A real life Japan real estate investment.

Today I will start describing one real estate operation I did 6 months ago, to give an example of what can be done, by a foreigner, in Japan. Please note that I can speak decent Japanese and somewhat read it as well. Not enough to understand the in and out of a real estate contract, but enough to get the gist of it and definitely enough to surf the web for properties. It was not the first property I bought, which helped, but it was the first property I bought for investment in Japan. My English speaking Japanese wife helped a lot as well.

1- Japan real estate as an asset class properties.

Before starting, I redirect you to the good of bad points of real estate, thanks to an article I wrote a while back which is perfectly relevant today and will most likely remain relevant for a loooong time. Please read it to familiarize yourself a bit with this kind of asset.

Please note that Japan real estate is quite different from the rest of the world as in Japan: property do not get old in Japan. They are usually destroyed to be rebuild on a 40 to 70 years cycle basis. This is mostly due to the earthquakes in the country, weakening or damaging properties, to the earthquake regulations evolution, which are the most stringent in the world and evolve with the technology available and also due to the fact Japanese people do not like 2nd hand things anyway (a bit more on that here).

The main impact is that, contrary to most countries, the building value of a property decreases with time (not really the case in other countries where, if well maintained, a property keep its value or even increases after a long time).

I am not talking here about inflation, or a change in market demand for a specific location. Just plain building depreciation, as a building, in Japan, is a value losing asset (like a car).

It has 2 main impacts:

  • First, it means rental returns are higher than elsewhere, to account for this building depreciation.
  • It also means there may be some sweet spots in a property life where the price of the property is lower (due to its depreciation), compared to its cash flow generation potential.

I will deal with the tax impacts in another post.

2- Looking for a property.

I use mainly two websites for my investment property research.

  • The first one, to identify the good investment properties is the following.

This website is relatively complete and provides important information like the building to land ratio and the max habitable surface to land ratio. It also usually indicates whether the property can be rebuilt or not (this as a significant impact on price). It is mostly used for investment properties and as such mentions an indicate return on investment ratio, usually computed from the actual tenants living in the property, this is a huge feature that cannot be found in other websites. The possibility to filter on things like leasehold/freehold or to search directly from the map are also quite useful and not always available on other websites.

With this awesome website, you can visit the area you are planning to purchase into. You can check if the park around are nice or what colour the sand of the beach close by is and so forth. Thanks to this site, at least in well covered area, it is possible to really do a lot of ground work and information gathering without even moving from your chair.

3- shortlisting some properties.

Of course, everybody is different and as a result, a particular property would not have the same value to two different persons. This is where the skill in identifying undervalued properties come from. That being said, they are some important and recognised criteria that really impact the value of a property for most people. See if in your particular condition and for your particular target audience, some of those criteria can be ignored or at least be less of a focus as it will allow to lower the price you pay.

  • Age of the property: as mentioned above, price goes from full value for a new property to land value only (the building value being totally depreciated). Depending on the material used for the construction this decrease takes longer (more on that here).
  • Floor of the apartment if it is an apartment (the higher the more expensive).
  • Distance to a station: price start decreasing relatively importantly further than 15min walking distance from a station.
  • The kind of station close by: higher property value if there are several stations/lines within walking distance. Bonus as well if express or super-express trains stop at the close by station.
  • Material used for the construction (some more information on why here).
  • various building to land ratio.
  • If the building can be rebuilt.
  • Return when rented: older properties have higher return but will be usable for less time before rebuilding and may be harder to rent for really old property, unless some comprehensive renovations are done.

4- Contacting the real estate agent:

Make a list of the interesting properties, class them, and then contact the agent for the one you are interested in. If the agent looks good, is quick to answer questions, belong to a big company etc. do not hesitate to mention the other properties you are interested in, as even those where his company is not mentioned as the contact may still be in his portfolio. It is much easier to discuss and plan visits with only 1-2 real estate agents for 10 properties than with 10 agents… Also, in doing so, you gain some goodwill with this particular agent (indeed, if you end up buying a property that was mentioned under another company responsibility, your agent will earn the processing fee, not the competition). This may come in handy when you try to negotiate the Real Estate agent fee (there is a bit of negotiating room here, more on that in another post).

In general, try to use a recognised company Real Estate agent (I hate saying that, as I am sure it is possible to make better deals with less recognized companies), as the agent is really important. Indeed he has a duty to inform you about any specific point where the property may have an issue, and can be made liable in the future if he has withheld some information. It is much easier to do so when a big company’s reputation is at risk, especially in Japan, and therefore all the agent from big company I have met so far were all really forthcoming in mentioning all the property issues, so that you can make a well informed decision. It is all the more important if you are a foreigner buying in Japan, as some points may not be clear to you due to local specificities. things such are the present of asbestos or sign of wood ants are for example things that the real estate agent must tell you.

