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Renovating Traditional Japanese Houses for Preservation and Profit

In a previous article, we mentioned that according to the Ministry of Land, Infrastructure, Transport, and Tourism, in 2013, there were 8.2million vacant houses throughout Japan. This is about 13.5% of the entire residential housing stock and the highest number ever.

A subset of this problem is the growing number of vacant traditional-style folk houses, known as kominka (古民家). In a recent report, the Development Bank of Japan (DBJ) reports that there are about 210,000 vacant kominka throughout Japan. As the country’s population continues to decline, more and more of these traditional-style houses are being left to deteriorate and eventually to be torn down.

Market Potential

The DBJ report suggests that instead of being demolished, kominka could be important assets as the centerpieces in regional revitalization. It proposes that the private sector take the lead in renovating kominka and re-purpose them as destination boutique hotels and short-term rentals or as restaurants and cultural centers where tourists can learn about traditional Japanese foods and crafts.

This type of strategy could potentially stimulate local economies to the tune of 1.8 trillion yen by creating demand for carpentry, wood, and other construction-related services and supplies. According to the DBJ, there is already awareness by foreign tourists of kominka as unique destinations in Japan. Properly marketed, kominka could draw more in-bound (overseas) tourists, who could potentially spend an estimated 38 billion yen a year. The DBJ estimates that it would take some 7,400 kominka to support this market size.

Re-purposing kominka also serves the important goal of preserving the buildings themselves as unique cultural assets and the traditional woodworking skills involved in renovating and maintaining them.

High Returns

The DBJ suggests that the return from renovating kominka is potentially high simply because their unrenovated appraised value is relatively low. The DBJ report emphasizes tourism potential and rental income as a reason for investing in old houses, but resale is also an option.

For example, Bloomberg has reported on a foreigner in Japan who successfully carried out a renovation project in Shojiko, a town near Mt. Fuji. According to the article (from 2012), 150 to 200-year old minka, traditional farm houses with peaked roofs, could be bought in Shojiko for 5 to 6 million yen (about $40,000 to 48,000 at today’s exchange rate), renovated for another 5 million yen, then resold for 15 to 18 million yen, a gross yield of 50% to 80%.

In terms of investing for rental income, Bloomberg gives the example of a couple, both foreigners, who renovated a machiya (traditional townhouse) in Kyoto, with an initial investment of about $180,000 in 2008. They have been able to successfully rent out the house, with the property generating as much as 8 million yen in rental revenue a year, apparently a 20% return.


However, because of their relatively low assessed values, financing can be one of the biggest issues in buying a kominka because the appraised value of a house is one of the main factors used to determine the amount of financing available to a borrower. For example, if a bank approves a loan-to-value ratio of 70%, then the bank will not lend more than 70% of the value of the property, and the borrower will have to come up with the remaining 30% of the purchase price from their own funds.

Some banks have recognized the growing interest in renovating old houses. For example, Kyoto Shinkin Bank offers a loan product specifically for renovating traditional townhouses in Kyoto, but apparently, funds can only be used to renovate a house that the owner will be residing in, not for investment.

Boat Houses in Kyoto

One town in Japan has taken an innovative approach to renovating historic houses and in how it is financing the project.

Ine town, located in northern Kyoto prefecture, is an idyllic fishing village (population 2,306) famous for its distinctive architecture called funaya (舟屋) or boat houses. Ine Bay is surrounded by a ring of about 230 funaya boat houses, each of which has a dock for boats and fishing equipment on the ground level and living space on the second level. Most of the houses were built between the Meiji and early Show eras. The funaya have been designated by the government as an “important district for the preservation of traditional buildings.”

The Michelin Green Guide has deemed Ine interesting enough to grant it two stars, which has led to more tourists visiting the area, but Ine has not escaped from the aging and population decline that has hit Japan as a whole. More and more funaya are becoming vacant.

In a bid to preserve its heritage and revitalize the local economy, the town decided to renovate some of the funaya as short-term rentals and retail shops. Renovated houses have a small apartment on the upper level which include a kitchen, bathroom and hot spring tub. The rooms are being rented for 12,000yen a night per person, with a maximum occupancy of two people. The docks on the first level are being turned into coffee shops, where tourists can sample locally made Japanese sweets.

Crowd Funding

An interesting aspect of this project is that it was funded through crowdfunding, as one of the first crowdfunding projects carried out by the Bank of Kyoto and Music Securities (ミュージックセキュリティーズ株式会社), a platform that promotes independent musicians through micro funds. The project goal was to raise 8.4 million yen for renovations. Investment units offered to the public at 20,000yen per unit were quickly snapped up, and the town quickly reached its funding goal.

Public officials from other towns in Japan have visited Ine with an eye to using it as a model for the revitalizing of their own traditional houses.

It seems that public and private entrepreneurs have already seen the potential in kominka and ensuring that their value does not go to waste.

Sources (in Japanese): Development Bank of Japan, Bloomberg, Suumo Journal, Ine Town Homepage, Kyoto Shinkin Bank

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