By Erik Oskamp
It is now possible through Airbnb and other websites to rent out properties on a short-term basis, mostly to tourists. In the last two years, thousands of people in Tokyo and other major cities have listed their properties online.
There continues to be a lot of confusion about the legality of Airbnb-style short-term rentals. There have even been articles in the news about Airbnb being legalized. The reality couldn’t be further from the truth.
Currently, accepting short-term rentals is a direct violation of the Japanese Hotel Business Law
You need a hotel (or minpaku, 民泊) license to rent out any property for less than a month
Monthly rentals might be allowed, but only if they are arranged through a licensed real estate agency. Any arrangement over the internet remains strictly illegal.
Recent action by local munipalities has only made short-term rentals more illegal.
For example, the recent so-called legalization efforts by Osaka and Ota Ward in Tokyo have, in fact, placed more restrictions on Airbnb-style rentals. Potential Airbnb operators would have to register at the ward office, get approval from neighbors and building managers, submit to regular fire inspections and only allow guests who will be staying at least 7 days.
Of course neighbors and building managers are seriously reluctant to approve such applications and about 80% of all guest reservations are less than 7 days. Fire inspections are costly. Needless to say, only a handful of applications have been submitted. Tokyo’s Taito Ward didn’t even bother pretending and have explicitly forbidden any short-term rentals.
Resistance from owners, building managers and neighbors
Aside from the issue of legality, there remains the practical matter of resistance from other apartmet owners in the same building, property managers, and neighbors.
Currently, many building management associations (similar to Homeowners’ Associations [HOAs] in the United States) are adjusting building by-laws to explicitly forbid short-term rentals. On-site building managers and doormen, as well as neighbors, actively intervene to kick out hosts, their guests, and even apartment owners themselves who try to rent out their apartment on a short-term basis.
Nonetheless, tens of thousands of properties continue to be listed online.
Do profit margins justify owners’ decisions to rent out their properties as Airbnb-style short-term rentals?
A few years ago, income generated from short-term rentals far exceeded rents.
In 2014 there were not many hosts in Japan and income generated was easily double the rent. News spread quickly and many new hosts listed properties online. By the middle of 2015 average profit margins for well-run properties fell probably to around 35%. By 2016 this number shrank further to about 25% for professional hosts.
A different story for individual operators
Individual hosts, however, are not so lucky.
From anecdotal evidence, we now hear that the average individual operator takes about a year to make back their initial investment in furniture and agent fees.
And that is not taking into account the work to set-up and clean the apartment, as well as dealing with the guests.
To be profitable now, a host will need many listings to achieve economy of scale, and tight vertical integration by working closely with investors, real estate agents and property managers, as well as an in-house cleaning and maintenance crew.
On top of that a host will need detailed pricing information to price properties correctly using a dynamic pricing algorithm.
Basically, the gold rush is over and making money now with short-term rentals is hard work.
If you decide to start hosting on Airbnb here are a few basic things you need to consider:
Airbnb guests generally decide to rent an apartment because it is cheaper than a hotel. Therefore, there is little value in putting beautiful, expensive properties on the market. They just cost too much. The same holds for trying to reach “superhost” status. Basically, it’s expensive to keep everyone happy.
The best performing apartments are cheaper, older places in areas tourists like to visit, although some places in Tokyo like Roppongi and Shibuya are suffering from saturation.
It is also essential that a building does not have security. A host can expect to get expelled quickly if there is a doorman watching the antics of the guests.
There is a niche market for small 2- and 3-bedroom apartments. Many Asians travel with their extended family and like to stay together. Hotels generally don’t cater to such groups. The problem, however, is that larger apartments also attract groups of as large as ten people, often triggering intense responses from neighbors.
Dealing With Guests
Guests come in all shapes and sizes and from all over the world. This means reservation requests come in around the clock, 24 hours a day, 7 days a week. Cultural misunderstandings are rife. Many guests expect some kind of hotel service and are surprised they have to locate the apartment themselves and then find the key.
It is common that when they encounter small problems, they will ring a neighbor’s doorbell to ask for assistance, even in the middle of the night.
