At some point, you likely pondered whether real estate investment in Japan was possible. Not just for Japanese citizens or “special” foreigners, but YOU. Does the legal framework exist for it to be possible? Well, you found the answer to that question: Yes. The lightbulb above your head went from cool blue to a faint, warm yellow. Then you probably wondered whether it was affordable. Sure, some millionaire or billionaire with his own team of professionals can do it, but what about the average investor? Perhaps you scrolled through pages and pages of Suumo or At Home listings. Then you looked at the prices, and realised “I could do this too”! The lightbulb above your head turned a blinding white! This leaves you with one final question before you dive in: How do I choose a real estate investment in Japan?
How To Choose A Real Estate Investment in Japan: Budget
Properties For All Budgets
Think about your finances. Do you have enough cash to buy property? How much do you have? Are you eligible for a mortgage or an investment loan, and if so, for how much? These are all important questions when deciding your budget. For as little as US$20,000, you can buy a small apartment in western Tokyo. For less than $55,000, you can buy a small apartment in the 23 Special Wards. You can get a free-standing house in Ōme, western Tokyo, for under $45,000.
Or do you have more cash or access to loans? The sky is the limit. There’s plenty of prime real estate in Ginza, for example. There, schoolchildren at a certain public school have Armani school uniforms. The land under a famous Ginza department store is worth ¥50.5 million ($461,383.14)—per square meter.
Therefore, whether you have $20,000 or $20 million, there are properties in Tokyo to match your budget. You just have to decide your budget and then take a look.
Apartments? Whole Buildings?
A small apartment usually has lower repair costs than a whole building. When something goes wrong in a building, it’s typically very costly to repair. When something breaks in an apartment complex, on the other hand, the condo owner’s association takes care of it. That is, if it was in the common area. There isn’t typically much that can happen within an individual apartments four walls that’s particularly expensive to fix. The cost comes out of the building’s fund if it’s in the common area. Of course, the individual apartment owners must pay monthly fees into this fund, but the cost is spread over many owners.
The very smallest apartments have an average ROI (return on investment) of 7%. They make wonderful investments for beginners. Some investors have more money. Therefore, they can afford not only the purchase price (or at least down payment) on larger buildings, but also the upkeep. This is “lumpy”—that is, not usually expensive, but when something comes along, it can be very expensive.
How To Choose A Real Estate Investment In Japan: Time Horizon
Life Spans of buildings vary greatly. The Japanese government allows you to fully depreciate your wooden building in just 22 years (or 4 if already depreciated). They assume you won’t use it much longer than that. Try telling that to the monks at the Horyuji Temple. It contains several wooden buildings over 1,300 years old. In other words, in Japan, different people and different buildings have vastly different time horizons. What’s your time horizon?
Is this something you want to hold onto for the rest of your life? Or do you maybe even want to pass it on to future generations? By the way, Japanese real estate is a great vehicle for reducing and avoiding Japanese inheritance tax…
Or is it a passive income stopgap for 5~10 years time? Do you plan to release it to pay for something you have to pay for? This influences whether you should buy one that is quickly and easily sold. Or one that is not so quickly and easily sold, but with a higher income. Real estate in downtown Tokyo, that is the 23 Special Wards, has an average ROI of 5.5%. That’s great, but the outlying areas of Tokyo have even higher ROIs, averaging around 6.5%. However, they would be harder to sell due to risk, and by the way…
How To Choose A Real Estate Investment In Japan: What’s Your Tolerance For Risk?
Imagine that you needed to sell a property in a rural or less metropolitan city quickly. It would be more difficult than if it’s in the middle of Ginza. This is due to risk. An investor in Ginza knows what he is in for. He’ll invest a certain amount of money and get a return of 5.5% on average. With tenancy rates of 95% in the 23 Special Wards, it’s very predictable. This makes the property easy to sell, because the next investor knows what to expect.
On the other hand, for a property in the shadow of Mt. Bandai in Fukushima Prefecture, there’s more risk. Maybe the building is at full tenancy right now, making 10% ROI or more. However, that might just be due to luck. What if two or three tenants move out? The ROI could drop several percentage points. In a rural location like that, there’s no guarantee the vacancies will be filled anytime soon. Investors know this, so selling the property could be more difficult.
The Lowest-Risk Investments
If your tolerance for risk is low, some of the lowest-risk locations in the country are Ebisu, Meguro, and Shinjuku. These are in a densely-populated area with a constant stream of potential tenants. The closer to a station on the Yamanote Line (山手線, Yamanote-sen), the better. Within seven minutes is optimal. Tenancy rates are over 95%. If the age of the building is about 20 years old, but the building has been refurbished, all the better. Units on the second floor are the easiest to rent out. The reason for this is that single women prefer second-floor units because they’re safer.
Risk In Commercial Real Estate
Commercial real estate has an occupancy rate of over 98% at the time of this writing. However, there’s more risk in the beginning because the properties often take a longer time to fill. Once established, though, commercial enterprises prefer to stay in the same building for a long time. They’re very loyal tenants. Moreover, commercial real estate has higher returns.
Most investors start out with residential real estate. It’s less risky (easier to fill). It’s also easier to get a loan from a bank.
How Do You Choose A Real Estate Investment In Japan?
The three main things to consider are budget, time horizon, and tolerance for risk. Which property to buy is a highly personal thing. There are right answers, but you must look inside yourself to find them. Make sure to ask yourself these three questions and think deeply about the answers. Don’t proceed until you know what it is that you want.