5- Plan visits and do them:

Visits is obviously a key part of the process. There are so many point of attention that could be listed that it is actually difficult to do so… still a few important points:

Check the overall property soundness. The foundations etc. It is not necessarily easy for a beginner, but still try to see what you can and ask questions. Regulation on foundations are evolving and for an older property, when it will be time to rebuild, you may or may not be able to do so without redoing the foundations to a more recent standard.

Check the neighbourhood, do not hesitate to walk to the station to see what kind of area is around, what kind of shops are their etc.

If it is currently rented, you will not be able to check inside the apartments. at the same time, it is a good sign, as it means it is in rentable condition.

I may make a more dedicated post on that aspect another time.

6- Make an offer:

If you have found something you like, you can make an offer. Offers are not “legally” binding until the deposit is paid and the deposit paper signed. That being said, if you make an offer, it is widely expected that should it be accepted, you will have to follow through. Because of that, it is usually difficult to make offers on different properties at the same time (unless you want to buy several at the same time of course), as the real estate agent will usually refuse, since if both sellers accept, he knows you will decline one and he will have to explain that to the seller. On the other hand, should you make an offer and it be accepted, the seller may also change his mind before the deposit payment etc. but again, it is usually a bad move if you want to keep good relationship with your real estate broker.

Having good relationship with him/her is something you should thrive for, as it may mean lower commission, easier access to properties newly put on the market, great service etc. It is all the more important if you want to buy several properties over time or if you are a foreigner, or looking for something a bit special, as your agent will know your specificities and may help fulfil them more easily. Having good relationship may also allow you to make concomitant offers on several properties, where the Real Estate agent knows he may have issues with his boss should several seller accept, as he knows you bring more business than the risk he is taking. I am not being paid by any Real Estate company to say so, it is just valuable advice just by itself.

The offer needs several information:

  • What price you wish to buy the property for.
  • What deposit you intend to pay (between 5-10% is normal, I have paid as low as 3% once)
  • When do you wish to buy (it may have an impact is the seller is still living in the property or on the contrary if you plan to buy only in 6 months).

In general, it is possible to bargain a bit on the price. Japan so far has not been like other crazy countries like US or Europe where there are bidding wars on properties. It is usually possible to get a property for a bit less than the price tag. for Example, if a property is listed 33.8millions, an offer at 33millions is extremely likely to be accepted. It is possible to ask for bigger discounts but then the chance of getting them can be low. Still I strongly recommend bargaining a bit.

7- Deposit time:

Once both parties have agreed, the Agent will setup a meeting for both buyer and seller to meet to sign a commitment to buy/sell and pay the deposit. Such meeting takes between 1 and 1h30.

Deposits are usually paid in cash, it means going to the bank beforehand hand having anything between 1million and 10millions in cash on yourself. If you need more than 2millions, the ATM may not be able to provide the amount (or tour card limit may be hit) so it is better to go to the bank counter. Japan being a really safe country, having that kind of money on yourself is not as big a risk as in other places. Still be careful.

Once the commitment is signed, it is binding. It means should the buyer change his mind, the deposit will remain with the seller. On the contrary, if the seller change his mind, he will have to pay back the deposit, and top it off with the same amount of money from his own pocket.

It is possible to put some particular clauses in a deposit commitment. such clauses, if not met, can result in the transaction not being made at no penalty for both buyer and seller. The most common one is, on the buyer side, to ask for a clause making this purchase commitment dependant on a bank accepting to lend the missing money. should the bank refuses, the buyer cannot purchase, but do not lose his deposit.

8- Bank visit:

It is strongly recommended, when starting to look for a property, if a loan be necessary, to go to the bank early in the search. The idea being that you present to the bank a property you may not want to buy, but in the price range/age/area of what you are looking for and ask for an agreement for a loan. The bank will prepare your file, ask the necessary information on income etc. and should it accept, it would speed up the process for the real purchase, once the ideal property is identified.

Please note that as a foreigner, it is extremely difficult to get a loan to buy a main residence. You would need to have a permanent resident visa (10years in Japan and some paperwork), a Japanese guarantor (can be your wife/husband if you are married to a Japanese person).

Getting a loan to invest, while more expensive interest-wise, is easier as well. Not all banks do those loans to foreigner, but the ones which do are mostly looking at your capacity to pay back, and the amount of deposit you propose.

9- Buying cash:

Buying cash is much easier and does not have any special restriction. Your bargaining power is also a bit higher (since the seller will be sure you can buy, not being dependent on a bank to do so). For foreigners it is clearly the easiest option and can even be done when you are not living in Japan. You would have to provide a certificate of residence from the country you are living in along with a certified translation into Japanese. You also need a certificate of signature, as, not being registered in Japan, you cannot use anko (seal).

For the property I bought 6 month ago. I went to the French consulate (I am French) in Mumbai (I am living there), got such certificates, then brought them to the French consulate in Tokyo (at the time of my visits) to get them officially translated. It does not cost much to do. I actually did the paperwork 1 year early (I was planning to buy in 2015, but ended up, after 3 weeks of visits, with nothing to buy). Since I had by then good relationship with the real estate agent, he agreed to use my 1 year old paperwork to proceed the transaction. I also made the necessary paperwork to enable my father in law to sign the contract as I was back to India by then (the real estate company managed that, at no cost to me).

