Property Investment Types in Japan

Foreigners buying property in Japan is becoming more common nowadays, because most of the properties are freehold and there are no restrictions on price and area even for foreign buyers. 

After buying the property, you will want to make sure that these properties are being leased out so you can get a yield for your investment.

There are few types of investments in Japan:

1. Standard Leasing

Standard leasing is the most common type of investment in Japan, it involves leasing of residential / commercial property to a tenant.

While selecting potential real estate investments, you might come across some second-hand properties that are labelled as owner change.

This type of property is very common especially for smaller units such as 1K(size range from 20 sqm. to 25 sqm.).

As there is already a tenant living inside, it is not possible to arrange an interior viewing. Interested investor can only check the building appearance from the outside and the surrounding neighborhood.

After settlement, the new owner will have rental income immediately.

As for properties that are vacant/new, after settlement the property management company or the real estate agency will start recruiting tenants at which upon successful recruitment one month fee is payable as the commission.

Pros: Rental amount follows the market price, which contributes to higher rental yield (market yield)

Cons: Vacancy risk when tenants move out, as there will be a period of vacancy while a new tenant is being recruited

 

2. Guarantee Leasing/Sublease

This option is available for new properties or vacant properties usually below 10 years in populated urban areas such as the 23 wards of Tokyo and central wards in Osaka where the demand for rental units is high.

A sublease basically refers to a foreign owner leasing his/her unit to a sublease company (corporate) and that company leases to another tenant (either individual/corporate).

For owners who worry about vacancy risk, the guarantee leasing option may be ideal, since a fixed rental income is guaranteed regardless of the unit having a tenant or not.

Pros: Fixed rental income regardless of vacancy, therefore rental yield is very stable

Cons: Rental yield is lower than the market rate by 10~20% and may come with a 'free rent period' for 1-2 months (depending on the sublease company policy) before the rental starts coming in

Another point to take note of is, according to the Japanese tax regulations, when a guaranteed leasing option is chosen, which is when a foreigner owned unit is leased to a corporate (the sublease company), a 20.42% of withholding tax has to be deducted from rental income monthly. This 20.42% can be refunded after filing taxes every year from February 15th to March 15th. You may need to hire a tax accountant to do this for you.

 

3. Operation Type 

This is applicable for vacation rentals or hotel projects where an operation company is needed to help run the business.

Operation fees usually cost between 15 - 50% of the total revenue.

For example, an operation fee of 20% would be taken from the monthly revenue of the business (excluding the owner's other costs such as utility fees, promotion fees, property related taxes etc.)

Some operation companies may also provide a fixed income that cover most of the expenses.

For example, the operation company promises the amount of X every month to the owner, the owner is only responsible for property related taxes.

Pros: The rental yield with full occupancy is the highest amongst all investment types

Cons: Higher returns are linked with higher risks and vacation rentals / hotel business income can be unstable and easily affected by peak / low seasons and unforeseen circusmstances such as natural disasters or pandemics.

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