How to Invest in Japanese Real Estate: 5 Simple Steps to a Successful Property Acquisition in Japan
This guy gets it
How can I begin investing in real estate in Japan?
Many contemplate the idea of investing in real estate, whether it's for their dream apartment or a long-term investment property, but often hesitate due to the uncharted waters, fear of financial loss, or the convenience of renting. However, as with any significant task, getting started is often more challenging than the actual execution of the process, and there are substantial rewards for those willing to make the effort. In this guide, we'll demystify the real estate investment process in 5 digestible steps, revealing industry secrets at each stage for both home ownership and investment properties.
Table of Contents: Flow of Property Acquisition
Define your objective and budget realistically
Many people may think that real estate investment starts with the search for properties, but really it’s clarifying the objective of your real estate investment and being realistic with your current financial situation.
What is your Objective?
Clearly outline your investment goal and remain committed to them.
There are very compelling (and questionable) reasons to invest in real estate for personal use or as an investment property.
Investing in real estate can provide an opportunity to upgrade your living space for mid to long-term plans, break free from leasing arrangements where you contribute to someone else's mortgage, diversify your investment portfolio, and benefit from reduced income tax through property depreciation, among other advantages.
While there is no definitive right or wrong answer, we strongly advise defining your objectives early on and adhering to the plan. The real estate market offers a multitude of options, and maintaining focus on your goals is essential to avoid distractions.
What is your Budget?
Conduct an honest reflection of your financial situation and align your real estate aspirations within your financial capacity.
Identifying a realistic budget in terms of the scale of real estate investment, monthly payment limits and upfront cash is critical. If your goals exceed your financial means, you may be at risk for potential long-term financial strain. Real estate investments are typically heavily leveraged, and being over-extended on your financial boundaries during a market downturn can have crippling consequences.
Additionally, becoming comfortable with the potential for large-scale debt and associated risks is part of the process. To secure a loan, your creditworthiness is vital and is determined by factors such as cash reserves, tenure at your existing company, and the creditworthiness of your employer. Lastly, be prepared to provide 10-20% of the purchase price upfront in cash.
Conclusion:
Determining your objective and budget is essential for developing your investment thesis, guiding your investment strategy, and helping you narrow down your investment parameters even before the property search begins. This reverse engineering approach of your final result ensures a smoother progression in your real estate journey.
3 Key Points to Master the Property Search
The property search can be daunting with the sea of property information available online and many things to consider. In this section, we will breakdown the key metrics to review and simplify the property search.
If you are new to the landscape of Japanese real estate, refer to our guide on Navigating Japanese Residential Asset Classes and Terminology.
Look-out Points in a Property Search
Real estate portals for residential properties in Japan provide transparent, asset-level information and doing your research with a professional’s mindset will be key to determine if the property is a good investment. When you begin reviewing properties, we suggest maintaining an Excel spreadsheet with the following key financial metrics and asset information.
Location, Location, Location
We cannot stress enough the importance of location when buying real estate, as you are ultimately making a long-term investment in the area and its potential future upside. We like to view locations from a macro and micro perspective.
Macro-location - Good locations aren’t limited to prime or central areas that are already popular and pricey areas like Azabu-juban or Ebisu; it extends to neighborhoods that will retain relevance and have a positive growth story. For example, is the station area evolving with up-and-coming businesses and refreshing retail or is it the same dusty mom-and-pop shops and vacant retail? Remember, your investment extends beyond the building itself to the overall neighborhood.
Micro-location - How does the property situate within the area? When selecting a property, keep in mind the following criteria which will enhance desirability for you or your tenants:
Close proximity to the train station operating multiple train lines, on a train line that connects to a terminal station or operates the express train
Essential amenities such as convenience stores, supermarkets, drug stores, F&B, etc.
Corner lot, top of the hill or along wider roads
Nature and greenery in the form of parks, rivers, etc.
Pricing Metrics
Buying well and gauging if the property is over-priced or under-valued is arguably the most important metric in investing and unlike location, can be deducted quantitatively. But how can you tell? It’s simple. We look at 2 metrics: Price per tsubo (or sqm) and Net Yield (for investment properties)
Price per tsubo - Benchmark your property price by calculating the price per tsubo (or price per sqm) and compare it against similar properties in the area. For example, calculate the price of 10-15 similar properties (i.e. within 10-min. walk from Yutenji station, RC-build, within 10 years old, etc.) and divide by the area (tsubo or sqm) to get your unit pricing. Take the average per tsubo pricing of the 10 properties as your sub-market benchmark and compare against the property you are interested in.
