How to play your Japanese property game smoothly.

- Stable rental trend

- High market liquidity

- Solid legal structure

- Ultra-low interest rate

Yes, you can easily name the attractions of property investment in Japan.

On the flip side, you might be confused by the unique Japanese property rules/practices.

So, why don’t we learn the rule of the game before jumping into the market.

This article is for your information only. You shall consult with your qualified professionals such as accountants, tax consultants, lawyers, etc., before making any decisions or actions. Please refer to the disclaimer at the end of this article as well.

CONTENTS:

1. INTRODUCTION

2. PROPERTY SEARCH

3. ACQUISITION

4. LEASING

5. PROPERTY MANAGEMENT

6. TAX

7. EPILOGUE

1. INTRODUCTION

The life cycle of the property business is considered quite universal like this.

✔ GAME PLAN

Defining the target property in terms of the type, use, location, floor space, and price range. A four-bedroom condominium in Tokyo for rental income, a vacation home of 200 square meters for occasional skiing in Hokkaido, an office building up to YEN 1 billion price tag for your corporate investment, etc.

✔ PROPERTY SEARCH

Studying the market, collecting/analyzing lists of properties, and retaining a broker.

✔ DUE DILIGENCE

Making physical inspections, studying a bunch of reports (appraisal report, title research, engineering report, fire & other insurances, rental market report, environment study, hazard map, etc.), checking the rent roll / making cash flow projection if applicable.

✔ ACQUISITION PROCESS

Negotiating the purchase terms, executing contracts, payment of the proceeds, delivery, and registration of the property/title. Moving into the property if it’s for your own use.

✔ OWNERSHIP / MANAGEMENT

Managing the property in terms of leasing, maintenance, repair, and major renovations.

✔ TAX & FINANCE

Handling cash flow ( both in and out ), and tax return/payment.

✔ EXIT

The final stage. Selling the property or handing it over to your heirs, etc., with due consideration of relevant tax codes, laws, and financial factors.

Though none of each element seems much different in Japan, modus operandi differs a lot. Let’s see each of them in the following chapters.

2. PROPERTY SEARCH

Good and bad news for you.

The bad one is the language barrier.

- Most property-related information is still spoken and written in the Japanese language.

- So, it’s quite essential that either you or somebody on your behalf have command of practical Japanese.

The abundance of property information is the good news.

- You can get plenty of property listings and related information on the web, in Japanese though.

- Unlike in the last century, real estate related information/data have got very transparent now. So, you can verify/crosscheck them easily.

Based on the above backdrop, this article is written with the assumption that you have a resource of Japanese language proficiency.

Now, let’s see the world of property hunting in Japan.

You might be very confused by some property-related Japanglish. Let’s see a couple of examples below.

‘MANSHON’ or Mansion

- Japanese people consider ‘MANSHON’ as a relatively expensive unit in the residence building with a reinforced concrete/steel reinforced concrete structure.

- The ownership doesn’t matter. So, you’d see both the rental and owned ‘MANSHON’.

- The authentic definition of ‘mansion’ in English is barely imagined in Japan.

‘APAATO’ or Apartment

- On the other hand, ‘APAATO’, or apartment specifically means a ‘rental’ unit.

- It usually carries a connotation of a slightly lower quality of facility/property, such as a relatively older wooden structure without elevators, etc.

Mysteriously, Japanese people love to use words sounding like English, but they usually don’t care about the authentic meaning of them.

3. ACQUISITION

Let’s move on to the purchase phase of the property.

3-1. Brokerage contract

- First of all, you need to inspect(*1) the property by yourself and decide whether to go ahead or not.

- If you move on, then, you need to retain a broker on your behalf. They usually ask you to sign a sort of brokerage contract, which specifies the terms and conditions of the brokerage service including the fee(*3).

- The timing of the brokerage fee payment is either at the sales contract execution or the delivery of the property subject to negotiation. Phase payment at each time is also possible.

- The brokerage contract terms including brokerage fees are strictly regulated by Real Estate Brokerage Act(*2), or Takken Gyoho. This act is the supreme rule of property games in Japan.

- Your broker shall be a licensed Real Estate Transaction Specialist under this act.

*1: You should inspect your particular unit (in case of condo, etc.), common area, exterior, property boundary, distance to the nearby station, the environment (noise, odor, neighbors, surrounding properties, sunshine to the room, etc. as per your checklist.

*2: Real Estate Brokerage Act

http://www.japaneselawtranslation.go.jp/law/detail/?id=2653&vm=04&re=01

Please find the English translation of article 1 of the act below.

‘Article 1　The purpose of this Act is to secure the proper operations of the business of persons engaged in real estate brokerage by implementing a licensing system for said persons, through the enforcement of necessary regulations, properly managing the business, making fair dealings, and promoting the sound development of real estate brokerage while continuing the smooth distribution and facilitation, and protecting the profits of buyers, etc.’

*3: Brokerage fee is regulated by the Act as below.

