Real estate investing is pay-to-play so it’s important to make sure that you are well prepared and fully aware of its nuances before making your first investment; this is especially true in Japan, which can be a very different market to other developed countries. The following is a list of checkpoints that will inform your own research, ultimately allowing you to make smart investment decisions and successfully create your own passive income portfolio using Japanese assets.
1) Do You Have The Money To Buy Real Estate?
Seriously though, do you? Even if you will be getting an investment loan from a Japanese bank, you will still be asked to put down a down-payment of between 10% to 30% of the purchase price depending on your creditworthiness (see our guide: Getting a real estate loan from a Japanese Bank). Lets say you are buying a building priced at 100,000,000 JPY and the bank needs a 10% down-payment from you- your total spend will be 10,000,000 JPY, right? Wrong. Due to closing costs, fees and taxes, the total out of pocket expense for an investor is between 15% to 18% of the total purchase price (including the 10% down-payment). It often makes more sense to look at things in reverse, starting with your budget:
> money available to invest in real estate = 10,000,000 JPY
> How big an asset can we purchase with 10,000,000 JPY if 10,000,000 JPY is 18% of that asset price?
> 10,000,000 / 18% (calculated as 10,000,000 / 0.18 ) = 55,555,555 JPY
So, maximum purchase price for a real estate investment is 55.5 million JPY, based on a budget of 10,000,000 JPY.
Using a bank loan lowers the capital required from an investor and also increases their ROI. That said, real estate is still capital intensive, and you have to have money to start. Further, it should go without saying, but you should also have some money left over after the initial investment for emergencies. Eggs. One basket. You get the idea…
2) Have You Researched Japanese Real Estate Investing?
There is a learning-curve to Japanese real estate investing that actually steepens if you have real estate investing experience in other countries. The market here is quite different to other developed countries and you’d be wise to find out what you’re buying into. One of first things to come to terms with, is that you are highly unlikely to be able to sell a property for more than you paid for it. This lack of potential for capital gains could leave many scratching their heads as to the appeal of Japanese real estate. That is, unless they understand the depreciation system and its tax breaks, and the robust nature of Japanese yields. (See: Why Japanese Real Estate Is Different). Seeing as the ideal holding period for an income-producing Japanese real estate investment is forever, you should make sure that you understand the system long before you purchase your large, immovable, cash-flow producing asset.
3) Do You Have Realistic Expectations For Real Estate Investing?
Everybody knows somebody already invested, or actively investing in real estate. When these conversations happen socially you will rarely hear about people’s problem tenants, vacancy periods, tax returns and broken air conditioning units- people leave out all of the negative’s in favour of the positives and its easy to think that Real Estate is a piece of cake. Real estate can be an extremely profitable endeavour, but it certainly isn’t free money. Depending on how much you are able to out-source, you may or may not be dealing with problems and procedures at regular intervals. Although both a stock market investor and a real estate investor will likely employ a buy-and-hold strategy, the real estate investor does not have the luxury or being able to turn off the computer and forget about everything until such a time that it suits him to get re-acquainted. A real estate portfolio will knock on your door on a regular basis and you need to answer. Is it profitable? Yes, it is- but sometimes it is more like a business than an investment. What did you expect?
4) Are You Patient Enough For Japanese Real Estate?
Real estate investing has been described as “get rich slowly”, which admittedly is a lot less appealing than “get rich quick”, but only when you consider that anything that can make money quickly can similarly lose money just as fast. Real estate investing is the long-game. In fact, because any real estate investment will start with an initial cash injection, it will probably be any number of years before you re-coup the initial expense of the investment. Does this bother you? Are you concerned that you will not be able to access your money in a hurry should you need it? Perhaps real estate is not for you. Steady cash-flows are paid for not with an initial investment, but with patience. There are plenty of assets available in capital markets for investors who require liquidity and capital appreciation. Real estate is often what they fall back on when things don’t work out. After all, its a lot easier to make speculative investments with high potential pay-outs when you have a steady passive income from real estate to fall back on. Real estate is long term, but are you?
5) Do You Understand Risk?
And not just the idea of “losing money”. For real estate investors, risk comes in the form of vacancy or a lack of liquidity come the time to sell the property. Are you aware how vacant rooms could affect your returns during your ownership period? It’s necessary to sit down and consider all possible scenarios before pulling the trigger on any deal; look at varying levels of vacancy and doomsday scenarios where you are responsible for all of the running costs out of pocket. Real estate investing when done well is extremely uneventful (especially compared to stock market investments which have daily changes in value- volatility), but it is still no free lunch. Make sure you understand how any investment compensates you for the risk undertaken and only consider properties with an attractive return profile.