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How to make money on property in Tokyo

32 Comments
By Erik Oskamp

Property in Japan is comparatively cheap. According to an October 2010 article in The Economist, Japan is 35% undervalued. However, rents haven’t dropped as much, so rental yields in Tokyo remain high when compared to other cities in developed countries. Since the 2nd half of last year, rents started moving higher again, with the outer wards doing better than the center of the city. With the government very eager to print money, I expect this trend to accelerate with capital gains of about 5% this year and more in 2012.

When buying properties, the investor should prefer older buildings because depreciation in Japan is brutal. Usually, new properties lose 60% of their value in 30 years. It is better to buy properties that are already fully depreciated. Small apartments and units outside the center have much higher rental yields. Focus on Tokyo as the population in the rest of the country is declining. Avoid family-sized units as more and more Japanese live alone.

The best rental income is, therefore, made by investing in smaller, older properties. Properties in the north end of Tokyo in areas such as Adachi-ku and Itabashi-ku are especially lucrative. These areas are flush with small apartments, often as small as 16 square meters, that were built in the late 1980s during the bubble. Originally, these units sold for around 20 to 25 million yen and can now be had for around 5 million yen. Rental income for such a unit is on average about 50,000 yen a month, resulting in a 12% gross rental yield. This is more than double the yield on a larger, newer property in the city center.

The reason for this is because when people buy a property for themselves, they tend to do so for their family. These buyers will have good income and have access to cheap mortgages, so they tend to buy in more central locations. The smaller properties outside the center tend to be occupied by renters and are bought by investors.

That said, in Japan it is very difficult to get investment loans, even for Japanese citizens. The few available investment mortgages carry high interest rates and come with many restrictions. So while there is ample financing for units that people prefer to live in, a lot of equity is required to buy an investment property.

These two phenomena drive up prices for larger, newer and centrally located properties. On the other hand the investment market is starved for financing options and so prices for investment properties tend to be lower, despite market rents staying stable. In short, the less the typical salaryman and his wife like a property, the better investment it is.

Buying these high yield apartments can be lucrative there are still many pitfalls that can ruin your income. Building maintenance and repair can take a big bite out of your income. Elevator maintenance and replacement is expensive, so try to buy apartments in buildings without an elevator. In older buildings with elevators, confirm the last time it was replaced or that the Repair Reserve Fund has enough capital on hand if an elevator needs to be replaced.

Always look at the land value. The owner of a property has a share of the underlying land. With older buildings it is common that the building itself is worthless and that all the value is in the land. In high-rises, invest in units on lower floors as they are cheaper while having the same land rights as higher floors. Avoid flood zones or irregular shaped pieces of land as this can significantly impact the land value. Check market rents for other apartments similar to the one you’re thinking of buying. The current renter of a property might be paying a higher than market rates as the rental contract might have been signed almost two years prior. Generally, across Tokyo in all budgets, rents have come down in the last two years.

In short, investing in property in Tokyo is very attractive, but it is important to target the right properties.

Erik Oskamp is the CEO of Akasaka Real Estate and a long-term Tokyo real estate agent.

Erik Oskamp will be leading an online webinar on Feb 25 at 2 p.m. in which he will share his insight and experience on the Tokyo property market. If you are interested in finding out more, the webinar is open to all. Find out more info at http://www.realestate.co.jp/2011/02/04/live-webinar-a-practical-investors-guide-to-the-tokyo-real-estate-market/

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32 Comments
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My place is worth squat to sell, but I plan on renting to US military officers. That will take care of the mortgage which is killing me and the Kanri.

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Interesting article, thanks.

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No mention of tax? Shouldn't there be something about that?

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I know a gaijin-Japanese couple that bought a house (as in 4 walls) here and don't own the land. They plan to retire overseas anyway; therefore the reluctance to buy house + land here. Although, they do save on rent, they don't own land overseas either??? I just wonder if it actually makes sense to buy an apartment or house "shell" at all in Japan given the 30 year building life span and the fact that owning the land is probably what matters most after all???

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If you have access to purchasing property in Japan with a full mortgage then go for it. You won't find a better market in the world with 1% mortgage rates. Even 35 years fixed is in the 3% range. How do people buy property in the UK with rates at 6-8% and 20-25 years to pay off? In any case it is far cheaper (if not works out rent free) to buy property then sell off after a few years. Rent is for suckers...

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This is a really well-written and informative article but it really only scratches the surface of the market.

For example: as they always say location location location. If you are smart about what and where you buy, it can still hold its value well if you sell it on at the right time.

Example: Family X deliberately bought a 2LDK knowing the area was very popular with young couples just starting a family and wanting to get the kids into the excellent kindergarten across the street. They deliberately bought in a tower building because they are the most popular in the area. They bought the lowest level north facing apartment knowing the building itself would pull up its value against other like-apartments. They bought new and sold after 7 years. Even though they sold last year when the market was at its lowest they still made over 10mill profit.

