Investing in a whole apartment building is not for everyone, but if you are looking to diversify your portfolio and/or are looking for a relatively stable income stream in Japan, residential apartment investing may be something to consider.
Leveraging your capital
There are a number of advantages to owning real estate directly, opposed to buying shares in a real estate fund such as a J-REIT, but the most significant is the ability to leverage your capital.
Generally you cannot get a loan from a bank to invest in securities, but you can to invest directly in real estate, which enables you to do more with your starting capital. Leverage allows you to earn equity returns on the entire purchase amount (after deducting loan payments). In addition, through direct ownership you can receive the benefit of depreciation and other operating expenses, which in many cases can be used as a tax shield for other income.
Tighter lending standards
However, it is not as easy as it once was to get a real estate loan in Japan. In the fall of 2018, the Suruga bank scandal (in which employees of Suruga bank were found to have forged documents in order to grease loan applications for investment in share houses) led to a severe tightening of credit for “salary man” loans for investment share houses and single-unit residential apartments
Since the outbreak of COVID-19, Japanese banks’ underwriting conditions have also gotten stricter as they scrutinize loan applicants’ income and employment prospects against the backdrop of more uncertain conditions in the economy as a whole. This holds for both Japanese and non-Japanese applicants.
In general, as a foreigner living in Japan with a working visa (or more ideally, permanent residency or residency status as the spouse of Japanese national) and high enough income (usually at least seven million yen per year), it is possible to get a property investment loan with a loan-to-value (LTV) ratio as high as 90% at some Japanese banks. The LTV is equal to the mortgage amount divided by the appraised value of the property or the purchase price. The higher the LTV, the greater the risk for the bank. On the other hand, the higher LTV, the more that you, as the borrower, can finance your investment.
A typical loan term is 25 to 30 years. The longer the term, the better the opportunity to generate cash flow. The majority of investment property loans are structured as adjustable rate mortgages, with an initial fixed interest rate. The initial fixed term varies from bank to bank, with the mega-banks (Mitsubishi Tokyo UFJ, Mizuho, and Mitsui Sumitomo) having the lowest rates (in the neighborhood of 1.0%, as of February 2020) but the strictest lending standards. Regional banks have less strict lending standards, varying between 3.5% and 4.5%. For whole building investment, the typical down payment is 10% to 30% of the sales price plus the closing costs.
Of course, your individual financial and risk profile will vary, so just meeting these two conditions is not enough to guarantee that you will be approved for an property investment loan from a Japanese bank. It’s important that you consult directly with your potential lender and real estate agent when researching whether you might qualify for a loan, or even if whole building investment would fit your investment profile.
What yield can you expect?
There are a multitude of factors that affect potential yield. Generally speaking, it is possible to get double-digit yields in regional cities like Fukuoka and Hokkaido. For properties on Real Estate Japan, our partner agents are listing estimated gross yield in Tokyo of between 3.5% and 6.0%.
For example, the property below, a currently tenanted whole apartment building for sale in Sapporo with a list price of ¥20,800,000 ($195,000) and an estimated gross yield of 16.8%. Please see the full listing here: Whole apartment building for sale in Sapporo.
Whole apartment building for sale in Tokyo – Estimated gross yield 6.1%
One of our partners, Mr. Land Co. Ltd., a bilingual real estate agent based in Chiyoda has just listed this tenanted, whole apartment building (built in 1989) for sale in Senzoku Ike Station on the Tokyu Ikegami line in Chiyoda Ward, Tokyo.
The list price for this building is ¥550,000,000 ($5.15 million). Estimated potential rent, if the building is fully occupied, is ¥33,753,600 per year, for an estimated gross yield of 6.13%.
This would be an owner-change property (since the building is already tenanted). There are 43 1K apartment units in the building. It is a four-story reinforced structure with excellent earthquake and fire resistance.
The property is located near the Tokyo Institute of Technology, so demand by students is expected to be high. It is also just a 5-min walk from Senzoku Ike Station, with supermarkets, convenience stores, and restaurants near the station all catering to young single people.
One of the major long-term advantages of investing in Tokyo real estate, as opposed to property in regional cities, is the demographic aspect. More and more young people are moving to Tokyo for university and work. At the same time, the proportion of single-person households is increasing, due to the graying of the population and lower and lower marriage and birth rates.
Other potential advantages to consider
As the owner of a residential apartment building, you are considered a small-business owner and can grow your credit as you use your rental income to repay your loan. As you build your credit, you can qualify for higher loan amounts if you should choose to buy a bigger property in the future.
When you invest directly in real estate, you are in charge of how the property is managed. As a practical matter, however, many people who invest in residential apartment buildings use a professional property management company to deal with the actual management of the building.
In Japan, getting a property loan also gives you or your successor an unencumbered right to the property and any rental income, in case you pass away or sustain a serious injury. This is because when you get a property loan from a Japanese bank you are required to also take out “group life insurance.” If you pass away before the loan is paid off, the insurance company pays the balance of the mortgage, and the asset passes unencumbered to your successor.
Risks, further research, and finding the right agent
As with any other financial decision it is important to do your research and due diligence to that you understand the risks involved in any kind of real estate investment.
Your best resource will be a real estate agent whom you can trust and who has your best interests in mind. For this, communication will be key. On Real Estate Japan, all of our partner agents are bilingual in English and Japanese. Some agents are also able to speak Traditional and Simplified Chinese.
To find an bilingual agent, you can look at the For Sale listings to find properties of interest and contact the listing agent through the inquiry form. Or you can use this page to find an agent in your area: Search for bilingual real estate agents in Japan.