
If the evaluation method for profitability is based on the total evaluation (collateral evaluation), it may be difficult to pass the examination for investment in condominiums.
The reason it easier to get financing when purchasing whole buildings is because the value of the land is also taken into consideration.
When purchasing a single unit, the value is based just on that unit, so the collateral value is lower.
If the evaluation method for profitability focuses on income capitalization, it is unlikely to be disadvantageous because the judgment is based on the yield of the surrounding market, etc.

What type of investor is suited for Investing in Condominiums?

We have discussed the merits and risks of investing in single unit condominiums.
Now we will discuss who is suited for this type of investment.

For those who want a side business

In the past, many companies did not allow side businesses for employees, but now, more and more companies are allowing it.
However, most full time employees are too busy with their regular jobs to do a side business.
With real estate investing, employees can earn rental income passively making it the ideal side business.
It is much easier to manage a single unit condo rather than a whole building

For those who want to save money for retirement

Unlike buying a single building, condominiums are characterized by low income, so they are not suitable for people who want to build assets in a short period of time. However, they are also a low risk investment.
This is the best investment for those who don't have enough money to invest in a whole building, but want to invest some money for the long term and save it for retirement.

For those who want to start investing with a small amount

Investment in condominiums is possible from a single unit.
Investing in a 1 Room Condominium can be done with as little as a million yen.
Moreover, those with a stable income such as salaried employees have a better chance of passing the screening process for loans.
Getting a loan to fund real estate investing is definitely a viable option.
Most investors who purchase single unit condos are salaried workers with incomes of around 5 million yen.

For those who want to rethink their life insurance policies

There are many people who have multiple life insurance policies without truly understanding their contents.
Until recently, life insurance was seen as a form of savings plan, however not many life insurance policies function in that respect anymore.
It is better to think of them as they were originally intended, insurance in the event of death.
When obtaining a loan for real estate investment, many banks require that you purchase group credit life insurance, which allows you to leave your assets to your family with the loan paid off in the event of your death.
This may be a good opportunity to rethink your insurance policies.

In Conclusion

In this article, we discussed the merits and risks of investing in condos.
One can invest with a small amount compared to buying a whole building.
Investing in condos is suited for the beginner investor however it does not come without risks and it is wise to understand the merits and risks before investing.