They have now ploughed those profits into a unique apartment with a fantastic view in a famously up and coming area. The apartment was undersold because they needed a quick sale, and they got lucky being #2 in a queue of 7 people waiting to buy it (#1 was rejected by the bank).

My point in all this is that real estate is complex, and it is not just about knowing the mechanics of pricing and depreciation, but also knowing your target customer in the future as well, a long with a bit of luck!

cwhite is right: if you can get a mortgage then my god Japan is the place to do it! My friends back home almost cry when I tell them our mortgage interest rate!

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The high yield may seem attractive, but the 12% yield example given doesn't take into account the repair fee and service charges. I'm not sure how the residual rental income will be taxed, but that could make a hefty dent in the profits too.

The author talks about a possible 5% capital gain this year, but this is pure speculation. Falling salaries and bonuses would seem to leave little room for appreciation in housing prices, or rents for that matter. And what happens if (when) interest rates rise?

cwhite: I think if you plan to buy and sell within a few years you would almost certainly be better off renting. Purchasing the property means paying consumption tax, estate agent fees, loan arrangement fees, land registration tax etc. Add all that up and it comes to a couple of years rent. Factor in capital depreciation and the short-term buyer is definitely on to a loser.

I'm still renting after 15 years. We have the cash to buy a place, but decided not to. Renting gives us flexibility and we can invest our capital overseas where the yields (may) be better. Plus, if the building is destroyed in an earthquake we can walk away (unless we are buried underneath it). If you bought a place with a loan you must still pay the loan back, even if your dream apartment is now a pile of rubble.

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I'm still renting after 15 years. We have the cash to buy a place, but decided not to. Renting gives us flexibility and we can invest our capital overseas where the yields (may) be better. Plus, if the building is destroyed in an earthquake we can walk away (unless we are buried underneath it). If you bought a place with a loan you must still pay the loan back, even if your dream apartment is now a pile of rubble.

it all depends on your life style.. there is no way we can say renting is better or buying a property is better.. different life styles, different answers :)

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Good article, but one major point is always left out - the prospect of your building being demolished in the near future.

How good is your investment if you're obliged to foot the costs of demolition/construction of an entire new building again several years down the road? And then have it quickly depreciate?

How is the decision arrived at? The tenants association? What criteria are used?

I've asked such questions to the experts and homeowners before, and I never get any clear answers.

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Is Japanese property outside of the cities ever going to increase in price, or as the article argues does decreasing population mean decreasing land prices?

Land prices might increase outside of Tokyo: If desire for a place of ones own were to increase at a rate faster than the rate of poplation decrease. Are Japanese becoming more or less my-homey? Are apartments becoming more or less popular? If foreigners were to start purchase Japanese property for their own use. French rural property used to be cheap until British and Germans bought it and drove the price up. Japanese rural property is almost free. When are the Chinese coming? If Japanese start wanting to have a second home in the country. Will they ever get into that?

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I really don't see much profit to be made here for the ordinary person by buying/selling. As for saving on rent, it's hard to see the numbers, but whenever I look at it, renting comes out cheaper the closer in to central Tokyo you live. Finally, looking at the dingy, small, uninsulated rabbit hutch I could buy for my family of 5 with a mortgage for say JPY 50M, it seems really depressing. For half that, I could get a nice 4BR house with a big yard and woods in back in any nice midwestern university town and I think my kids would thank me for it too. If I could have that house and yard here in say, Azabu or Kamakura, well, that would be heaven. It would also cost about $20M for sure, and probably still be uninsulated.

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While there is info in the blurb there is a lot left out, he is way way over optimistic imo.

Buying the kind of small places he is going on about will give you loads of headaches, dont forget your likely going to have to parcel the place of to those racist agents that have little nooks around the stations & want their cut as well.

The chances of getting a REAL 12% return are unlikely & if you hold on yr going to be 10+ yrs before yr breaking even with this guys example & that doesnt account for all the wild card stuff that WILL HAPPEN!

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There is an article in one of the weeklies (I saw the ad on the train but can't remember which one it was) that with population decline, land prices in Japan are poised to plummet. One would think that makes them a poor investment. Mr. Oskamp, isn't your optimism driven by enlightened self-interest?

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"Rent is for suckers"

Really? I've moved several times in my years in Japan due to changes in work locations. If I'd bought a place every time, it would have been a royal pain in the neck to have to sell it, and there is no doubt I would have lost millions of yen doing that.

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At the urging of people who didn't know what they were talking about, I nearly decided to buy this one place during the bubble. Oh, my, what a good thing it was I didn't - the value of the place dropped by at least a third soon after.

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A good article, this, and food for thought. He is clearly talking about investment properties here, not owner occupied dwellings, so the income is generated by the rent, not the increase in property value. I used to live in Itabashi Ku, and I can see what he is saying about that area. But, as he points out, you would need to choose carefully, of course.

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Paying a mortage here is cheaper than renting by about 20-30% roughly, i recommend it if your planning on staying awhile.

