Property investment in Japan is very different than in many other countries.
Differing Expectations
One difference is that property is generally expected to lose value. The land may hold its value, but the buildings are normally depreciated over 30 or 50 years. This is just for accounting purposes, but the actual market value of the property generally falls as well.
This makes sense when you think about it. Would you rather live in a 40 year old building? Or a 5 year old building? If it was the same price, most people would choose the newer building. As a result, rents for older buildings are generally lower, all else being equal. If rents are lower, then purchase values will also trend lower. Another reason that property values fall is that older buildings generally cost more to maintain. For apartments and condos, this is in the form of a higher monthly maintenance and repair sinking fund fee. For stand-alone houses, this means needing to spend more money for water proofing, and repairing things like the roof, cracks in the concrete, etc.
You would expect buildings to hold their value better because of inflation, but remember that Japan didn’t have inflation for several decades.
This is in stark contrast to countries where the buildings are often expected to increase in value.
A preference for Shiny and New
Many people in Japan have a dream to own their own home, but it’s always a new home. The housing market is something like 90% used homes in many countries, but in Japan, everyone wants something new and shiny. There are historical reasons for this, but it’s ingrained into the culture at this point. This means that as soon as you buy a house and live in it, it becomes “used” and the value drops overnight. Buying a new house is therefore, almost always a bad idea from a financial point of view.
Cheap Money
Interest rates have been extremely low over the past few decades, to the point that loans were as close to free as they could get. Even now, there are home loans available for less than 1% annual interest.
A preference for Renting
Many people in Japan have a strong preference for renting. If you rent, you can move whenever you want, and generally stay as long as you like. Landlords can’t unilaterally raise your rent, and tenant protections are very strong. Alternatively, you can move to a new place every few years if you like.
In general, the DIY spirit is weak, and the service economy in Japan is strong. Many people simply prefer to pay a pro to do things for them, and housing is no different.
This is again very different from the attitude you will find in China or the United States, where people religiously believe that buying is always better, without bothering to do the math.
Loan Payment vs. Rent Balance
The combination of low interest fees and a preference for renting means that it’s possible to get a loan where the monthly payments are less than the rent you will receive. Sometimes the rent will even cover the loan payments plus the management and repair fees. If you’re lucky, you can even cover property tax payments with the rental income as well. What’s more, you can even claim the loan interest and other expenses when you file your taxes.
This means that instead of having a negative cash flow until the property is paid off, you can have a positive cash flow from day one. Of course once the loan is paid off, your net income will increase substantially since you’ll be able to use most of the rent for whatever you want.
Even suppose that by the time your property is paid off after 30 years, the value of the property has dropped to half of what it was, and the repair expenses have doubled – you’ll still have something that was paid off by the tenant’s money that you can live in or sell.
Therefore, investing in property in Japan can be a good deal if you are good at finding places below market price in areas with growing populations, and renting them out at a profit.
Scams
Sadly, whenever there is the smell of money, scam artists tend to enter the picture. Japan is no different in this respect.
Over-Valuation
The first and simplest scam is to simply over-price a property. Let’s say a real estate company has taken possession of a condo that they know has a market value of $800k. They may approach you and sell it to you for $100k, assuring you that it is a good deal. Since most people don’t have a good feel for the market, this may be easy to do.
- They may compare the property to other properties nearby with similar prices – even if there are reasons for the price to be different that you don’t know about.
- They may assure you that they are giving you a special deal because they want your future business.
- They may assure you that the bank wouldn’t sign off on a deal that wasn’t at market value. (In reality, the bank doesn’t care as long as they think you can pay for the loan).
In this case, if they bought the property for below market value and sold it for above market value, they earn profit from doing essentially nothing.
Loan Scams
There are basically two types of loans: Investment Loans and Home Loans. Home Loans are strictly for when you will live in the home yourself. The cheapest of these is the so-called Flat 35 loan, which is backed by the government. Investment loans are, as the name suggests, for investment properties. Investment loans generally carry higher interest rates.
The Cash Back Scam
Loans in Japan can typically be made for up to 100% of the price of a property, sometimes even including certain taxes and fees. This means you can often buy a property with very little money down.
It starts becoming a scam, however, when the real estate company inflates the value of the property they display to the bank above the price you are paying. They will frequently advertise it like this “Pay off your debts and become a property owner!”
If works like this. The company will sell you a property for $100k, but they will tell the bank that the loan is for $150k. The bank disburses $150k, and the the real estate company keeps, say $20k and gives the buyer $30k. This is bad for several reasons. First of all, the buyer gets $30k in cash, but they now have to pay interest on an extra $50k, $20k of which the real estate company pocketed. Secondly, lying to the bank is obviously fraud.
