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Rental Insurance: Guaranteed Rent in Japan

When first reading about Japanese real estate, it might seem almost too good to be true. Get a low-interest mortgage and acquire a high-value property for little money down, then immediately start making a passive rental income and high ROI from tenants. Reinvest the profits, buy more units, and rent them out, too. Finally achieve financial independence. Then, the reality check: is rent really guaranteed rent? What if the renters do not pay their rent, or cause damage?

Good news: For a real estate investor, one special feature of the Japanese rental market is that Japanese rent delinquency is among the lowest in the world. This means extremely high chances of being paid on time and in full. Government statistics reveal that the vast majority of renters are prompt with their payments with only 1.6% of tenants ‘rent-delinquent’ (non-paying) for two months or more during the year.

Okay, but what if? What if I am unlucky and my tenant is one of the less than 1 in 50 that does not pay up for at least two months? Fortunately, to mitigate these risks, Japan has guarantors and guarantor companies (which basically function as a form of “rental insurance”). Both of these cost the landlord nothing because the cost is met by the renter. Generally, a landlord and his or her real estate agency require either a guarantor OR guarantor company, but a few require both.

What is a guarantor?

Many rental contracts require the use of a guarantor (otherwise known elsewhere as a “co-signer”). Of course, any given tenant is highly likely to pay on time and in full, but a guarantor helps ensure this, and pays in place of said tenant in the event of the tenant’s non-payment- so this is the first method by which a landlord can be assured of guaranteed rent. The minimum requirement to be a guarantor is to be a Japanese national, have a stable financial background, and possess a hanko (判子, name stamp). However, these days, it is becoming increasing common for landlords to require a specific guarantor company rather than an individual, because whereas a guarantor might age and pass away over the course of a ten-year tenancy, an established guarantor company is much more likely to still be around in the far future.

Tokyo Japan real estate handshake guaranteed rentWhat are the types of guarantor?

There are two main types of guarantor: regular guarantor (保証人, hoshōnin) or joint guarantor (連帯保証人, rentai hoshōnin). Whereas regular guarantors cannot legally be forced to pay for a renter’s missed rent, joint guarantors are just as liable as the renter. Therefore, many landlords prefer joint guarantors because of the advantage of receiving guaranteed rent even if the tenant does not pay up. Recently, new legislation has been enacted that requires a contract to state how much money the joint guarantor is liable for in the event of non-payment by the renter. Although joint guarantors are preferred, regular guarantors who are family members may be considered sufficient in some cases, though the trend is for the landlord and real estate company to ask prospective tenants to work with a guarantor company.

Some renters use their parents. This assures the landlord, because a regular guarantor cannot necessarily be compelled to pay if the tenant fails to pay rent. However, one problem with using one’s parents is that often, it is required that the rent not be more than 30% of the guarantor’s income; for example, if a prospective tenant wants to rent a property for ¥150,000 per month, this would require the guarantor to have an income of ¥500,000 per month:

 

¥150,000 in rent per month ÷ 30% of the guarantor’s income = ¥500,000 per month in income that the guarantor must have to be a guarantor 

 

This is a problem for parents who are working part-time or retired; although they surely love their son or daughter, they simply do not have the income to serve as guarantor and assure the owner that he or she will receive guaranteed rent. Being a guarantor is also a big responsibility and many feel uncomfortable asking someone else, even a family member, to be a guarantor. Therefore, the use of guarantor companies is becoming increasingly common.

Guarantor companies (for example, Nihon Safety) provide services for a fee, usually about half a month’s or one month’s rent up front.

Tokyo Japan real estate 21st century businessman guaranteed rent

They are careful about who they deal with, because being a guarantor is a major responsibility, and much trust is required. For some individuals, it is best to use a workplace or school/university as a guarantor, but most real estate agencies have a preferred guarantor with whom they like to work, whom they trust to provide guaranteed rent in the event the tenant does not pay; it also simplifies things for them because they only need to have one point of contact for multiple clients.

 

The Function of Guarantor Companies: Rental Insurance

Tokyo Japan real estate signing a contract guaranteed rentThe renter pays the cost of a guarantor company. It typically costs him or her half a month’s rent or one month’s rent.

The rental insurance provided by the guarantor company can cover rental payments if the tenant fails to make them. In the event of non-payment, the insurance company helps with the eviction.

It also covers damage he or she might cause, such as by starting a fire or leaving the water running. It may have provisions for both tenant and personal liability. Tenant liability means damage the tenant might cause to his/her unit and/or other units. Personal liability covers both property damage and personal injuries to others that the tenant might cause.

Conclusion

Delinquent renters, as well as those who cause damage to property, are a concern for real estate investors all over the world. Fortunately, in Japan, with a delinquency rate of only 1.6% for two months or more, it is highly unlikely that any one of a landlord’s five, ten, or even twenty tenants will fail to pay rent in any given year. The probability of significant property damage is also low. Even so, guarantors and guarantor companies, that provide renter’s insurance as part of their packages, can help the property owner to sleep easier at night knowing that he or she will have a steady cash flow uninterrupted by the actions of the renter, and it is the renter who pays, not the owner.

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