Comprehensive Comparison of Real Estate Crowdfunding vs. Physical Property Investment | From Small-Scale to Full-Scale Operations

Two Options in Real Estate Investment

When people think of real estate investment, many envision "physical real estate investment"—purchasing apartments or condominiums to earn rental income. However, in recent years, "real estate crowdfunding," which allows investors to invest in real estate with small amounts of money through the internet, has been growing, diversifying investors' options.

Each investment method has distinct characteristics, and the optimal choice depends on an investor's objectives, capital, experience, and risk tolerance. It is important to correctly understand the differences between both approaches and choose the method that suits you.

Differences in Investment Mechanisms

Physical Real Estate Investment

Investors purchase actual real estate and operate it as a landlord. From selecting a property, applying for financing, managing rentals, deciding on repairs, to selling (exit strategy)—all decision-making is either handled by the investor personally or delegated to a management company.

Investors hold ownership of the real estate and can receive both rental income from the property and potential capital gains from appreciation at the time of sale.

Real Estate Crowdfunding

A system in which multiple investors contribute to real estate selected and acquired by an operating company through the internet. Investors do not directly own the real estate; instead, they receive dividends through the operating company.

The main types include "silent partnership" and "general partnership." Silent partnership is a structure where investors contribute to the operating company and receive dividends—the most common form. General partnership is a structure where investors indirectly hold shares in real estate and is sometimes noted for inheritance planning purposes.

Comparison of Investment Amount and Entry Barriers

Minimum Investment Amount

Physical investment requires, in addition to property purchase costs, various expenses such as brokerage fees, registration costs, and real estate acquisition taxes. Even when utilizing financing, it is typical to need several million yen in down payments as self-funding.

Crowdfunding has many services that allow investment starting from 10,000 yen, with a notably low financial barrier to entry. You can begin real estate investment without substantial capital.

With or Without Financing

In physical investment, utilizing financing from financial institutions enables investment on a larger scale than your own capital (leverage effect). While this is a major advantage of physical investment, it also carries repayment risk.

In crowdfunding, you cannot utilize financing, and investment amounts are limited to your own capital. There is no leverage effect, but there is also no borrowing risk.

Comparison of Yields and Returns

Physical Real Estate Investment Yields

In physical investment, profitability is evaluated using multiple metrics: gross yield, net yield, and cash flow yield. Yields vary significantly depending on property location, age, and maintenance condition, and cash flow also fluctuates based on financing terms.

Additionally, physical investment is characterized by returns beyond rental income—capital gains from property appreciation and tax benefits through depreciation—that investors can expect.

Real Estate Crowdfunding Yields

Expected yields for crowdfunding vary by service and project, but general benchmarks are publicly disclosed. However, it is important to note that this is an expected yield and is not guaranteed.

Returns other than dividends (capital gains and tax benefits) are generally not available in silent partnership structures.

Risk Comparison

Physical Real Estate Investment Risks

Vacancy risk is the risk of not finding tenants and losing rental income. This can be mitigated through good location selection and proper rental management.

Repair risk is the occurrence of repair costs due to building deterioration. As buildings age, repair frequency and costs tend to increase.

Interest rate risk is the risk of increased repayment amounts when variable-rate financing is used.

Liquidity risk is the possibility that a buyer may not be found quickly when attempting to sell. Real estate is a low-liquidity asset.

Real Estate Crowdfunding Risks

Principal impairment risk is the risk that the principal investment decreases due to a decline in the value of the target real estate. Services that adopt a "priority-subordinated structure" mitigate investors' principal impairment risk to a certain extent, as the operating company's own contribution (subordinated investment) absorbs losses first.

Operating company risk is the risk of capital loss due to the operating company's insolvency or misconduct. It is important to verify the operating company's credibility and registration status.

Liquidity risk is that many services restrict or do not allow mid-term withdrawal during the investment period. You should plan with the premise that invested capital will be tied up until the end of the investment period.

Comparison of Management Effort

Physical investment requires constant decision-making regarding property management and operations. Even when delegating to a management company, final judgments as the owner are necessary. On the other hand, you have the discretion to decide the property's operational policy based on your own judgment.

Crowdfunding requires almost no effort from the investor, as the operating company handles management after investment. The simplicity of investing and then simply waiting for dividends is why this approach appeals to busy individuals and investment beginners. However, you cannot control the investment operations yourself.

Tax Treatment

Physical investment requires filing a tax return as real estate income, and tax savings through expense deductions and depreciation are possible. Conversely, dividends from crowdfunding (silent partnership) are classified as miscellaneous income, combined with other income, and taxed accordingly. The scope of deductible expenses is limited, and the tax benefits are more restricted compared to physical investment.

The difference in tax treatment can result in significant differences in net returns, especially for large investments. It is important to understand the structure of tax returns as well.

How to Choose an Investment Method That Suits You

This is not about which investment method is superior, but rather using each method appropriately based on your individual circumstances.

Crowdfunding is suitable for: those with limited investment experience who want to start with small amounts, those whose main job keeps them too busy to manage properties, and those without substantial capital yet.

Physical investment is suitable for: those with some self-capital and creditworthiness who can leverage financing, those who want to actively engage in real estate management, and those who prioritize long-term wealth building and tax savings.

Combining both approaches: You can build a foundation through physical investment while directing surplus capital to crowdfunding, thereby diversifying your investment portfolio.

You do not need to choose only one real estate investment method. Find the optimal combination that suits your objectives, capital, and risk tolerance.