The Lease Back or Guarantee Scam
The second common scam is called the “Lease back” scam, or the “Guarantee” scam. This is when the real estate company works to convince you that real estate investment can be made risk free, if you just pay a small premium.
Real estate can be a great investment, but it comes with risks.
- Interest rates can rise
- Repair fees can rise
- Occupancy rates can fall
- Natural disasters such as earthquakes can happen
- Rents can fall
- etc.
Of these, one of the most often cited is occupancy risk. What is nobody wants to live in your property? If you can’t find a tenant and nobody wants to rent from you, then you will be stuck making loan payments out of your own pocket every month. Japanese people are risk adverse as a group, and so in order to close the sale and take even more money, the real estate company may “guarantee” the rental income. They may also introduce a related “lease back” company that will lease the property from you. The idea is that they will keep paying you the rent, even if the tenant moves out and they can’t find a new one.
It stands to reason that if this was such a fool proof idea, then the real estate company should just keep the properties instead of selling them. Of course the reality is that these companies can’t magically find tenants willing to pay the rent you desire.
There have been several scandals in the past decades where lease back companies have accepted payments equal to around 10% of the property’s value in exchange for a 20 year guarantee.
When they couldn’t keep their promises, they simply went bankrupt and ran away with the money.
Due to these scandals, they can’t get away with these scams anymore, so instead the lease back contracts will simply have clauses that make them effectively meaningless. To prevent them from running away with the money, you pay them monthly in the form of a margin on the rent instead of prepaying them a large sum. For example, if the rent you could get for an apartment is $800 a month, they might make a contract saying that they will pay you $700 a month for 20 years. The idea is that they pocket the $100 each month, and in the event a tenant moves out and they can’t find a new one, then they can use that margin they took to pay you back until they find a new one. This makes sense in theory, but it’s nothing you couldn’t do yourself. More importantly, if the market changes, there is not much the company can do about. To prevent themselves from going bankrupt, they have numerous clauses to soften the guarantee.
For example, a common clause is that they will only cover the rent at 2 months at full price, after which you will need to accept a lower rent. The existence of these kinds of clauses means that you are effectively paying guarantee fees for no guarantee at all. It’s clear that these contracts are designed to make people feel safe and enter into a real estate investment without understanding and considering the risks.
Loan Type Fraud
As mentioned above, home loans are cheaper than investment loans, so one of the simplest scams to pull off is to simply apply for a home loan, and then rent the property out. Instead of paying 1.7% for an investment loan, you take out a home loan for 0.7%, resulting in lower payments, and saving a large amount of money over the life of the loan.
This could obviously be done at a personal level, but sometimes real estate companies are knowingly involved. They may even give advice to buyers on how to avoid detection. For example, they may tell you to make sure to change your address to the new property for at least 6 months in case the bank checks, etc.
Obtaining a loan under false pretenses is again obviously fraud, and in cases where Flat 35 loans are involved, the government is actively searching for such fraud.
Combination
Of course some companies will combine these different scams together to increase their profit even more.
- They buy a property at below market value from an unsuspecting seller ((Say $80k for a $100k property)
- They sell the property for above market value (Say $120k for a $100k property)
- They apply for a home loan instead of an investment loan
- They apply for a higher amount than they are actually selling the property for (Say $160k for a property they are selling for $120k)
- They encourage the buyer to sign up for an expensive and worthless leaseback program.
Personal Experience
I have invested in or been involved in investing in more than 6 properties. There are good deals to be had if you are patient and level headed – but you should do you research well beforehand.
Conclusion
Don’t believe anything any bank or real estate agent says without verifying it. There are lazy and dishonest real estate agents everywhere.
Be aware that you may be able to buy properties on the cheap, buy you should know the reason they are cheap and make sure you are okay with that reason. For example, if a property is cheap because it can’t be redeveloped, or because it doesn’t come with the land, you should know. It might still be a great deal, but you can’t make that determination if you don’t know the reason. Sometimes properties are cheap because the owner is in a hurry to sell, but if something seems to be true, it probably is.
You should also know that Real estate fees are typically 600,000 JPY + 3% of the sale value. This is quite expensive, but it can be more if multiple companies are involved. If you buy direct from a seller and go to the government office to transfer the title yourself, then these fees aren’t necessary.
Be aware that a single mistake in area of property investing can set you back so far that you may not be able to recover.
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