Following some questions and discussions regarding the specifics of transactions in the land of the rising sun, I thought I'll re-post this up to date deal breakdown. Would love to hear your thoughts, questions, etc –
This is what the end costs and income involved come up to, with slight fluctuations due to exchange rates possible.
At the end, I'll list the factors that make this deal attractive in my view, and in the process outline some of the criteria we would recommend for anyone considering investment in Japan at this time –
1. Property advertised for several weeks at app. $22K. As funds were prepared in advance, gaining interest, and exchange rates seemed stable, we waited, then applied at app. $18,500 – this price offer has been set based on the final return we would like to see.
2. Allow 5% for the sellers agent/s, 10% for registration/stamp duty, purchase tax & legal fees (can be slightly discounted in some cases, such as multiple unit purchase for instance)
3. Our fee for the sale is then added – 5% again (not required if you're doing this by yourself)
4. This brings us to a total of app. $22,200, with gross current rent income at app. $350/mth
5. On a monthly basis, we deduct app. $21 for property mgmt, $49 for building management (equivalent of HOA or body corporate – in Japan, combination of public area mgmt & future public repair/renovation fund – so no other building related expenses are to be expected), $11 for our translation & proxy fees and an astounding $1.10 for comprehensive insurance which includes earthquakes, fires and other natural or man-made disasters.
6. The total remaining takes us to app. $268/mth income on our $22,200 total expense, and 14.62% pre-tax return p/a (or 15% if you do this yourself, slightly more if you don't require our monthly proxy/management service). To minimize taxes, vacancy periods and repairs on occasion, you would of course want to utilize a hand-picked team with a proven track record, consisting of property manager, accountant and renovation/repair professionals. In Japan, fortunately, this is the norm in most cases- the only barriers being the language and lack of international awareness, so you'd want some sort of local person/entity these pros (barring perhaps the accountants, who can be English/foreigner oriented) can communicate with.
Selection Criteria – Why Recommend this Unit?
1. Kyushu area – landmass equalling half of Japan’s mainland – is as far away from Fukushima and as clean radiation-wise as you can get in Japan, barring Okinawa, a tiny island further offshore. Fukuoka prefecture is our favourite area to operate in at the moment, due to the above, and also due to an increasing presence of Chinese, Koreans, Taiwanese, etc, who bring much business and cash in.
2. Unit located in Hakata, Fukuoka city’s CBD. Fukuoka city is Kuyshu’s metro capital, numbering 1.5 mil pop (roughly the size of Vegas) – vacancy rate for this area doesn’t get any lower, nor should selling this property be an issue at any given time – other foreign investors and local market channels are first and second exit strategy potential, and normally perform well.
3. Large building, tiny tiny flat (12.5 sqm), internally excellent shape, all of the above hopefully meaning minimal future expenses in reno/repair. Old building (’74) but with regular checks & huge repair/reno fund collected over the years, from 252 mostly occupied apartments. Tiny apartments also mean greatly reduced property tax.
4. Tenanted, paid in advance, by a company, for its single employee, for the past two years. Japanese company employees don’t tend to move around much as a rule, and would be grateful to keep their job for as long as they can. An ageing population also means our risk of tenant leaving due to marriage is further reduced as time goes by, enhancing the advantage of singles’ apartments, Having said that, Fukuoka prefecture is actually one of the only places in Japan where core family figures (couples plus young children) are actually on the rise, most likely due to migration trends from the Tokyo area and surrounding regions post last year's disaster, as well as the foreign influence mentioned above.
Hope this helps!
Ziv Magen- Manager, Asia-Pacific
NTI – Global Real Estate – Japanese Property
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
Thanks Ziv. This may be a stupid question but what is MB on the floorplans?
Cheers David
Meter Box (water, gas, electric), usually accessible from outside the unit.
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
Ziv, how do you estimate the risk of vacancies? Are there statistics on vacancy rates?
There are statistics for every area, and also a list of vacancies per each and every unit block, although these may take some digging up to retrieve in some cases.
Japanese owners, however, are extremely averse to government supported tenants (equivalent of section 8 in the USA or housing supported tenants in Australia). We, as foreigners, don't suffer from this stigma- these guys are quiet as mice, and normally come with government backed guarantees for 3 months of payment even if they abscond, which also covers the price of cleaning and getting a court order to throw out their belongings if they end up disappearing- which is the worst they'd do. Japanese tenants would NEVER EVER damage a unit, and having others stay there is unheard of (not to mention physically impossible with the size of these flats).
As a result, the official vacancy rates hardly apply for the foreign investor – if a unit is vacant for a month, we normally would apply for a government supported tenant, as opposed to Japanese owners, who in the majority of cases would prefer to have the unit stand empty rather than take them in, so there are always long lines of those waiting to find units, AND as a result, the government also approves higher rents for them. Win-win all around, from our perspective, as well as the tenants and the government, as for the tax payers who foot their bills…well. But that's a wholly different issue, and not the focus of the investors' attention normally. More a social/moral dilemma.
The bottom line is, the longest we had a unit vacant so far was six weeks, regardless of what the actual vacancy rate of that building was (let alone the area average).
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
As if to echo the point, I've just been informed that one of my own units, which housed a govt. supported tenant (I'm very cool with them, for the reasons stated above) hasn't been paid for in two months. It's the first I heard about it, because the money kept coming in through the government guarantee, and the only reason the PM now contacted me is because he's preparing to throw out the tenants belongings (the guy hasn't lived there in a while it seems), and requires my signature on a form.
The money will keep coming in for another month, the place will get cleaned, I'm not a cent out of pocket, AND meanwhile we can start looking for a new tenant. Might try to get another one of those, maybe even raise the rent a bit higher if possible. Gotta love that system.
)Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
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