Net yield (for investment properties) - Websites will typically show the gross yield which is the purchase price ÷ revenue at full occupancy. This can be a deceiving metric, especially for a property that is underperforming in occupancy, and does not incorporate costs such as operating expense (management fees, repair fees, insurance, utilities expense, brokerage fees, etc.) which is the net yield. Net yield is your 2nd most important metric after price per sqm and will require close attention.
For more information on yields and key performance metrics, view our guide A Beginner’s Guide to Property Investment in Japan: Property Cashflow, Yields, and Key Performance Metrics.
For easy yield and property performance calculation, use our Japan Investment Property Calculator.
Monthly operating costs
If you are buying a condominium, there are two monthly costs that are recurring, outside your control and do not contribute to your mortgage payments. They are the Management fee (“kanrihi” / 管理費) & Building maintenance reserve (“shuuzen tsumitatekin / 修繕積立金). Whole building also have these costs, but can be managed more to your own discretion.
Management fee (“kanrihi” / 管理費) is a monthly paid fee in condominiums which covers the costs of managing, maintaining, and operating shared facilities and common areas. While it is important that your building is property managed, this fee is purely an expense and the lower the better (JPY10,000-15,000/month is a good reference point). Houses do not have this cost, but take into account that you are responsible for the payment at your own labor and expense. For whole building ownership as an investment property, you will charge this cost back to your tenants.
Building maintenance reserve (“shuuzen tsumitatekin / 修繕積立金) is a monthly paid fee in condominiums to cover future repair or maintenance expenses for the shared facilities or common areas of the property. Similarly to the management fee, it is important the building has enough reserves in case your building is damaged or needs repair, but it is also an expense and the lower the better (~JPY10,000-15,000/month is a good reference point). For houses, you are responsible for managing repairs and maintenance at your own labor and expense. For whole building ownership, this also applies but also for all repairs and maintenance at the unit-level.
Bonus Tip - Pro-active Online Property Sourcing
While you can source property information through contacting a local real estate agency via their websites or visiting their locations found nearby most stations, desirable properties tend to be swiftly taken off market and sourcing online is often the quicker route. Rather than wait for property information to be sent to you, we recommend committing to your search by scouring various online portal sites (recommendations below) and request information directly online where you will be put into contact by the representative agent and be sent further property details. Alternatively, if you have a preferred agent that is English compatible, send them the property information you found online and they are more likely to actively work with you on next steps.
List of recommended websites for the property search:
Local websites tend to have more listings and are more up-to-date, making them better sources for information. If you can’t read Japanese, the Google translate plug-in on Google Chrome is a great source.
Personal Housing:
https://suumo.jp/ (also have a useful app)
Investment Properties:
https://toushi-athome.jp/
https://toushi.homes.co.jp/
https://www.nomu.com/pro/
https://www.rakumachi.jp/
Conclusion:
As you are looking for properties, you must not forget – this is a large-scale and long-term investment. For personal housing investors, the allure of the most convenient, newest and most beautiful interior might be captivating. Meanwhile for investment property seekers you may be drawn to the highest yield properties. However, by following these 3 key tips, you can ensure that your investment is a wise purchase – one that is situated in a good location, priced correctly and has money going to the right places. Be pro-active in your property search and use agents as supplemental resources.
How to Identify Property Potential and Risks: 5 Due Diligence Checkpoints
After identifying a property of interest, the next step is to delve deeper and initiate your due diligence on the property. The due diligence process is a critical part in the acquisition process, serving as the arena where all outstanding questions and concerns must find resolution. Unlike stock or equity investments, real estate involves a physical element that cannot be dismissed and it is essential that you view the property and the surrounding macro-area to understand what you are investing into. Additionally, you will need to conduct a thorough review of the asset’s financial, legal, and historical details.
In the upcoming section, we explore the 5 essential checkpoints throughout this due diligence process so there are no stones left unturned by the end of it.
Due Diligence Checklist
Here is a checklist for things to look out for during your due diligence process:
Macro Review - Assessment of the surrounding area
Station-front dynamics: Is the retail surrounding the station front being gentrified with new business?
Station access: Is the # of min. walk to the station as advertised? (Websites list train accessibility from the property to the nearest entrance/exit, not to the train itself, so try to understand your actual commute)
Tenant Amenities: What amenities are available to you or potential tenants? How close is the nearest convenience store and supermarket?
Neighborhood safety: Are there any dodgy establishments that might make the area feel unsafe, particularly at night?
New Developments: Are there any new developments (public infrastructure or private development) in the area that could either positively impact the property value or create a construction noise nightmare for the next few years?
Green Spaces and Recreation: Are there accessible green spaces, parks, and recreational facilities nearby?
Property Review - On-site assessment
Verification of Property Information: Does the property information align with the details that have been advertised?
