Tokyo investment property options

Residential Properties

An investment in Tokyo residential property will prove to be stable with enormous potential to grow your money. There is continuous pent up demand in Tokyo for residential rental properties. An abundance of real estate agents bring you a continuous stream of rental candidates. The demand is so great that tenants are the ones who pay the commission to agents to find suitable homes. In many cases, upon signing the contract, the new tenant even agrees to pay "Key" money in addition to the traditional 2-3 months' security deposit. This is a traditional gesture of thanks to the property owner for allowing rental of their new home.

Most often property owners who specialize in renting apartments or houses to foreigners do not require Key money from them. The reason being they wish to avoid the hassle of explaining the tradition. Instead, these property owners compensate by charging the foreign tenant a higher rent and larger security deposit.

Standard rental contract terms are written for a two year period and the tenant has the right to terminate the contract at any time, with one to two months' prior notice (depends on contract). But tenants typically continue contracts for long periods of time due to the heavy costs associated with moving to a new home (key money + agent's commission + moving costs, etc.).

The inclusion of a "Guarantor" is another standard practice. If the tenant is negligent, the Guarantor is obligated to assume full responsibility on behalf of the tenant. So common sense practice is to preliminarily always make sure that the Japanese Guarantor is financially fit to easily cover any potential tenant instigated damages.

Fully furnished apartments have gained in popularity the past 10 years. They are typically rented on a monthly basis and thus charge quite a bit more than unfurnished apartments. However this type of property requires many additional costs for maintenance, services, marketing, etc. The law also mandates a one month minimum rental contract. Anything less than one month would require a hotel operation permit. Short term rentals usually incur a higher risk of vacancy.

There are a few potential negative outcomes that landlords must consider: First, tenants are protected by law for unreasonable rental rate increases; Second, even if there is a clause in the rental contract specifying the landlord's right to terminate, the tenant still has protection. So the landlord cannot simply change his/her mind during the rental period, even if for seemingly valid reasons. Landlords must follow certain legal procedures to clean up each situation. Simply pushing the tenant out or changing the key to the front door are not options, even if the tenant has past due payments. The prudent action to take is to minimize risks by preliminarily hiring an experienced and knowledgeable property manger from the outset.

A concrete building that is subdivided into individual units is called a "Mansion" in Japan.

One room mansion (Studio)
The purchase of this type of rental unit is a popular real estate investment choice for investors with small amounts of capital. As a basic guideline, a new studio unit is typically 20-25 sqm's with an accompanying purchase price range of 20-25 million JPY. Monthly rent is in the range of 90,000 - 120,000 JPY. There is tremendous demand for "single person" dwelling units. These are usually rented out unfurnished. This is the smallest real estate investment option in Tokyo, other than REIT's or real estate funds. With the right timing, you might be able to find an entire Mansion and acquire it from the developer prior to them going to market selling units.

Family mansion
The category with the largest number of properties for sale is the IBR-1Bath (35-50 sqm) to 3BR -1Bath family sized layout (60-90 sqm), sometimes with powder room. Prices in central Tokyo fall in the 1 million to 2 million JPY /sqm range - for brand new units, and 20-30% less for older units (depending upon how old, as older usually means cheaper). The gross rental yield is typically 4-5% (annual total rent yield vs. property price). These are usually rented out unfurnished, even sometimes with no air conditioner (but higher rental incomes usually require a refrigerator, washer/dryer and window shades/drapes). The Family Mansion category also commands strong rental demand in Central Tokyo, however these are not typically attractive to foreigners as a rental unit, especially not to western country executives.

Most apartments and houses designed to foreigners' tastes are rarely for sale. Key points of contrast are: 1) Japanese entrances and floor materials are not suitable for life with shoes worn in the house. 2) The concept of suitable number of household bathrooms and the concept of a bath, are different. These issues are manageable for many foreigner couples and singles. But for typical western families, especially Americans, a 3BR -1Bath, 4BR -1Bath, or even larger sized mansion unit, will not appeal to them. If your plan is to rent out your 3BR-1Bath unit to native Japanese, there should be no concern, but if you invest with expectations to rent out to like minded foreigners desiring a household footprint and layout suitable to the lifestyle in your home country, then most certainly a family mansion will be too small.

Apartment
An apartment has a landlord managing and collecting rental income from multi-dwelling units throughout an entire building. The word apartment is not attractive to most Japanese people. The image most Japanese have for this word is a "cheap rental place" accompanied by a mundane lifestyle. Apartments are often called mansion's just for name sake, but technically mansion's must be collectively owned.

