As a landlord in Japan, and as a landlord in general, your income and risk are linked to the quality of your tenants. Essentially, good tenants lead to good returns and bad tenants lead to poor returns. One reason why Japanese real estate is so popular among foreign real estate investors is because tenants in Japan are incredibly responsible. Furthermore, numerous safeguards exist to protect your investment and its monthly cash flows.
With the right property in the right location, there will always be a good rental market for your real estate assets- but why choose Japan?
Contract Renewal Fees For Renters In Japan
Japan does many things differently to Western countries and property rental is no exception (SEE: Why Japanese Real Estate Is Different). While the procedures and property rental standards in Japan may be less ideal for renters, they will be beneficial for you as the landlord.
Ordinarily, renters sign a minimum 2-year contract. Longer contracts can be offered to good tenants, meaning a longer reliable source of income for your property. Aside from fees paid by the tenant to commence a rental agreement, a ‘renewal fee’ of 1 month’s rent is paid to renew the contract after each contract period (again, usually 2 years). This contract renewal fee is standard and expected nationwide. While these fees and procedures are different from other countries, they are the standard for the real estate market in Japan and tenants expect to pay them.
‘Key Money’ is paid to landlords upon the signing of a new contract. Key money is not the same as a security deposit and is a practice unique to Japan. Key money is a fee paid in ‘gratitude’ to the landlord for letting the tenant rent the property. This fee is equal to 1 month’s rent. Although the practice dates back to the war-era it is still commonplace for high-end apartments and new-builds.
What Is a “Guarantor” In Japan And What Are They
The first safeguard in place to protect landlords in the case of unpaid rent is the ‘Guarantor’. All rental properties in Japan will require the tenant to provide a guarantor to cosign the rental contract. If the tenant fails to pay rent, the financial responsibility of the due money will fall to the guarantor. The guarantor must be both living and working in Japan with a stable source of income. As a landlord in Japan or anywhere else in the world, you should always require the tenant to provide a reliable guarantor before commencing a rental agreement.
If somehow both the tenant and guarantor fail to pay the rent money owed, the Japanese real estate market has a second available safeguard to protect landlords.
Rental Insurance And How It Works
In the unlikely event that both the tenant and guarantor fail to pay rent, the amount owing can be recovered via rental insurance companies, sometimes referred to as ‘Guarantor Companies’.
The costs of rental insurance falls on the tenant and is on average 50% to 100% of the monthly rent paid on a one-off basis at the beginning of the rental contact. If the renter ever becomes delinquent (i.e does not pay their rent), full payment of the rent owing will be made by the guarantor company. This could be looked upon as guaranteed rent, minimising the risk and maximising the returns of your investment. Again, this is standard procedure in Japan and renters who are unable to provide a private guarantor are required to sign up with a guarantor company as standard. Some landlords require both.
As the guarantor company is paid for by the tenants and not the landlord, it makes sense to make it compulsory for your renters.
Japan Has One of The Lowest Rent Delinquency Risks In The World
Failing to pay rent is a crime in Japan and the crime rates in Japan are among the lowest in the world. In 2016, the total theft rate in Japan was 0.57 percent. As a reference point, in the same year, the rate of property crime in the United States was 2.45 percent.
While there will always be a risk of rent delinquency in any country, Japanese tenants are among the lowest risk in the world.
Japanese People Are Respectful of Other People’s Property
The exact reason for the staggeringly low crime rates in Japan despite its size is still a mystery, but one explanation could be in the culture itself. Japanese society is based upon “wa” or 和, meaning harmony. From a young age, cohesion is encouraged in all parts of life. The Japanese are often said to have a hive mentality, valuing the needs of the community as a whole. This is the reason why Japanese trains may be the most congested in the world, but also the cleanest and most quiet.
Japanese people are encouraged to keep the peace within the society and the concept of “meiwaku”, meaning annoyance, noise, or trouble, is taught to children and discouraged at a young age.
This principle ingrained into Japanese society is one possible reason why the crime rates are so low and why you are extremely unlikely to have a tenant run away or destroy your property. Japanese people are respectful of each other and each other’s things.
There Will Always Be A Market
When selecting the right property in a good location, there will always be a market for your property.
Households in Japan have been shifting from private housing to rental properties with an increasing trend towards rental properties. With an ageing population and decreasing birth rate, the amount of one-person households has been on the increase. This valuable trend is being capitalised on by many individual investors who favour one-room studio apartments for their low maintenance costs, low vacancy and generous yields. Naturally, the demand for rental housing remains high among both renters and landlords.
Japan offers the same stability as other G7 nations but with more safeguards for investors. While being a landlord can sometimes be stressful in Western countries, it’s largely hassle-free in Japan; usually requiring little-to-no contact with your real estate agent outside of the contract signing periods.
The various safeguards for landlords, the low risk of tenant delinquency, and the high risk-adjusted returns are some of the reasons why international real estate investors continue to choose Japan and its real estate as a home for their money.
[ Sources ]
- Japan Statistics Bureau 2017 Handbook – Ministry of Internal Affairs and Communications
- USA FBI Official Crime Statistics 2016
- Nomura Research Institute – The Japanese Real Estate Investment Market 2018