10- the purchase day:

On the agreed day, both parties will meet, along with the Real Estate agent and the lawyer in charge of recording the sale. Such lawyer can also be provided by the Real Estate company. The whole contract will be read, aloud, to both parties. It takes hours and cannot be avoided, it is part of the Japanese regulation. For a foreigner, it is a bit tough but well.

Once those maybe 3hours are done and the paper signed, the next step is, if a loan was involved, to go to the bank for the bank person to issue to loan to the buyer account, then the buyer to make bank transfers to the seller, the lawyer and the real estate company for the appropriate amounts.

11- Finding a management company

After that, you may also need to find a management company if you cannot or do not what to manage the property yourself. See pros and cons of that in this article. In my case, not being in Japan, I did not really have a choice. The real estate agent company had a subsidiary doing that business so he introduced me. I am not sure it is the most efficient way to find an agent but I had little choice. Keep in mind that it is possible to both negotiate the kind of options such management contract contains (less option means cheaper) and the price itself as well.

When the contract expires in 2 years, if I am back to Japan at that time, I may try the DYI method. I have made limited research on that so far but this website is about finding appartment or tenant without agent, which is the hardest part of managing a property by oneself. The rest can be organized separatly. I will certainly make an dedicated article on that at some point, and also try that hopefully soon.

I will give some details on the property I bought in a later post.

do not hesitate to leave comment or ask questions.










The best way to make money…

Today I will change a bit from my usual topics on macro economics or trading and instead delve on a seldom discussed topic in Finance, even though it is so central to your capacity to actually build up your wealth.

The best way to make money (check that other post to refresh your understanding on what money is, here I am talking about real money, or Money as Capital, as I call it) is actually not to spend it. I know it is a big secret I am letting out here but as it happens, it is also quite effective.

I stumbled on that blog a few days ago and I strongly recommend it. The blog actually inspired this post and my renewed motivation to post here (even with absolutely no readership so far ^^).

I do not share the author’s view on everything, especially on his reliance on stock market returns to generate a part of the income he considers, at least not on his returns expectations, but most of his advises are really sound and he makes some great point. He is also fun to read and managed to make me chuckle aloud a few times, no easy feat for the internet blasé person I am. That being said, I strongly disagree with his opinion on moustaches, but I would love to share that face to face with him over a few beers.

My opinion on stocks is anyway of little value as being a non-French tax payer, I cannot open a share account in France. Being non-Japanese, it is also difficult to open the same in Japan and in any case due to my current work, it would be a real hassle to make the declarations I would need to make to the Compliance department every time I would be even remotely considering doing anything…

To add a tiny stone to his great work, I will then make a specific topic on the “saving money” aspect where I know the situation well: Japan.

Japan happens to be, in my opinion, the Paradise for money saving:

  • Salaries are quite high, compared to the rest of the world, that leaves a lot of opportunity for saving. Cost of living is high too, but there are a lot of workaround to that. More opportunities to save when you start with a lot than when you start with little!
  • The country is in constant deflation, due to a strongly diminishing population. The central bank and politicians are fighting that, a huge mistake and a huge present to indebted entities in Japan, namely the Banks and the Government, while being a huge disservice to the general population they are supposed to serve. Nothing new here, it is the same almost everywhere. The time of reckoning for those scums will come someday I suppose, but it is not the purpose of the post. The fact is, there will be deflation, at least compared to some other intrinsically valuable constants (oil price, gold price, good companies share) in some aspects, the main one being real estate and land price (at least our of the centre of Tokyo), which can be huge part of saving money.
  • Japanese people simply “hates” second-hand things. On top of that, they also are really conscientious and take great care of their possessions. Finally, they tend to live in small apartments, meaning they have little room to store things and function on a “buy-new-sell-shortly-after-in-excellent-condition” mode, and that for really cheap since other Japanese do not want to buy second hand to start with.
    • Case in point, video games, bought and resold in mind conditions a few days after release, for a 10%-20% discount.
    • Manga and books in general, sold 20 volumes for 500-1000 yen (4-8 USD).
    • Baby equipment: bought a stroller, a car seat, an elevated chair and some baby cloths for less than 5000 yen (40 USD). New, that would have cost well north of 100 000 yen (800 USD+).
    • Sport gear and so forth.
  • Japan has the best public transportation in the world, and unless you have 2 or 3 kids and live country side, you can really live without a car. I have 2 kids now (2nd one born 1 month ago ♥) and, as I may be heading back to Japan soon, I will definitly give the “live with 2 kids and no car” a try.

All of that combined together make for a really high potential saving rate. Which can then be build upon.

I will not mention more that that today, living some for the following posts I consider making on that aspect.