How to make money on property in Tokyo

February 16th, 2011By Category: Events

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.

Note: Erik Oskamp is the CEO of Akasaka Real Estate and a long-term Tokyo real estate agent.  He 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.  The Webinar page is here.

Photo credit: Kris Miller / Flickr

Author of this article

Erik Oskamp

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  • The real expert

    Why would I invest in something that has no capital appreciation? Instead of property investing with an unrealistic target of a 12% yield (never heard of a 5 million unit in north Tokyo), why wouldn’t I put that cash into a fixed 8% term deposit? No risk and a guaranteed 8% return on investment, no maintenance headaches, no government red tape headaches, no flood headaches, no housing bubble headaches etc etc. Investing in the Tokyo real estate market would have to be the worst investment decision ever. If you buy a house in Western countries you will get appreciation on your investment, i.e the value of your house will go up unlike Japan where prices go down. Erik your article is total rubish and people should never buy houses in Japan for investment purposes.

  • Ben Shalom Bernanke

    Fixed 8% term deposit? What kind of fantasy is that? Is it in Zimbabwe? Also, if you haven’t noticed, real estate is in a secular bear market globally with a few exceptions where the bubble is still alive (e.g. China, Australia, Canada, Norway and Sweden) and the market continues to be over-priced in the developed world as indicated by very low rental yields. Getting 12% gross yield on something that has seen full price depreciation is not a bad move as an income generator. This is like investing in a utility where you also do not expect capital appreciation, or, hopefully depreciation. My biggest worry as an investor would be to find a renter for the dump……

  • Bring the pain

    Actually Ben, there are plenty of countries offering 8% do some research. Rest of the world in a bear market – obviously you are a Sepo and think the whole world (America) is in a bear market. American property is in a bear market because you have a retarded financial and banking system flow on effects include high unemployment, low GDP and unsustainable housing market due to dodgy loans. Bear markets are the best time to buy in a business cycle you moron. Having an asset depreciate in value means you lose money benny boy; get a grip on your economics. Again, the quality of housing in Japan is shocking. Who wants to live in a rabbit cage made out of plasterboard. Good luck getting 12% for a 1dk piece of rubish, good luck keeping the piece of rubish standing for more than 2 years. Rather buy a house in Swedan, houses made out of brick, stable banking system, and no earthquakes. If you want to lose money in Japan buy an investment property.

  • Coolryan45

    what kind of fixed term deposit is paying 8% real expert? and i lived in Sweden for a year and the krown taxed the shit out of everything, not exactly a country friendly to profits. Buying real estate in Japan cold be a good idea but id have to go with unlikely, the yen anyone makes in Japan can kick ass outside, lets do that. if buying a property helps you sell something here, now thats worth talking about. I doubt the Japanese government is going to start printing money right away because people are going to stop giving them the money for free… the people VS big busines, i am all about inflating the yen but it wont happen until the Euro and dolar do..

  • This is my first time i visit here. I found so many entertaining stuff in your blog, especially its discussion. From the tons of comments on your articles, I guess I am not the only one having all the enjoyment here! Keep up the good work.
    Regards:
    Trade4target

  • Great! Thank for information, I’m looking for it for
    a long time,

  • Andrew Sheldon

    The reason is because capital appreciate is just one issue – rent expense substitution or rental yield, depending on your perspective is the other issue. There is typically an inverse relationship between the two, i.e High capital appreciation or high yield. That is why Japanese yields are high. If you can find some structural distortion being corrected then you can get both, i.e. Say the Philippines today because it has 8% yield and good capital appreciation. i.e. There is the realisation that Asian labour is rising in cost, so even low productivity Filipinos start looking appealing as a labour force, most particularly because they make satisfactory call centre agents. 
    Japan only makes sense if you are buying a rural lifestyle property, an inner city land rental purchase of house, or suburban house for rent substitution; and even this might only make sense if you are earning Japanese income.

  • Andrew Sheldon

    Yeh, but Japan is 13% and its not even about the money, its a great place to live. Also who cares if the house falls apart in a few years, if you love living there or you are getting 13% yield. After all, some will have the opportunity to leverage themselves into the acquisition, and you can get foreclosed property for much below market price.

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