If done properly, becoming a landlord can be your ticket to financial independence. When you accumulate enough properties and populate them with tenants, with such a large passive income, you will no longer need to toil away at a day job. Then you can enjoy life on your own terms.
However, not everyone makes a good landlord. On the contrary, some just get by. Others flourish. So how does one become a landlord, then EXCEL at it?
The Process of Becoming, Then Being, a Landlord
- Decide what kind of investment property you would like to own.
- Contact a licensed real estate brokerage. Go through the transaction process. Buy the property.
- Clean it up. Make it ready for the tenant(s).
- Find tenants using a real estate agent. Sign a contract with (a) tenant(s). Two types of contracts:
- Ordinary rental agreement: The default: the tenant may continue to rent the property as long as he/she obeys the rules and pays rent. Contracts are typically “two years,” but the tenant has the right to renew. You can only raise the rent if the tenant accepts.
Advantage: Ordinary rental agreements command higher rent from the start.
Disadvantages: Difficulty in eviction of bad tenants and raising the rent even if nearby units’ rents are increasing
- Fixed-term lease: Two years, typically, like an ordinary rental agreement. However, the landlord can require the tenant to vacate the property at the end.
Advantage: More power to make the tenant vacate at the end of the lease, raise the rent unilaterally, etc.
Disadvantage: Usually have lower rents, so not as much potential profit as with ordinary rental agreements.
5. Collect rent from tenants (passive income). Deal with tenants yourself (contracts, collecting rent/fees, repairs, complaints, etc.). If you would prefer not to, get a property manager. If a tenant moves out, go back to #3-4 and repeat.
Tips to Be an Exceptional Landlord
Do Not Be a Slumlord
It might be tempting to buy the cheapest property that meets your specifications, rent it out, and thereby dip your toes into Japanese real estate before jumping in. However, the cheapest properties might attract low-quality tenants who bring a disproportionate share of problems (e.g. non-payment). In Japan, only 1.5% of tenants are in a state of non-payment for 2+ months; however, for the cheapest apartments in the city, this number will probably increase.
Do Not Rent to Family/Friends
Will your friend still be your friend if you keep telling him to turn down his TV and not have house parties? What will you do if your sister stops paying rent?
Sometimes, tenants and landlords experience friction. Do you really want it with someone you care about? Would he/she take advantage of your relationship, skipping out on rent or bending/breaking other rules? The occupancy rates in Tokyo and Osaka are ~95%; it should not be necessary to rent to family/ friends. Successful real estate investment relies on numbers, not emotions. It is almost impossible to ignore emotions when involving a family member/friend.
Continue Educating Yourself
Read about real estate trends, laws, etc. Stay current. Knowledge is power. Your PM will probably deal directly with the tenants. If he/she does not, brushing up on your Japanese will not hurt, either.
Develop Systems from the Beginning→Run It as a Business
It might be tempting to ad lib it with only 1~2 properties. Don’t. When you become successful, pretty soon, you will have many pieces of real estate generating turnkey income. You will need systems in place to manage them all. Hire good people.
Get organized. Use filing systems, software, etc.
Treat it as a business; perhaps even registering it. The advantage is if your business officially owns a property (not you), as far as the tenant is concerned, you are not the owner, only the property manager. This reduces friction. Instead of blaming you for strictness, raising the rent, etc., a tenant will see you as only the messenger.
Create written policies for the business, understood from the beginning. Renters are much less likely to argue with “company policy” because they signed the agreement knowing it will probably not change, whereas they might try to change your mind if it is a new rule that they know you decided.
One policy should be late fees. Many renters claim to have cash flow problems, but actually DO have the money. They just pay late because it is a lower priority. By charging a late fee, they will often come up with the money on time. Maybe instead of buying that new car/big screen TV, that money will go to this month’s rent, because they would prefer to avoid a late fee.
Set business hours. Fancy unclogging a drain at 3:00 AM? Set business hours, e.g. 9-5. This will allow you some peace and quiet.
Google Voice Number
This is a phone number they can call. It will transfer the call to your landline/cell phone. Configure it to go to voicemail automatically after closing time so as not to interrupt your dinner/late-night TV-watching. Give your tenants an emergency cell phone number, but in general, they will not call it.
Maybe you have experience as a handyman, electrician, construction worker, etc., but unless you really do not mind, is making repairs really the best use of your time? Calculate what your time is worth—no DIY unless the time cost is very low. Consider outsourcing most repairs, maintenance, etc.
Consider getting a Property Manager (PM).
Certain (especially corporate) tenants require someone nearby. If investing from overseas, obviously this will not be you, so a PM is a good idea. He/she can send the money to you overseas (very useful if you have no bank account in Japan), do the taxes, and be there during times of tenant turnover (e.g. handing over the keys). Importantly, PMs know the law:
- Did you know that if the former renter leaves trash in your apartment, you legally must store it, not throw it away? Perhaps you were unaware of that. Better to hire a PM who knows that than to end up in court because you threw away someone’s dead plants and tattered old clothes, claimed to be “worth ¥100,000.”
- Did you know changing locks on a property is illegal, even if the tenant is long delinquent? Again, a competent PM knows this.
- The laws are changing to favor the landlord. Basically, in WW2, strongly pro-renter laws were enacted to protect the families of soldiers. However, when the ‘80s/’90s Bubble Era ended, many experienced financial difficulties. Therefore, there were numerous units that were occupied by difficult-to-evict, delinquent tenants. In 2000, the government enacted the “Land and Housing Lease Act and the Law on the Promotion of Good Quality Housing” (rolls right off the tongue?), making it easier to evict tenants who do not pay, alter the units, are noisy, and/or who sublease against the rules. A PM knows the new laws. It might be worth it to hire one.
Do you have what it takes?
Anyone with a property to let can become a landlord. However, to be a shrewd real estate investor, a top-grade landlord, make your money work for you, instead of working for your money. If you are spending 50 hours a week dealing with broken air conditioners and chasing down rent checks, this is not an investment, but a day job. You can get one of those without putting down millions of yen. Minimize time and effort; maximize income. Use these tips to accomplish this. Then you can enjoy your new, financially independent life funded by all the turnkey income you need.