Investing in Tokyo residential real estate from overseas: FAQs

Real Estate Japan recently conducted an email interview with Mr.LAND Co. Ltd., a tri-lingual Tokyo-based real estate brokerage specializing in the sale and purchase of income properties for overseas clients.

Below they provide insightful answers to FAQs on:

  • What are the advantages and disadvantages of whole building investment?
  • Can you get financing from your home country financial institution to invest in Japanese real estate?
  • Why are so many overseas investors drawn to income-producing properties in Tokyo?
  • How has COVID-19 impacted the Tokyo residential real estate market?
  • How can whole building investment meet your investment goals?

Q: What are the advantages and disadvantages of whole building investment? What type of buyer or investor should consider purchasing a whole building?

I think it is easier to understand the advantages and disadvantages of investing in a whole building by comparing it with investing in a single unit.

Compared to single-unit investment

One of the main differences between investing in a single unit apartment and a whole building is that the investor can hedge risk based on ownership of multiple units. If you invest in a single unit, your income will either be “zero” (if the unit is vacant) or “one” (if the unit is occupied), meaning that you risk earning nothing at all. However, for a whole building, even if one of the units becomes vacant, you can expect income from other units, which gives you a risk hedge.

When you invest in a whole building, you can also acquire all the land that the building occupies, which increases the value of your asset. With single unit investment, each individual unit holder does not necessarily own a proportional ratio of the land.

An owner of a single-unit in a whole building is also bound by the rules established by the building management association. These rules may even restrict whether and how you renovate your individual unit. In contrast, the owner of a whole building can decide for themselves how they want to renovate the entire building or how to renovate specific units; this allows whole-building owners to improve revenue through remodeling and renovation.

Drawbacks

One of the main drawbacks to investing in a whole building is that the initial acquisition cost is quite high.

Taking Tokyo as an example, a single-unit apartment in the city center can be acquired for tens of millions of yen, but a whole building property will average hundreds of millions of yen (at least, several million US dollars). If you want to buy a whole building for less than this, you will need to look at properties a little farther from the city center or at older properties; however, this means that it may be much more difficult to secure tenants, which increases your vacancy risk.

Another drawback to whole building investment is that you will need to set aside a much greater sum for repair costs. If you own a single unit in an apartment building, you have to contribute a set monthly amount to a repair fund, along with the other individual unit owners. This fund will be tapped by the building management association when a major repair is required for the building as a whole. If you are the owner of a whole building, of course, you will bear the entire amount of the repair cost.

The bottom line

Overall, an important point to keep in mind is that whole building properties have higher yields than single-unit properties, which means the potential income stream is much higher. Even given the drawbacks discussed above, a higher potential top line means a higher potential for net income.

Q: Is it possible for a foreigner to get financing to invest in a whole building? What are the requirements?

To obtain a loan from a financial institution in Japan, it is basically a prerequisite that you have permanent residency in Japan.

If you are unable to obtain permanent residency in Japan, you will be asked to check with the financial institution of your home country to see if you can obtain a loan for the property in Japan.

We have worked with clients who have received positive answers regarding loans for Japanese real estate from some financial institutions in the United States, especially in cases where the applicant has an existing mortgage loan in the US.

Our recommendation is for you to check with your home financial institution.

Q: Can you tell us about some of the foreign clients you have worked with? What made them interested in whole building investment?

Why Japan?

Through our partnership with Real Estate Japan, we receive inquiries from countries in Asia, Europe, and the United States.

The reason that many of our clients are interested in whole building properties in Japan is the relatively high yield compared to overseas properties.

In other Asian countries, you can find properties that are attractive in terms of asset appreciation, but with these, it is difficult to expect them to produce an ongoing revenue stream. In Japan, however, you can find high-yielding properties even in the Tokyo metropolitan area.

In addition, there is also potential for capital gain when you sell the property in the future, since land prices in Tokyo have been increasing annually.

These two factors, a stable income stream and the potential capital gain, seem to be attracting a lot of buyers because they are able to invest with less risk.

In addition, Japan is known worldwide for its stable political environment and public safety, which reduces so-called “country risk”. Sharp price acceleration is less likely in Japan, but so are sharp price drops caused by domestic conditions. I think Japan’s reputation as a safe country is an important factor in drawing investor interest.

COVID-19: Very low foreseeable risk of a decline in Tokyo property values

Regarding the impact of COVID-19 as related to country risk, Japan has been able hold down the number of infections, which means that the outflow of population from metropolitan to rural areas has not been pronounced. Tokyo is a megacity. Even if we were to see some reverse urbanization, real demand will continue to be strong, and the risk of property value decline due to a decrease in rent or vacancies is miniscule.

The strength of residential asset values in Tokyo has recently been attracting attention from investors all over the world.

We have been hearing in the market that investors are looking to sell their overseas properties and to invest in Tokyo real estate as a risk hedge.

The reason why overseas investors are interested in Japanese whole building properties is that, as mentioned above, whole buildings offer a higher potential income stream, which lowers a number of investment risks, in addition to the advantage of Japan’s very low “country risk”.

I think that people who would like to make a solid investment and to increase their assets fit the investor profile for whole building investment.

Q: What are Mr.LAND’s strong points?

Mr.LAND provides one-stop service for people looking to buy Japanese property from overseas.

Let’s talk in English!

We have staff who speak English and Chinese and look forward to answering your questions without the worry of the language barrier. We’re also happy to create presentation materials to help you get as much information as possible on the buying process and target property.

In many cases, our consultations take place in English by phone. In these meetings we’ll introduce the property, explain the details of what to expect, and answer your questions. Our goal is to reduce the stress of having to deal with the purchase process in a foreign language and to make the whole transaction as transparent as possible.

Buy property in Japan from overseas

Mr.LAND is also one of the few companies in Japan that has obtained permission to conduct the explanation of important matters online. We also have a system in place that allows clients to conclude a real estate sales contract without actually having to come to Japan.

Financial analysis to help you meet your investment goals

When we introduce potential target properties, we will also provide income and profit simulations and relevant property and market data to help you make your decision. To make a purchase decision we believe that you need to be able to estimate potential income, in addition to having all the facts about the property itself.

We will also explain Japan’s tax system and introduce the most suitable properties and investment methods based on how you want to invest and manage your asset.

Q: Can you tell us about one or two properties that you would like to recommend to our readers and why?

We’re pleased to recommend the following whole building, which is located in the Shirokane neighborhood of Tokyo, which is a sought after high-class residential area in Minato Ward. Because living in Shirokane is seen as a status symbol, leasing demand here is high and risk of vacancies will be low.

La Fort Shirokane

19-1, Shirokane 6-chome, Minato Ward, Tokyo

Price: ¥399,000,000

Gross yield: 4.14%

The building itself is quite new (built in 2018) and has a reinforced concrete structure. This means that the risk of long-term repair costs is lower and the risk of a significant price drop in the property as a whole will be mitigated.

In addition, since land prices near the property have risen in the last few years, we expect both income gains and capital gains for a buyer who holds the property over the medium- to long-term before selling.

For more information on this property, please contact us.

Contact Mr.LAND

For more information on how Mr.LAND can assist you, please visit their agent page:

Mr.LAND Bilingual Agent

To see a list of properties currently handled by MrLAND, please see:

For sale properties by Mr.LAND