For a beginner investor without much money, buying a single apartment and renting it out might be the only choice. A wealthier investor has more options. He or she can either buy a single apartment, renting it out (or multiple single apartments, renting them out), OR he can buy a whole building comprised of multiple units. Then there is the investor in the middle. Maybe he is sufficiently capitalised to buy a single apartment but could possible arrange financing to go bigger and acquire a whole residential building instead. Would that be wise? We explore the pros/cons of each: single apartment vs. whole building investments.
Single Apartment Investments
You can buy a single apartment in am apartment building. In principle, you’re responsible for what happens inside the walls of the apartment. However, for things in the common areas, those are the responsibility of the owners’ association/management company. Common areas include the hallway, stairs, laundry area, etc. That’s not to say that what happens in the common areas has no effect on you whatsoever. Owners of single apartments still need to pay monthly fees to the association/management company.
If these fees are insufficient to cover a major repair, renovation, etc., the association/management company might ask for more. However, there is some “padding” when buying a single apartment.
Pros Of Single Apartments
Single apartments are cheap.
For example, in western Tokyo, there are small apartments for about US$20,000. They’re affordable for even beginning investors. However, a whole building might have about 40 units in it.
$20,000 per single apartment × 40 units in the building = $800,000
That’s assuming that only the single apartments themselves have value. That’s assigning no value to the hallways, the stairs, the laundry area, the bicycle parking area, etc. The building’s total value could easily be $1 or $2 million. This is far out of reach for a beginning investor. One single apartment, though, or even ten, could be within budget.
Single apartments are easy to manage if you don’t have many of them.
Your property manager finds you a tenant and you sign a two-year lease. During those two years, nothing goes wrong. The plumbing works fine. The electricity and air conditioning continue to function just as they had before. The next you even hear from that tenant is after two years, when it’s time to renew the lease. A single apartment might just have one bathroom, fusebox, and conditioner: three things with moving parts. A 40-unit building might have 120 things with moving parts. Of course the probability that something will go wrong is much higher in any given year when there are 120.
Single apartment reprice quickly.
If there’s a boom in the market, a single apartment’s value will go up more quickly than a whole building’s. You can sell it at a profit. It’s also easier to sell because single apartments are more liquid.
You can pick the best single apartment, while avoiding buying the less appealing ones.
Maybe #401 has a sweeping view of Mt. Fuji. It has two windows and a balcony, and because it’s on the third floor, it’s more appealing to potential tenants. The fourth floor is more secure than the first floor (harder to break into from the outside). In the same building, #110 has a sweeping view of… …the side of an ugly, old concrete building that exemplifies the brutalist architectural style. It has only one window, no balcony, and has been broken into multiple times because it’s on the first floor. Oh, and we almost forgot to mention, it’s an “owner change;” The tenant is delinquent on her rent.
Now, if buying a whole building, you’d get #401, sure, but you’d also have to take #110. If buying single apartments, though, you can snap up #401 and let #110 be someone else’s problem.
With a single apartment, you don’t have to deal with repairs to building-level components.
For example, if the elevator breaks down, it’s not your problem. If you owned the whole building, it would be.
Cons Of Single Apartments
It’s sometimes hard to get financing for a single apartment if the bank does not value the building itself.
Many financial institutions also won’t give you a mortgage for less than ¥10 million.
It’s hard to refinance a single apartment.
This makes it more difficult to get better mortgage terms, leading to a longer/more expensive mortgage. This increases the time until paying off the mortgage. When paid off, the result is having the lien released by the lender in exchange for paying off the mortgage.
Administration is laborious if you have numerous single units in different locations.
Imagine having a single apartment in Tokyo, one in Osaka, one in Nagoya, one in Fukuoka… Either you’ll be running around Japan whenever:
- A toilet overflows
- A switch in a fusebox needs to be replaced
- An air conditioner dies
Or you’ll be paying many property managers to do it for you. It’ll either be time-consuming, expensive, or both. This is supposed to be a passive income, not a day job!
The endgame for most investors is to acquire a building. For most people these are residential apartment buildings featuring multiple units. Sometimes people will acquire buildings with commercial units at street level (shops) in areas with strong foot-traffic, and residential units in the upper floors. Owner-occupation is also common. Who wouldn’t want to live in a a building that has their name on it?
Pros Of Whole Buildings
Whole buildings usually have higher returns. One reason for this is scale.
Another reason is that investors (who are logical, and use numbers, not emotions) buy buildings based on cap rate. This means that a whole building is less likely to be overvalued than a single apartment. In the case of a single apartment, emotional buyers bid up the price. For instance, in Manhattan, the average cap rate is 4% for whole-building investments, but only 3% for single-apartment investments.
Whole buildings are easy to manage because they are all in one location.
Having everything in one location makes administration much easier. One property manager. One gas contract. One management company. One location. One good nights sleep.
You can also make unilateral decisions.
Sometimes, management companies make decisions that are, well, “mystifying”. Why do they want to spend ¥2 million+ re-tiling the ground floor when it already looks fine? Is that money really going to the construction company or the workmen? Or does the re-tiling really only cost ¥1 million, with the remaining million or so going to hostess bars? If you owned the building, then how you spend the ¥2 million+ is up to you. You can make sure it actually goes towards maintaining, repairing, or even improving the building.
It is easier to get finance for a whole building.
Banks and other financial institutions are more willing to loan money for a property of ¥10 million or more. Smaller pieces of real estate are often not worth their time. The mortgage origination fees and interest are small because the property is small. Imagine if you (heaven forbid) defaulted on a mortgage for a ¥2 or ¥3 million single apartment. Reselling could possibly be more trouble than it’s worth for them. It is also easier to use a whole building as collateral/leverage for future purchases.
Cons Of Whole Buildings
It’s pay-to-play. Whole buildings require more money in the first place.
Not everyone has $1 or $2 million to invest in a whole building (though much more inexpensive buildings also exist outside of Tokyo).
Reliance on one quality property manager
Basically, buying a whole building is putting all your eggs in one basket because one PM will manage it all. If that PM is wonderful, then great. If that PM is lazy or incompetent, then it affects possibly the entirety of your Japanese real estate portfolio.
Single Apartment Vs. Whole-Building Investments: Conclusion
For wealthy investors, whole building purchases are a better idea than single-unit investments. Big institutions, for example pension funds or endowments, usually buy whole buildings, not single apartments. This year, M&G Real Estate, Allianz Real Estate, and Bayerische Versorgungskammer (BVK) have all invested in Japanese real estate. They have invested billions of dollars into it ($1.2 billion in the case of Allianz). In the case of M&G, this month, they bought 1,700 units—in a mere 23 buildings! It’s pretty clear which direction the large EU real estate companies are going. However, for an investor of more humble means, a single apartment can be a good starting point.