Learn real estate management

Q: Isn’t it true that properties in regional areas have higher returns than properties in urban areas?

A: It goes without saying that the "yield" of any financial product, not just real estate, is an indicator of the level of risk. It is the same as the "odds" in gambling.

From that perspective, the difference in yield between urban and rural areas is a "difference in risk."
While regional properties with high yields are certainly attractive, you must be aware of the risks that lurk there. The most common one is the risk of vacancy.
As population decline accelerates across Japan, and employment issues are also a factor, population outflow to urban areas is inevitable.
In addition, the "Revised Urban Renewal Special Measures Act"The plan calls for clarifying which areas will be developed and which will not, with the aim of improving the efficiency of government services, etc.
In areas where the re-advertising period is long (i.e. the vacancy period is long), the income will naturally decrease, and the yield may be significantly lower than expected. Please be careful about this point.

Another risk is depending on a single facility that has rental demand, which is common in suburban areas. For example, university campuses, general hospitals, factories and research facilities of major companies.
It is often said that when a facility relocates, rental demand in the surrounding area declines, making it difficult to re-open.

Our company's stance is not that it absolutely has to be in the city center.
However, from the perspective of a management company, we would like you to understand that there are many "risks that cannot be seen by yield alone."

At Conspirito, we would like to warn you about the outlook for these areas as well.

Q: What is the return on investment in real estate?

A: It is an essential indicator for real estate management.yield.
Broadly speaking,Surface yield・"Net Yield"・"Real Yield"Here, we will explain the two most frequently used types, "nominal yield" and "real yield."

1. Gross yield

Annual rental income ÷ property purchase price × 100

The calculation above gives the "gross yield." Most of the sales drawings and websites for purchases and sales use this gross yield.
Since it does not reflect any costs associated with running a property, it should only be used as a guideline.

2. Real yield

(Annual rental income - Annual necessary expenses*) ÷ property purchase price × 100

*Annual necessary expenses = management fees, repair reserve funds (none for one building), rental management commission, taxes and public charges (fixed and metropolitan taxes), etc.

The calculation method that includes necessary expenses in addition to the gross yield is the "actual yield."
Although unexpected expenses such as renovation costs are not included, the yield reflects the actual flow to a certain extent.
Since it is rare that all costs will be known when you first look at the information, it may be better to use the "nominal yield" to get a rough idea, and then use the "actual yield" as an indicator for making a final decision.

(Calculation example)
Sales price: 18 million yen
Current rent: 85,000 yen
Management fee/month: 8,000 yen Repair fund/month: 4,000 yen
Rental management commission fee/month: Current rent x 5%
Fixed and metropolitan taxes/year: 50,000 yen

Gross yield
85,000 yen x 12 months = 1,020,000 yen ÷ 18 million yen x 100 = 5.6%

Real Yield
85,000 yen-8,000 yen -4,000 yen -4,250 yen) x 12 months = 825,000 yen
825,000 yen-50,000 yen= 775,000 yen ÷ 18 million yen × 100 = 4.3%

Q: What is the difference between yield, “ROI” and “NOI”?

A: Like yield, it is a number or index used when analyzing real estate management (investment).
When purchasing income-generating real estate, it is necessary to analyze various aspects. It is a good idea to keep in mind what each figure includes and excludes when calculating it.
Below is a brief introduction to some of the most commonly used ones.

NOI...Abbreviation for Net Operating Income, translated as "net operating profit."

Strictly speaking, NOI alone is not an "index," but it is a number used to calculate ROI, etc. In real estate, if you divide this number by the purchase price, you get "Real Yield' is calculated.

As the word "Net" suggests, NOI is the net profit obtained by deducting the various costs associated with operating a property (management fees, repair costs, taxes, fees to the management company, etc.) from rental income. NOI is only operating profit, not ordinary profit, so it does not reflect loan repayments, depreciation, or income tax.

ROI...Abbreviation for Return On Investment, translated as "return on investment."

Simply put, it is an indicator that shows "how much you invest in purchasing real estate and how much you have left over." At first glance, it is often confused with "real yield," but the crucial difference is that it considers the "cash flow" minus monthly loan repayments as income. The formula is as follows:

When calculating the "effective yield," NOI is used, which helps to objectively view the income of the "target property."
In contrast, ROI is a "subjective" indicator because it considers "cash flow" reflecting the loan repayment amount to be revenue.
Since loan conditions vary from person to person, the loan repayment amount will naturally also vary from person to person. If this is taken into account in the "real yield," the true profitability of the target property will not be apparent.
Be sure to take into consideration the difference between "real yield" and "ROI" when using this term.

CCR: Cash on Cash Return.

This is a similar concept to ROI, but it is an indicator that shows how much profit is generated in relation to the "actual amount of cash invested."

While ROI is calculated by dividing cash flow by the "purchase price," CCR is calculated by dividing it by "equity only" excluding borrowed capital (bank loans).

Example: What if you purchase a property with an annual cash flow of 500,000 yen using 1 million yen of your own money?

500,000 yen ÷ 1,000,000 yen × 100 = 50%. This means that you can recover 50% of your own funds in one year.