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Good article and food for thought. I have a friend who bought a one room apartment for investment and used that as collateral to buy another apartment. Verdict for him was it was the older apartment that is bringing in more margin than the new one because it was much more costly to buy the new one. But the key thing here is rather than renting which are sunk costs, better to build equity which you can always sell later. And yes agreed, buying property is only good for those planning on being here awhile. And if costs are dipping, then that much more incentive that you should buy.

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Between the slipshod enforcement of building codes and zoning, and the fact that organized crime is heavily involved in both real estate and construction businesses, buying non-residential property in Japan is a crap shoot.

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Please keep in mind that it is a real estate agent writing this fluff

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okay, let me re-phrase. If your planning not to move every few years then it makes sense to buy property and take a mortgage out on it. If you do then move after lets say 5-8 years you pay off the current mortgage with the money you make and shift it to the next place of residence. You find a really nice qualified guy like I did who can do absolutely everything on your behalf. The fees are all fixed by law so you can work out pretty much what buying/selling and moving is going to cost you. Bear in mind that the average house owner who rents it out gets their money back in about 240 months. After that it's just profit minus the maintenance costs, repairs, etc... In any case the land (not building) becomes an asset for you to leverage. Buy another property and just rent it out... that's what the majority of well off people in Japan do and seem to spend all their time in the pachinko parlours. Mind you I would personally invest overseas in a tax free haven.

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Absolutely does not work in neighborhoods like Hiroo and Azabu, where rental cost is a fraction of what you'd pay on a mortgage. The place we live in is worth 6-8 oku yen. Even if I could get a mortgage that big, the payments would be several million yen per month. Our rent is not even close to that.

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wow, you live in a ultra expensive area. Even so the landlords must be making enough to cover the mortgage otherwise they would have been long bankrupt. A 1-2% mortgage would be the same as borrowing 6-8oku with an APR of 1-2%. If you know what your doing you could essentially sell the property for the same price or more if your lucky while paying back the monthly mortgage and reinvesting the rest into to other gov bonds, securities, risk free low yield stuff 5% return or a little higher with more risk. That said, yes you need money to make more money. The rich just get richer.

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cwhite, the assumption that landowners or landlords here need to make positive income off the property or else go bankrupt is not correct around here. It is simply not the case that in every neighborhood, the rental income covers mortgage and taxes. There are loads of filthy rich people in these neighborhoods who have giant empty houses they only visit once per year or less. Also, there is a lot of family or inherited property. Our place and several others around here are like a compound of properties that appears to have been in a large family for several generations. I think there has never been any mortgage for them to pay. How they handle the huge estate taxes, I don't know, but I guess the answer is something like "very rich". Or, a few decades of rental income without any mortgage covers it for them. As for buying property around here, trying to cover the huge mortgage even during busts like we have now, when hordes of expats up and left and many places around here were vacant for 2 years, and now coming back online with vastly reduced rents, and reinvesting "the rest" (what rest?!) into low-yield bonds and securities that barely keep pace with inflation, well, I can think of better things to do with that much money. Real estate in Japan is a gamble like in most places, and the idea that real estate can be an income solution and always appreciate in value is just wrong in most places. There is no free lunch and without a bubble or terrifying leverage plus a decade or two of good luck, real estate isn't going to make any middle-class or yuppie person rich.

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The writer is right about houses in the country being cheap and about doing the opposite of what Salaryman-san, or more likely his Mrs, wants to do (= expensive, new apt on top of a downtown train station). I bought a house 45 min expressway drive from downtown Nagoya on a 10 year mortgage that had monthly payments about the same as rent. Now I own the place, no landlord to deal with, relatively clean air, and folks in the country are really friendly. Older farmhouses in this village are now going for as low as 7 million yen. But this is only a good option if you're going to be here 5 years +.

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In the last 4-5 years property price has increased soo rapidly. If you have invested your hard earned money on property then you would have made hell a lot of money. Now the situation is not that good to Earn Easy Money

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I dont think his figures on rent in Adachiku or Idabashi are accurate. Much cheaper rents can be found. The reason taxes are not mentioned is that they are really cheap here. We own a 35 year old home in Suginami- a relatively affluent area in the 23 wards. The tax because the house is depreciated is around US $1000 a year. I can even found apartments like the ones mentioned in this area for 40,000 yen. But how is buying a small apartment going to be an investment? $6000 a year in rental income minus taxes and upkeep along with the hassles and payment to real estate agency to find a renter? its not worth it unless you buy the whole building. There are easier ways to make money.

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What is the “Kanri?”

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Bad migraine: this article is about Japan, not fly-over country. If your money goes further in Nebraska, then buy in Nebraska.

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Hikomain: if there are easier ways to make money, then go for it. A well maintained property that earns 6,000 bucks a year can be profitable. I own two such properties. You don’t.

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@ BORIS

I’ve personally stayed at all four of Hikomain’s places. Luxury.

I seriously doubt you could compete....

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If I buy a 40year old apartment, How easy is it to sell it after 20 years. Ie. the apartment is gonna be around 60 years old! Are they common? Will they be worthless then?

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