There are many reasons to investing in residential property in Tokyo:
- High rents/low interest rates
- Strong rule of law: No restrictions on foreign ownership; ownership rights are firmly protected.
- Law is pro-landlord: Little protection for the renter at the end of the lease period; key money, cleaning fees, renewal fees.
- Strong currency: A common misconception is that the yen is strong and possibly over-valued. Due to persistent deflation the yen can buy more and so long-term currency comparisons should be corrected for inflation. Have a look here for an inflation corrected chart of the yen. The US, the UK and Europe are printing excessive amounts of money which increases the long-term risk of inflation that would lead to devaluation of their currencies. Trade surplus, low individual debt levels, government debt are entirely domestically financed.
- Demographics: People are moving to Tokyo, and family size is decreasing
- Good timing: Prices went up in 2006 and 2007. During the financial crisis in 2008 prices declined. Prices finally stabilized in the summer of 2009 and have been very slowly increasing since. Still the market is down 80-85% since 1990.
What to buy
1. Older apartments
The advantages of older apartments are:
- Higher rental yield
- Lower depreciation
- No earthquake risk as all the value is in the land
Depreciation is brutal. After 30-35 years a building is worthless. There is very little for sale between 1984 and 1995.
Rents for older apartments are also lower.
But rents drop only about 30%, while prices drop 60%. So rental yields for older places are higher
The earthquake standards were upgraded in 1981, so if there is a chance that you will live there yourself avoid buildings that are much older.
2. Small apartments
Small apartments have higher yield.
3. Outside the Center
Rental yields are significantly higher outside the center. But avoid going outside the 23 wards of Tokyo. Not only is the population in the countryside rapidly declining, but also local real estate agents tend to have a near-monopoly in the smaller towns. As a result there is not a lot of transparency and it is hard to find out what a good price is. You would also have to rely on that same broker to find renters. That puts you at a disadvantage if that broker or his friends own property in the town as well. In Tokyo there are many brokers and the competition will ensure a decent level of service.
4. Apartments with an existing renter
A property with a renter is called ‘owner change’ in Japan.
The advantages of buying a property with a renter are:
- No need to search for a renter. You start collecting rent from the day you get the keys.
- They are cheaper. For small studio apartments the price difference is very small, but for a 3LDK the difference can be as much as 25%. Many buyers are looking for a residence for themselves and thus are not interested in a rented apartment. Japanese banks are reluctant to finance investment apartments, which means there is significantly less money chasing rented apartments.
- You receive the deposit from the seller.
- You cannot see inside, but sometimes there are pictures available and sellers are generally honest about the condition.
5. Ordinary apartments
Ordinary apartments are easier to rent out or sell than unique apartments. It is a common misconception that an especially beautiful, centrally located and new apartment is easy to rent out. In general such apartments are significantly more expensive and as such there are only few people that can afford such a place. It is much better to invest in ordinary apartments, such as apartments in large buildings with many similar units. As there is a big market for such units there are always people offering and looking for such units. This means it is easy to establish the market price at which such an apartment attracts a renter or a buyer quickly. Some areas might not have many very large buildings, but always prefer to invest in what is common for the area.
- Land issues: poor road access, setback, re-zoning.
- Building issues: post-construction inspection certificate, union fund, maintenance costs, artificially inflated rents, cemeteries, red light districts and suicides.
- Contract issues: A contract is only a declaration of intention. In Japan, business is done based on trust. Watch out for the financing clause.
- Do not waste time on leaseholds.
- Foreclosures are not attractive in Tokyo.