We’ve covered the basics – Japan’s got beautiful cash-flow, zilch to negative capital gain (may change, may not), and the icing on the cake – the best and safest business and residential environment one could possibly hope for as a foreign investor or business person.
So, the question begs to be asked –why isn’t everybody and their dog shopping there???
Well, the big boys, (GS, DBG, Fortress, TPG, etc) already are, as mentioned. As for the masses, the answer most likely lies in the “otherness” of Japan. We’ve already discussed the ethnocentric tendencies of Japanese people towards others – how they’ll rarely speak English, almost never enough to conduct business in – strangely enough, this works both ways. In much the same fashion that the Japanese are ignorant about foreigners, the average foreigner finds the Japanese alien – or worse, classifies them as “Asians” – a horrid mistake, since they’re probably as alien to most of their neighbours as they are to you.
The fact that in their case, that “otherness” translates to something very akin to chivalrous & child-like innocence, easily escapes the wandering eye, and it takes actual experience to realize that, in Japan, you almost never need to look to the law to protect you – you can actually depend on most individuals and entities you come in contact with to treat you fairly and expect the same in return, even in times of crisis and conflict. Keep this in mind as you examine these unpleasant -
Japan’s Tenancy Laws & Regulations
1) Security bonds or deposits, as means of ensuring tenant co-operation, are far from given. Sometimes you’ll have them, sometimes you won’t– it depends on the existing property manager’s policy and experience, and it’s usually best to follow their lead on this – meaning, if your PM doesn’t charge the tenants bonds in advance, because they found that in this particular area they’re hard to get, or that insisting on them doesn’t work– take their word on it - don’t insist – they know what they’re doing, and they’ll usually provide the guarantees to back it.
In such cases you’d normally have personal guarantors instead of deposits (friends, family members of employers who sign and promise to cover damages), and sometimes (in case of government tenants for example – see below) – not even that.
While this fact alone is already guaranteed to send the average foreign landlord running over the hills, images of drug labs, explosions, fires and general mayhem in their heads – in Japan it has very little, if any effect, on decision-making. The maximum out of pocket one could face in case of a feral tenant (meaning, the price of a complete rehab including fixtures, wallpaper, floorings, deep clean, etc) is normally around $2,000 for most cash-flow investments (small and old apartments) – hardly a case of total-loss, even if the entire unit cost $20,000. And the main thing is – Japanese tenants would never do any of those things. So while in other countries you’d be praying to god the security deposit, legal compensation and insurance policy put together will be legally and financially compelling enough to cover “this” (whatever “this” may be) –in Japan, “This” simply doesn’t happen. There are no warzones. No deadbeats. No habitual offenders. Or at least, none that you’d normally notice.
2) There are no internal inspections (or photographs, for that matter) of any sort while a property is tenanted. No periodical inspections. No pre-purchase inspections. No pre-lease renewal inspections. Nothing. And so, property managers and even owners of properties very rarely enter a tenanted property, simply because Japanese law does not allow it, unless the tenant permits – and the average Japanese property manager or property owner wouldn’t dream to ask tenants for permission of entry, because “it’s simply not done”. So, in effect – if you’re purchasing a tenanted property, you’ll, in the vast majority of cases, be purchasing sight unseen. The best you could hope for is a “seller’s responsibility” clause that may or may not be put into the contract (depending on the seller and realtor, but rare) – otherwise you’ll just have to rely on the property manager’s word, which relies on the tenant’s word, which relies on whatever condition report they filed or didn’t file as things broke down, (or didn’t), during their tenancy. Scary, right?
Not really. Not if you consider the fact that Japanese folk like things to work exactly as they’ve been working thus far – or better. Japan is as far from “DIY” as it gets – insurance agents, for example, visit your home to collect signatures for the slightest of clauses added to your car vehicle insurance policy – something as tiny, say, as adding an extra driver for $12 a year or so – because they’re expected to.
The idea of a client going to a website and downloading a form, then printing it, filling it in, signing it and posting it back to the insurance company, is simply unthinkable (this may be changing, but is still far from the norm). If you can’t get/pay/drop it off at the nearest 7-11, somebody comes to your house to do it for you.
So, in practice, the chances of a tenant trying to fix a leak by themselves, taping over an exposed wire or even trying to deal with a noisy neighbour with a knock on their door, is pretty darn slim – you can count on the fact that, if the tenant hasn’t complained during their tenancy, there’s absolutely nothing wrong with the property (or at least, nothing that any kind of inspection will reveal anyway). So yes, you can and should buy “sight unseen” – if you want a tenanted property, there’s just no other way.
3) Leases are signed for two years – meaning you can’t raise the rent or kick out the tenant (without reasonable and legal cause) for two years. They, on the other hand, can move out at a month’s notice. They rarely do, however, because…well, because they’re Japanese.
On the downside, you really shouldn’t touch the rent. As Japan’s inflation has been close to zero for the past two decades or so, and since prices don’t rise (average lease amount raised by something like $20 over 19 years, going off memory) – you shouldn’t be raising the rent at your properties either. Ever. If you do, rest assured, your tenant will move out.