Repair, Maintenance and Renovation Work: Have you identified any additional repair, maintenance, or renovation work that might be necessary, especially if the property is being handed over "as-is"? Review past work done on the property including receipts on any work done.
Utilities and Infrastructure: Are utilities such as water, electricity, and gas readily available and in good condition? Additionally, what is the condition of the existing air conditioning units in the property?
Floorplan Review: Are there are any unique features to the unit that are undisclosed in the floorplan?
Building Security: Are there security gates on the first floor, and if not, should they be considered for added safety measures?
Trash Area: Is the trash area well-maintained and organized?
Parcel Delivery Box: Does the property have a parcel delivery box installed for unattended Amazon delivery?
Car Ownership: Does the property have parking? Are the roads surrounding the property wide enough?
Legal Review
Verification of Registry Certificate: Have you thoroughly verified the Registry Certificate to confirm that the listed seller is the true and legal owner of the property?
Potential Legal Issues: Are there any ongoing neighbor disputes or unapproved structures on the property that could pose legal challenges or affect its value?
Legal Restrictions and Zoning Considerations: In addition to understanding legal restrictions and zoning affecting the property's use, have you explored specific local regulations that could impact your future plans or potential expansions?
Past Incidents and Deaths: Have you inquired about any incidents, including deaths, that might have occurred on the premises? (While the seller may not be required to disclose deaths on paper depending on the timing and cause, they should provide information if you ask directly. You can also check the website 'oshima-teru' , a public domain that tracks deaths in real estate properties.)
Financial Review (for investment properties)
Property Financial Performance: Have you conducted a comprehensive review of the property’s historical occupancy and cash flow data (revenue, operating expense and income) from the past 12 months? What is the net yield based on actuals?
Rent & Concessions Evaluation: Are the rental levels in the existing tenant rent roll reasonable of the current rental rates, considering the local market and property conditions? What are the currently provided concessions (free rent, agency fees, key money, etc.)?
Alignment of Lease Documents with Rent Roll: Are the tenant lease documents aligned accurately with the information provided in the rent roll?
Future Revenue Potential: Are there opportunities for increasing revenue, such as through property improvements, renovations, or adjusting rental rates in line with market trends?
Tax Details: Have you examined tax details, including property valuation and property tax indications, to gain insights into the property's financial obligations and potential implications for your investment?
Who is the seller? Know who you are negotiating against!
Recognizing the nature of the seller and their motivations is crucial for adopting a tailored negotiation strategy that aligns with the specific dynamics of the real estate transaction.
Professional real estate companies may have limited pricing flexibility due to set margins and the ability to wait until they hit their target pricing. These companies typically operate with a structured approach, adhering to predefined pricing strategies and financial goals. Individual sellers however, are often more open to negotiating a discounted price for a quicker sale, especially with vacant properties, considering the financial implications of holding an empty property.
Conclusion:
Due diligence is an important phase to uncover all aspects of the property that are otherwise not shown in the basic property details. Conducting on-site visits, thoroughly examining the property's surroundings, and engaging in a detailed legal and financial review will be key in making an informed decision and may signal potential issues that warrant caution before proceeding with the purchase. Bring the checklist with you on your next site inspection and cover your bases.
Guide to Property Loans in Japan
Real estate investment can amount to a substantial cost and obtaining a mortgage or financing from a bank or other financial institution is a common approach. Before proceeding with the application and buying process, you will need to discuss eligibility to finance the property with a lender as well as the terms such as amount, loan term and interest rate.
For a full review on loan strategy, mortgage structures and breakdown upfront costs, refer to our guide: Complete Guide to Real Estate Loans in Japan.
How do I secure a property loan?
If you're considering financing, it's advisable to seek pre-approval from a lender before proceeding with a purchase application. This pre-approval process helps you understand your eligibility for financing, the approved loan amount, the applicable interest rate, and other terms. Lenders assess factors such as your credit, existing debt, current income, employment, residency status, and more. The requirements for a housing loan differ across various financial institutions, but general requirements are listed below.
You can discuss which banking institution to proceed with your property agent or apply directly online for a consultation and quote. During a consultation, be prepared with property documents and personal identification materials, as they are essential for the loan assessment process. It's recommended to confirm the required documents in advance.
Which Bank Should I Choose?
There is a wide variety of available lenders you can choose from, so shop around and compare interest rates, loan terms, and fees from multiple lenders. Don't settle for the first lender you come across. Another important aspect of this step is maintaining persistence, especially if one financial institution rejects your loan application. Approach multiple financial institutions simultaneously to maximize your chances of securing the terms best for you, and balance loan terms versus compatibility.
