I was luckey enough to find a job renting out apartments when I first came to Tokyo. It provided an education into the way that Tokyo deals with making money from property.

The Tokyo property market is a great place to make money. Although you have to go about it the right way. The key to money is in property rental fees.
In other countries property is bought with the thought of capital gain to be had in years to come. In Tokyo the money is made through rental. Interest rates in Japan right now are almost equivalent to nothing. The prospect of borrowing money to buy an apartment is also very attractive. (If you are eligible to.)

a small Tokyo Apartment Floorplan

Invest in a property which has a location that is easy to rent. The rental value is such that you can expect to receive 100% return on investment in less than 10 years!

Here’s a realistic example.

Price to buy = ¥8,400,000 (approx. USD$100,000).
Current monthly income from apartment= ¥84,000.
Months to recover full costs = 100 months (cost of apartment divided by income from apartment).
100 months is equivalent to 8.3 years.

This is provided that the same person lives there for the full 8 years. This is not optimal. Standard practice in Japan is to charge 1 month’s rent as a renewal fee every 2 years. So in addition to the monthly rental payments a bonus payment of 1 months rent can also be due. This custom is based on a old law. The law is gone, but the custom still exists.

If your target audience is Japanese then expect to get a larger amount up front but less in rent each month. The standard practice when a renter comes to rent a property is 2 months for deposit from which any damages to the apartment are deducted. 2 months for bonus gift to the owner(a Japanese tradition, really.), 1 month as a real estate agency fee, and then finally the first months rent.

Total of 6 months rent up front to move into a Tokyo apartment.  Ridiculous if you are only planning to stay for 2 months in the first place.

Who to rent it to

The solution used by companies willing to rent to foreigners is  ‘shorter-term tennants’.

By having a high turnover rate anything from 1 month to 2 years you can increase the monthly fees paid. Tennants are willing to pay a higher monthly rent if they do not have to pay a lot to move in. The tenants win by getting to move into an apartment of high quality for no huge layout up front. Foreign tenants are an excellent target audience, since they come for shorter term, usually up to 2 years.

With a traditional Japanese Realtor, each tenant will require a Guarantor who signs an agreement to be financially responsible for any outstanding debts that the tenant might leave behind when they exit the country.  This is not just for foreigners, its everyone.

As an off-set to not having a guarantor, meaning higher risk of flight to the owner of the property, renting to foreigners can increase the monthly rent due.  Meaning that a property a Japanese tenant would be paying ¥64,000 per month could be rented to a short term tenant realistically for ¥84,000 per month.

Renovations and Upkeep

Expect to have to renovate the room about once every 3 years. This means give it a fresh set of wallpaper and maybe even new flooring. Use kitset wooden floors as they are easy to keep looking fresh and new. A coat of wax makes your apartment shine. The whole process should be able to be completed for around the cost of around one months rent. The tenants’ deposit covers any major damages so your investment should keep progressing along nicely. The bonus of doing renovations is that it makes the apartment easier to sell. The easiest time to rent a place is when it has just had a makeover. This is the time to re-adjust the rental price in accordance to the higher market value.

Capital gains tax

Yes there is capital gains tax.  If your property gains in value at all.  It probably wont, and thats not the reason to buy in Tokyo anyhow.  But if you re-sell a property within the first 5 years of purchasing it, there will be a 54% tax on the gain.

buy for ¥1,000,000  and sell for ¥1,500,000 within the first 5 years and the government will take ¥270,000.

So keep the place for 5 years at least.

OK so I have bought an apartment, now what?

a small Tokyo Apartment Floorplan

Now that you have an apartment you have to decide what to do with it. Will you hold on to it until the current tenant leaves, then sell it on the property market for about the same price to someone who wants an apartment to live in.

Do this and you get to walk away with the profit for each month that the tenant lived there, straight into your pocket.

The other option is to find another tenant and keep the money flowing in. Now that you are on to a good thing it would be a shame to stop when it is so easy to find a new tenant. With the apartment rented providing you cashflow you can use the apartment as collateral and apply for a more financing to fund another investment property…… Or so you might think.  I did.  But the reality of the Japanese banking system is that using your current apartment (which has a mortgage) for the collateral on a mortgage for a second property doesn’t work.

If you want to have buy a second rental property you first need to fully pay off the mortgage on the first in order to be eligible for another mortgage.

The attractive factor is the low interest mortgages vs the returns from the rent.

For those like me who is reliant on the banks to front the cash to start the game, its a slower process than I would like, but its a good game.

Start the game… Whoever has the most hotels at the end of the game is the winner.

Financing

Many foreigners are under the impression that foreigners cannot buy land in Japan. NOT TRUE! But obtaining financing from banks at the less than 1% rate is difficult if your not a Japanese national.

Check out this page for more information: http://www.jref.com/practical/property.shtml

They state that property prices have dropped in Tokyo by 50% to 80%. Any way you look at it that means a chance to make a profit. If property values increase you get the bonus of capital gain, but that is not the reason for buying anyhow so it does not matter if the property increases in value at all. Rental is the key with Tokyo apartments.

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