Case for Real Estate Investment in Japan

The highest Tokyo rental yield in Japan is at around 5.5% one of the highest in the developed world.

• Tenants are usually very careful with property and usually stay long term even at low-income level
• The country has low tax and stable institutions.
• The country's politicians are generally favorable to property rights and foreigners' rights are not restricted.
• Rental income is taxed below 10% (see here).

Image Credit: Kakidai CC BY-SA 3.0.

There are risks associated with longer vacancies and higher capex than in US, however, and financing is only available at a comparatively high rate.

Particularities of the Japan Market

Here are a few specificities of the Japanese market:

• Preference for New Construction: The desirability of properties in Japan falls rather quickly as the years pass, and it is much harder to find a tenant for an old flat than for a new flat. For this reason, houses depreciate fast, particularly in the first years. It is advisable to purchase a product that is already seasoned so that depreciation is not too quick.
• Demographics: Japan population is decreasing fast, and there is strong demand for convenient flats in mega-cities whereas countryside apartments face a real risk of permanent vacancy in the future.
• General building maintenance and administration costs, if you do not own the whole building is very costly in Japan.
• Expensive Renovations: Many kitchens and bathroom components involve plastics that do not age gracefully and renovation tend to be very expensive in Japan and the materials used do not always make sense.
• Seismic risk: housing is always vulnerable to a big earthquake.

Typical Investor Products

Typical investor products in good areas are:

• small flats in central Tokyo 4% yield with 25% of rent paid out in maintenance
• small apartment blocks a bit further away with 5%-6% yield and good control on costs

There are ways to monetize the flats using Airbnb, but regulations have changed recently and require registration.

Financing in Yen

Financing in JPY is very split:

• homeowners financing their home can get a 30Y fixed mortgage at 1%, this can be used to finance another rented area provided that it is physically linked to the home.
• investors can get 5% financing with much more restrictive terms.

Foreign investors may not find financing at all or get financing for 1% extra, in which case, much of the income from the property goes to the lender, and the investor is left with the depreciation risk.

A Source of Information on Japan Properties

I recommend the following book as an introduction to the Japanese market: The Savvy Foreign Investor’s Guide to Japanese Properties: How to Expertly Buy, Manage and Sell Real Estate in Japan.

I read this book last year and the author's website is worth the visit.

Conclusion

The cost of financing means that there is no easy way to obtain leverage in the Japanese market. The location should be chosen with demographics in mind, and a good yield, much above capital preservation can be achieved without worry. Obviously, the country's culture makes it an attractive lifestyle investment.