Fixed vs. Floating - which is better?
In considering your financing options, you will have the choice between fixed and floating rates. Each option comes with its own set of advantages and considerations. Fixed rates provide stability and predictability, as your interest rate remains constant throughout the loan term. On the other hand, floating rates, also known as adjustable or variable rates, can fluctuate based on market conditions. The decision between fixed and floating rates depends on various factors, including your risk tolerance, financial goals, and market expectations. It's essential to carefully weigh the pros and cons of each option before making a decision that aligns with your individual circumstances and preferences.
If you are unsure about choosing between fixed or floating interest rates, refer to our detailed guide: Choosing Between Fixed vs. Floating Interest Rates in Japan: Which is better?
Seal the Deal – 3 Final Steps in the Closing Process
Once you have completed the on-site inspection, confirmed there are no deal breakers, and have completed your preliminary loan approval, you are ready to move to the closing process. The closing process is broken down into 3 main components: the Purchase Application, the Purchase & Sales Agreement (PSA) and Financing Agreement.
Purchase Application
The purchase application (also known as the Letter of Intent or “LOI”) serves as a formal indication to the seller of your intention to acquire the property and should encompass essential deal terms which you are offering as well as property and buyer details such as:
Property Details: Property Name, address, description, area
Buyer Details: Name, birth date, contact details, current address, employer details, and salary
Deal Terms: Proposed purchase price, financing amount, contract and handover schedule, payment schedule (including upfront deposit)
Other Terms: Additional terms or specific conditions (i.e. repair requests, leasing conditions, etc.) and validity period
Submitting a purchase application doesn't guarantee securing the property. In instances where multiple investors submit applications for the same property, the decision ultimately rests with the seller. Factors such as the timing of the offer, cash availability, or a willingness to pay a higher price can influence the seller's choice.
A purchase application is an expression of interest and is typically not legally binding. If you choose to withdraw, you are usually not liable for any termination penalty. However, given the document's significance to the seller, it's advisable to submit it only if you genuinely intend to proceed with the purchase. Unjustified cancellations may impact your reputation with the real estate agency, and if negotiations have progressed very far, refusing to enter a contract without legitimate cause could expose you to potential damages. So avoid impulsive purchase applications without valid reasons solely to secure a property.
Once your application has been approved by the seller and you’ve successfully passed the pre-assessment by the financial institution, you're in the home stretch and ready to close the deal. Closing involves the execution of two key agreements: the Purchase and Sale Agreement (“PSA”) and the Financing Agreement (commonly referred to as the mortgage or loan agreement).
Purchase and Sales Agreement
The Purchase and Sale Agreement (“PSA”) is the contract executed between the buyer and seller, outlining the terms and conditions of the property sale, including the purchase price, closing date, and all other clauses related to the sale.
Prior to the execution of the PSA, you will receive a formal explanation from your agent known as the “explanation of key terms” (jyuusetsu or 重要事項説明) required by real estate law, where they will explain all the details of the deal over the course of an hour. If the terms are as agreed and expected you will need to seal this agreement as an acknowledgement of receipt and both the seller and the buyer will officially enter into a PSA thereafter.
The PSA is legally binding, so review them carefully (ideally with legal counsel) to ensure there are no discrepancies, errors, or fraudulent clauses. The PSA is usually executed prior to the financing agreement and may include a break clause related to financing in case you are unable to secure a loan.
A judicial scrivener verifies that all necessary documents for registration are in order. If there are no issues, they instruct the loan officer to execute the loan, initiating the settlement process. During settlement, the buyer is responsible for covering various expenses, including the remaining balance (purchase price minus deposit), fixed property tax settlement, registration fees and charges, and brokerage fees.
For the signing ceremony you will have to bring a seal, registration of the seal and certificate of residency. Confirming the deposit payment, if any, are also completed in person.
Financing Agreement
The Financing Agreement is executed between you and the bank, detailing the terms of the loan, such as the loan amount, interest rate, and repayment schedule.
Concurrently with the sales agreement, you'll formally apply for a loan from the financial institution and undergo the final assessment, which takes around 2 weeks to 1 month to receive a response. If the final assessment results in loan approval, you proceed to execute the financing agreement. It's essential to review the terms in detail, as they are fixed and cannot be changed.
Other (Life Insurance & Property Insurance)
In many cases, group credit life insurance agreements are also made concurrently. Although property insurance is not immediately required, it is strongly recommended to proceed with it sooner rather than later, after reviewing quotes from various providers.
Once all the formalities are completed, you will receive the keys, property-related documents, and the handover process will be finalized!
If you have any questions or need further assistance, feel free to contact us or refer to our many guides real estate ownership and other related topics.