With Japanese Yen stability and 11-15% cash-flow, though, you don’t ever need to raise the rent – that’s the beauty of it. If a tenant does move out, for whatever reasons, and you’re not in the mood for a vacant unit while you search for that perfect tenant (they’re all perfect in Japan, remember?) – just ask your property manager to interview government supported tenants. In Japan, all this means are sick, old and disabled folk – these guys are as harmless as any other tenant, and while most don’t have even personal guarantors, some of the property managers solve this problem for you by signing the lease on the tenant’s behalf, in front of the owner – so that you’re actually renting the place out to the property manager. This makes it easy for them to “make the problem go away” (don’t ask me how, I’m scared to ask them) – just in case those tenants end up not paying, crapping on the walls or whatever (and again, they never do).
Most Japanese landlords shun the government supported tenants (“they don’t look right”), so they’re very grateful to finally get a place – and the best part is, the government will usually approve a slightly higher rent for them.
What’s important to acknowledge here is the unimaginable fact that – in spite of all this horrible, anti-landlord legislation – you’re dealing with the best tenants you could possibly dream of – so all of the above, in reality, has absolutely zero effect on the profitability and hassle involved.
If you’ve digested all of this, the rest of the procedure is relatively easy, and involves –
The Purchase
Once you’ve approved all you can inspect (meaning the area, cost, return, history, monthly fees etc), you submit your offer – remembering, once again, that once accepted, it’s very rare for anyone to back off for whatever reason (they “lose face”)– and if it is accepted, you start receiving mountains of paperwork. Fear not, it’s good for you – this is what the Japanese call “The Explanation of Important Matters”, and consists of a highly detailed construction, status, rules, regulations, laws and bylaws, urban development plans and other such tidbits relating to the property – an endless array of information covering the unit, the building and its public areas, street and neighbourhood, top to bottom, as well as existing tenancy agreements, repairs conducted (if any) and more and more. After having received this vast amount of information, you then send off any questions to the agent, who receives replies from the sellers or their agents. At this stage, you should cover –
1. Rental history (on-time, late to pay, complaints etc), as far as 4-5 years back, which most owners should be able to provide at request. If the unit’s stood empty for six months, you want to know why. (Hint –renovation, evident in a rent rise, is a good enough excuse. Other excuses, not so).
2. The building’s “Accumulated Funds” status – part of the monthly fees which you’ll be paying (in case you don’t own the whole building), is collected by the “Housing Company” (equivalent of HOA in the US, Body Corp in Australia), for the explicit purpose of a future renovation and repairs trust. These “Accumulated Funds” are collected over long periods of time from all unit owners, and should accumulate to large amounts of money, used in cases of damages and repairs to the building as a result of wear & tear, natural disasters and other such evils. The housing companies collect and hold on to that money (or in other words, make a fat nice interest dividend on it over long, incident-free years), so that individual owners should RARELY BE OUT OF POCKET FOR ANY BUILDING OR PUBLIC AREA RELATED EXPENSE. Naturally, the higher the amount collected, the better – you want to steer clear of buildings where these funds have been depleted by emergency repairs, natural disaster compensations, rebuilds, etc – and stick to the old, heavyset, ugliest old blocks, where nothing’s been touched, and millions of yens have been put aside for any such case.
3. Internal repairs/rehabs etc, again, over the last 4-5 years (none is best, anything that’s been done, dig into a bit, but doesn’t happen much as a rule).
Turn-Ons :
No legal representation required – all agencies “come” with their own in-house judicial scrivener that handles the registration, asks you a few questions, collects a few signatures, and, barring the transfer of deposit and remaining amount, as agreed, that’s about it. The money starts rolling in immediately. Insurance is about $2/month for most smaller, older units, and includes fires, earthquakes and (partial) tsunami coverage (but expect insurance companies to do their best to avoid compensation, as anywhere else in the world). Oh, and get a good accountant, cuz you can claim the hell out of everything.
Turn-Offs:
Aside from the as of yet non-existent capital gain, the only issues in getting to this coveted lamppost are the Japanese themselves. Where the good deals are, there just aren’t any English speakers to speak of. And regardless of that, the majority of them don’t like to deal with non-Japanese (sometimes not even other Asians), don’t know how to transfer funds to overseas accounts (they just won’t), and raise their eyebrows alot at outlandish questions and requests, such as the housing company’s planned renovation schedule (“the what?”), aggressive negotiation techniques (such as anything beyond 10%) or Western-style excuses like “I didn’t get your email” – so don’t even try. You’ll be blacklisted around the prefecture, and not being Japanese, you weren’t that popular there to begin with. The last but possibly hardest difficulty imposed on non-residents, is that they find it very difficult to open local bank accounts, or indeed get anyone at all to talk to them if they’re not Japanese.
Summary:
In practice, though, all this means is that the huge potential of Japan’s less known metropolitan centres is completely untapped from a foreign perspective – and just imagine holding on to all that cheap cash-flow if capital gain happens to happen there again. It also means that, if you find yourself a good, reliable local partner, you’re sitting well on top of one of the world’s biggest, safest and most positively geared property markets. As good (and as simple!) as that.
(The majority of the information presented above has been gathered from and by NTI’s staff and principals, and is the result of a ten-year relationship and experience in and with Japan, its business environment, and its people. Nippon Tradings International is a registered Japanese Buyers’ and Proxy agency, whose Asia-Pacific operations are headed by the author of this article)
Photo 1 – Private Owner’s Castle wall, Fukui - Ziv Magen, Picture 2 – “Old Folk”, Ueno park diner, Tokyo – Ziv Magen
This Article is Copyright © 2004-2012 BiggerPockets, Inc. All Rights Reserved.
Real Estate in Japan – “The Tenant is King”