Some guests leave a mess, smoke inside the apartment, throw cigarette butts off the balcony, hang around hallways in large groups in the middle of the night, and of course, have no idea how to separate trash.
I have heard stories of guests throwing drug-fuelled parties, playing with fire extinguishers, breaking open doors, climbing on other people’s balconies and rooftops and even running around naked in the street.
Most guests are not a problem, but as a host you will need to be prepared for everything. Airbnb does not offer any assistance. In disputes with guests, Airbnb usually sides with the guest.
Even with hard evidence and hours of persistence with their customer service desk it is almost impossible to get a refund for a trashed apartment. And the review system doesn’t work for bad guests. They just create another profile.
Advice for Pricing an Airbnb-Style Rental
Airbnb allows a host to change the price and minimum stay for each day. To make a profit, it is essential for a host to take advantage of this and adjust pricing based on supply and demand.
In Japan, there is currently a shortage of hotels. During peak seasons, like the cherry blossom season (from the end March to the beginning of April) and New Year’s, hotels are usually fully occupied. Many hosts forget to increase their prices 3 to 6 months in advance and end up getting booked at off-peak rates. For hosts with patience, it is wise to at least treble prices for those peak days. With an increase of just 50% ,a host would still leave significant money on the table.
A similar thing happens around weekends. Friday and Saturday night should be priced more expensively, Monday and Tuesday more cheaply. To avoid gaps between reservations, the day before and after a reservation should be priced lower, and two days before and after a little higher to encourage guests to take the extra day. Minimum stay requirements need to be relaxed during gaps between reservations and last minute bookings, but lengthened for peak seasons.
Airbnb offers so-called “Smart Pricing” to hosts to help with dynamic pricing. Generally speaking, their prices are seriously off, mostly much too cheap. This will attract more reservations, which is good for Airbnb, but will lower the host’s revenue.
Outsourcing the Operation of Your Airbnb Rental
As a host, it is possible to outsource all of the work involved in operating an Airbnb-style rental. A whole industry of service providers has sprung up around this. Generally however, these providers do not help a hosts very much.
For example, outsourcing cleaning doubles the cost to about ¥6,000 to ¥9,000 per cleaning. Hiring a 24-hour messaging service takes 5% of the host’s income. A full service provider takes about 20%, basically the whole profit margin, while leaving all the risk for the host.
Nowadays, it is hard to make good money as an Airbnb host unless you are a professional outfit. Correctly pricing your property, however, will help. Given the local resistance, investors should not buy properties for the sole purpose of putting them on Airbnb.
Erik Oskamp came to Japan in 2004 and applied for a mortgage the first day. Within 2 months of research he bought his first property in Tokyo, a 3-bedroom house in Shirokane. By 2005 he bought his first investment property. During this process Mr. Oskamp encountered a lack of transparency in the Japanese real estate market and so proceeded to build computer models to assist with the statistical analysis. By 2006 he was able to realize his first capital gains with a 60% profit on the house in Shirokane.
This encouraged him to take a more serious look at real estate. When many friends and colleagues started asking for information he realized the need for a real estate agency specialized in helping foreigners dealing with the Japanese market.
He started Akasaka Real Estate in September 2007. He took advantage of the financial crisis by purchasing more properties in the dark days of early 2009. By 2010 many investors started following this strategy.
Before Mr. Oskamp started Akasaka Real Estate he spent over 15 years working in finance for companies such as Credit Suisse, Citibank, UBS and Barclays in New York, London and Tokyo, as well as his native Amsterdam. In his last position at Barclays he was working as a quantitative analyst, modeling the yen yield curve for swap traders.
Mr. Oskamp divides his time between Manila and Tokyo and has five daughters. He currently owns 24 properties in Japan, but rents the apartment he lives in. In his rare free time you might find him at the beach with his daughters or enjoying traveling.
Akasaka Real Estate
Akasaka Real Estate focuses on helping foreigners buy property in Tokyo, including both primary residences and investment properties. Other services include property management, help with obtaining financing, and organizing renovations.
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