Owning an Investment Property

Hidden Costs of Buying an Investment Property in Japan

By Nils Herchenroeder, Tokyu Housing Lease Corporation

Investment properties in Japan are usually advertised with a “gross yield” which is calculated by dividing the estimated annual rental income by the list price. Of course, gross yield is not the same thing as net yield, which is the number you need to know to see how your potential investment would perform.

In this article, I would like to talk about costs that you may incur while renting out an income property, especially from a property management perspective.

Taxes

I will not touch very deeply on tax issues, since that is best left to the experts. The following is just a general overview.

Taxes in Japan related to your investment property fall into three main categories:

  1. Taxes related to acquisition
  2. Taxes related to rental income
  3. Taxes related to disposition

Acquisition

When you buy a property you have to pay a real estate acquisition tax, registration and license tax, in some cases consumption tax on the building itself (land purchase does not incur consumption tax) and a document stamp tax. These are all one-time payments.

Rental Income

When you hold/rent out property, you will be charged a yearly fixed asset tax, city planning tax and income tax.

If you are a non-resident owner, when you master lease a property to a Property Manager (which is the most common scheme), your rental income will also be subject to withholding tax of 20.42%. This will also apply if your tenant is under a corporate contract.

For this and other reasons it is important to engage a tax accountant who will create a tax return including all expenses that your property has incurred during the year. In most cases, you can get a portion of the withholding tax back, so for most owners the effective tax rate will be much lower, since income tax is based on the net profit.

Disposition

When you sell your property, you will be charged income tax on capital gain. A good rule of thumb is that the tax rate will be around 30% if you sell the property within 5 years of buying it. This rate is reduced to 15% if you hold it for more than 5 years.

Now let’s talk about fees and costs related to leasing and property management that you should know about as an investor. For the sake of simplicity, the discussion below focuses on Tokyo-area property investments. Regional differences between eastern and western Japan may apply.

Property Management Fees

If you decide to use a property manager, they will generally charge you property management fees only on the monthly rental income. Your property manager takes care of everything related to the day-to-day operations of your property, including tenant care, administrative work, collection of rental income etc.

PM fees are usually stated exclusive of consumption tax. For example, if the rental income is 100,000 JPY in total and your PM charges 5%, you would pay 100,000 JPY x 5% x 1.08 = 5400 JPY monthly, at the current consumption tax rate of 8%.

Building Management Fees & Repair Reserve Fund

These are monthly charges that have to be paid by all owners in an apartment building to the building management association. For an in-depth discussion, please see: Common Area Maintenance and Reserve Repair Fees in Japan.

New Agreement Administrative Fee

This is a fee payable to your property manager when they successfully conclude a lease agreement with a tenant. It is usually equal to one month’s rent plus consumption tax.

Renewal Administrative Fee

When a tenant renews a regular lease contract, they will often be charged one month’s rent as a lease renewal fee. Your property manager may take a percentage (often 50% of the lease renewal fee) and you, as the owner, will keep the remainder.

Since fixed-term leases do not have a renewal clause, these fees are sometimes stated as Re-Contract Administrative Fees and the owner may have to pay a fee to the property manager.

Restoration Fee

This is the portion of fees paid by the owner to restore a residential property to its original condition when a tenant has vacated the property, in order to prepare it for re-leasing.

Generally speaking, your tenant will only be responsible for damages that are a result of negligence, which then will be deducted from the security deposit. For more details, please refer to the Tokyo Metropolitan Government’s Bureau of Urban Development’s official guidelines (in English and Japanese).

AD Fee

This is an optional fee an owner pays to a leasing agent who successfully finds a tenant for a property. It can be used as a tool to find a tenant more quickly in a competitive market or for properties that are a bit more difficult to rent out. Typically, AD fees range from 0.5 to 2 times the monthly rent.

Air Conditioner Installation

In Japan it is not necessary for an owner to furnish a property for leasing purposes, but it is essential to install air conditioning units in the living room area as well as the bedrooms.

Wire Transfer Charges

If you are not a resident of Japan, it is very difficult to open a bank account here, which presents a big obstacle if you are an overseas property owner wanting to remit rental income to your home country.

In this case, your property manager may be able to transfer the rental income directly to your overseas account, but as the owner, you have to bear the wire transfer charges. Thus, you may want to consider receiving your rental income only quarterly rather than monthly from your PM.

Parking Fees (Car, Motorcycle, Bicycle)

Some properties come with parking spaces included, for which the owner has to pay monthly fees along with the building managements fees. In some cases, the owner is free to choose if they want to rent a parking space.

From my experience, it should be sufficient to rent one or two bicycle spaces, since most tenants will make use of this when they rent your unit and bicycle parking spaces do sometimes fill up completely. The tenant pays the parking fees together with the monthly rent, so you as the owner will not incur additional expenses at this point.

Repair Fees

Owners are legally required to fix broken appliances and equipment (as designated in the lease) during the term of the tenancy. If such equipment cannot be repaired, the owner has the duty to replace it. In newer properties, there is usually less to worry about in this respect.

Fire/Earthquake Insurance Premiums

In Japan, fire insurance is a must when you rent out your property and also when you take out a loan to finance a property purchase. Some owners also opt for earthquake insurance, though this is not required. Rates depend on the size and value of the property.

Tokyu Housing Lease Corporation

Tokyu Housing Lease Corporation is one of Japan’s leading property management companies.

If you are interested in learning more about Tokyu Housing Lease’s PM services, please fill out the form below, and a representative will contact you shortly.

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