Some nice apartments have been built in the good area of Tokyo, mainly targeted to foreigners. But there have been very few nice apartment buildings available to Japanese for quite some time. So in contrast, mansions have gained in popularity amongst Japanese as being modern. But a new trend has emerged this past decade, many new high-rise mansion-type apartment buildings have sprung-up and are becoming popular assets for large developers and Real Estate Funds. They usually combine several types of unit layouts throughout the building. Many are considered very suitable for multi-national ex-pat tenants. These are a great target for foreign investors, but there are not many available for purchase. Some operate as serviced apartments throughout an apartment building and in other places throughout only a portion of the entire building.

Single family home
The purchase of single family homes for investment purpose is not an attractive investment choice. Usually the price is too high (land is expensive) and thus yield is too low. Some western style single and duplex homes have gained in popularity amongst foreign company employees in Central Tokyo, such as in Yoyogi Uehara, Azabu or Hiroo Aoyama. Rents range from approx. 1 million to 3 million JPY per month. Those are usually owned by long term land owners.

Commercial property

Commercial properties are popular to hold as an asset. Compared to residential properties, they are more sensitive to the affects of economic change and require more sophisticated management know-how. A typical commercial unit encompasses an entire building, so it is not suitable for small scale investors. Office condo units are not popular in Japan. The rental amount is usually indicated in terms of "per square meter per month", yet another Japanese unit measure is the "Tubo", which is approximately 3.3 sqm's. "Tubo" is not the legal way to calculate and convey measured units, however "long time" past customs used this measure, so many people still prefer it. You had better make sure to verify the unit of measure when computing the price or lease amount (a misunderstanding can occur even amongst fellow Japanese).

Office buildings
There are a multitude of sizes and scale of office buildings throughout Tokyo. Large scale IT ready buildings charge the highest monthly rents, e.g., 20,000 JPY per sqm. They attract high level tenants of excellent credit standing who take large spaces for long contract periods. Smaller or older buildings carry higher vacancy risk. They charge monthly rents of approximately 3,000 - 6,000 JPY per sqm. Office vacancy rates in Central Tokyo are very low, at less than 3% in recent years. It is a "landlords market". Even a very small building, such as a 40 sqm's per floor, 5-story building with no elevator, will command high tenant demand if the location is in a popular and fashionable area. Areas such as Ginza, Aoyama or Harajyuku.

The standard lease contract for office space is 3 years. More detailed and flexible conditions can be inserted in office lease contracts, compared to residential contracts. Commission for the tenants' agent and costs related to tenant improvements and/or recovery costs are the tenant's obligation upon moving out (some buildings provide ready to occupy furnished offices while others just provide a shell).

Many buildings also charge maintenance fees along with 10 months worth (or more) of security deposit, in addition to the monthly rental, if the quality of the building is above average. A condition in the contract called "depreciation cost" is typically applied so that 10-20% of the deposit will not be returned to the tenant.

Commercial space
Commercial spaces are usually portions of office or mansion buildings. Not many individual units are available for sale. The commercial space in such buildings usually make-up the most visibly noticeable and most easily accessible portions of the building, thus earning the highest rent in the building. That is especially true of ground floor spaces facing busy pedestrian trafficked streets. Such commercial spaces are always in great demand and very hard to acquire. Tenants are almost always obligated to incur costs to improve the space. Such prime property commands the highest security deposit, e.g., 20 months or more. Monthly rental and maintenance fees are standard. Spaces in shopping malls depend on the mall in question, some only charge for space, others also charge a percentage of gross sales of each business. Triple Net (NNN which is popular for US commercial leases) is rarely applied in Japan.

Hotels
Hotel investments basically include two possibilities: 1) Investor owned and operated property - which not only requires an astute hotel real estate investment, but also requires hotel business management experience and skills. 2) Investor owned property with hired hotel operations management - two practical ways for a foreign investor to accomplish this task would be to either hire a hotel operator or to lease out the hotel's management operations.

Build from scratch or renovate
This option is open to property owners who have acquired a high yield property asset. Of course, there will be much more hassle incurred to succeed. Only real estate experts with a suitable experience in high risk vs. reward projects, should attempt this.

Location Factors
The Central Tokyo areas of Chiyoda-ku, Minato-ku, Chuo-ku, Shinjyuku-ku, Shibuya-ku are the most popular areas for investment amongst Japanese and foreign investors alike. They command the highest property prices in Japan. Each of the 23 wards ("ku"=ward) within the Tokyo metropolitan area have different towns and can be graded differently depending upon their location. Selecting a good location is the key to success with real estate in Tokyo. The same is true of any other big city throughout the world. In periods of deep recession, like in the early 1990's, various types of properties in better locations throughout Tokyo experienced significant price drops, but virtually none experienced difficulty acquiring tenants to collect stable rental income. The same result can be expectedin the current recession.