Investing in Income Producing Properties in Japan: FAQ

Real Estate Japan recently interviewed August Friscia, an investment manager for Pacific Asset Management (PAM) and asked him FAQs we have received from our readers on investing in whole buildings in the Japanese market. We previously spoke with Hotaru Fujimoto of Premium Value Bank (PVB) on a similar topic.

What are the advantages of whole building investment?
Overall, some advantages of investing in entire buildings are as follows: 1. Your vacancy risk is spread across multiple rooms right from day one. If you only own one room and it is empty, your revenue is zero. If you own an entire building with ten rooms and one is vacant, your investment is still operating at ninety percent. 2. A portion of the closing costs can be deducted against your income tax the year of the purchase. For most clients this leads to an income tax refund 3. You become the owner of the entire building as well as the plot of land it is built on. This further contributes to the diversification of your investment portfolio.

What is the profile of the typical clients you work with?
We currently have about a 51/49 split of Japanese clients to non-Japanese clients. Our non-Japanese clients who live inside Japan include work-visa holders, spouse-visa holders, permanent residents and Japanese passport holders.

Japanese banks are pro-actively financing investment property deals these days, so if the investor meets the bank’s requirements, then it isn’t difficult to get financing. Initially, the most important factor is the individual’s salary, with everything else being icing on the cake. We arrange financing for our clients via local and major Japanese banks.

What are the typical financing terms?
There are as many answers to this as there are banks, but most investment property deals these days are being financed with floating rates.

Is it possible to structure a deal with no upfront cash?
It is possible to do a deal with no upfront cash, if the investor meets the eligibility requirements to do so.

What factors are important when banks assess an investor’s suitability for a loan?
When arranging financing, it is important to understand that different banks favor different investor profiles. Some don’t require any Japanese language ability and are open to investors living here on a work visa, while other banks want an investor with permanent residency who speaks and reads Japanese fluently.

At the same time, the assessed value of a property tends to differ between banks, which means that if a bank doesn’t assign a high value to a property, then a significant down payment will be required. So, as the loan arranger, we have to consider all these points when introducing a property and financing options.

Do investment properties typically require renovation before they can be leased?
There are cases where a bank won’t finance a property unless restorations are performed by a professional real estate company, such as Pacific Asset Management. This is one way we, as a professional asset manager, can arrange superior financing packages that our clients wouldn’t be able to arrange on their own.

How easy (or difficult) is it to find tenants for an investment property?
Leasing is a seasonal activity that also depends on the target tenant for the building. For example, is the building mostly occupied by students of a local university? Is it a building with family rooms located in a bedtown? The list goes on.

Do owners typically use a property management company?
This is probably a cliché comment, but the Japanese real estate market is very unique and so using a property management company is strongly recommended. We offer a full property and building management service, including English support and have a team dedicated to this.

Do you offer some sort of “rental income guarantee” service?
I recently introduced my client to a property in an excellent location but the previous owner simply hadn’t been advertising the rooms and the property had many vacancies. We took over the property management and concluded that we would need a buffer of a few months to fill the rooms. So we subleased the rooms during that period in order to maintain positive cash flow for the owner while we looked for new tenants.

What services does Pacific Asset Management (PAM) provide? What makes PAM unique?

We deal exclusively with high-yield rental properties (whole buildings) for investment, and specialize in securing no money down yen loans for foreign investors living in Japan.

PAM offers complete services for our clients, from the initial consultation stage, through to sourcing a suitably profitable property, securing financing, and arranging the transaction, as well as property management and tax advice post-purchase.

We source our properties based on yield rather than location, and typically look for properties with a gross yield of 10%+. Property prices typically range from 35 million yen to 500 million yen.

We tend to find the most profitable properties in prefectural capitals across Japan, such as Sapporo, Nagoya, Osaka, Sendai, and Matsuyama, as well as the Tokyo Greater Metropolitan area (Kanagawa, Chiba, Saitama).

Source: Email interview with August Friscia of Pacific Asset Management