Brokerage fee : Purchase price x 3% + \ 60,000 (Consumption tax applies)

In case the transaction value is less than \ 4 million, a slightly higher percentage applies. Please check with your broker.

[Column] Agency & Brokerage

- The concept of agency/agent and brokerage/broker is totally different.

- If you assign some party as your agent and authorize it to execute contracts on your behalf, it’s usually considered ‘agency’. In this case, you shall be responsible for the consequences of your agent’s actions.

- While, the brokers literally act for you only to handle the brokerage process of the property.

3-2. Research / Analysis

Then, you may want to finish various types of homework to analyze the property including the followings.

  [ Item ] / [ Subject property/type]

- Appraisal report / Income producing property

- Engineering report / Large scale property

- Environment report / Ditto

- Hazard maps / Your agent can give you reports from each municipal office

- Fire, damage, and other insurance coverage / All

- Rent roll & cash flow projection / Income producing property

- Earthquake durability / All

- History of repair and maintenance / All

- Title survey(*1) / Your agent/broker usually gets you a copy of registration.

- Property defect insurance / All

*1: You usually retain a judicial scrivener or SHIHOSHOSI for the final check of the existing title and the registration of your fresh title.

3-3. Letter of intent

In parallel with the above surveys, you’d make a purchase offer if you’ve decided to go on the process.

- You usually submit ‘KAITSUKESHOMEI’, a letter of intent to buy the property, to the seller through your broker.

- In the letter, you usually stipulate the basic terms, such as purchase price, payment method/timing of the price, your financial / company background, funding method (in case you need a mortgage), etc.

- It usually is non-binding, but deposit money might be requested by the seller, which is subject to negotiation.

- You may want to consult with your broker/accountant on the treatment of consumption tax on the building portion.

3-4. Disclosure statement / Contract

Disclosure Statement

- Once the letter of intent is accepted by the seller, your broker briefs you on the property in the form of ‘JUYOJIKOSETUMEI’, the disclosure statement(*1) according to the Real Estate Brokerage Act. This is the indispensable part of the property transaction defined by the law.

*1: After the briefing, the broker gives you the statement in written form, which you should keep for your record. The statement covers, including but not limited to, the title related matters, legal restrictions, physical status/outlook of the property, and the transaction terms. You may want to check the treatment of the warranty for the property defect. The effect of relative insurance coverage could be a choice.

Sales Contract

- After you fully understand and agree to the Disclosure Statement, you are ready to sign Sales Contract.

- The detailed term of the transaction shall be specified and agreed upon by you and the seller in the Contract.

- At this time, you usually need to pay the deposit(*1) money to the seller.

- Brokerage fee is legally effective upon sales contract execution. Please see more details in sections 3-1.

*1: There are some types of deposits. In certain cases, you can cancel the deal by giving up the deposit. Contrarily the seller can quit the deal with double payment of the deposit back to you. This is just an example, and you should consult with your broker about the nature and treatment of your deposit.

3-5. Delivery / Registration

- In the contract, you and the seller determine the date of delivery. Some Japanese people get suddenly superstitious and stick to a lucky day for the delivery as per the Japanese traditional calendar.

- On the delivery date, you pay the rest of the proceeds and receive the physical delivery and the title of the property.

- The rest of the brokerage fee ( some portion might have been paid before) shall be paid at the same time.

- Do not forget to effect fire/damage ( plus earthquake if needed) insurance or take over them from the seller effective on the delivery date without interruption.

- As briefly touched upon in sections 3-2, you usually retain a judicial scrivener, SHIHOSHOHI to register your title at the registration office. Needless to say, the judicial scrivener shall confirm the deletion of any of the seller’s mortgage/liens at the transfer of the title.

Please find the list of your main payment items at the delivery of the property/transfer of the title. Some of them are subject to consumption tax.

・Purchase price (less deposit)

・Fees for the title transfer registration / judicial scrivener service

・Brokerage fee (less anything paid before)

・Stamp duty on relevant documents (if any)

・Insurance premium

In addition, you need to pay property acquisition tax afterward, which is levied by the municipal government.

Settlement of the expenses

- Property related expenses such as utility bills, property taxes, and monthly dues are usually pro-rated on a daily basis between the seller and the buyer.

- The cash settlement is usually done together with the payment of the purchase price. Otherwise, you may not see the seller anymore and have no chance to make it.

4. LEASING

Now, let’s talk about the leasing aspect of the property business.

- If you intend to lease even part of your property, you need to decide your leasing strategy at the early stage of the property search.

- You have three major methods for your property lease.

4-1. Do It Yourself

In this case, you need to handle the entire process of leasing and tenant relations on your own.

Tenant relation:

Taking care of tenants’ requests/complaints, checking the receipt of rent / urging the tenants for the payment in case of delay

Vacancy management:

Checking the property condition / agreeing to the property restoration cost with the tenant upon the expiry of the lease.

Restoration work:

Making necessary repair/restoration of the property for a potential new tenant.

Leasing(*2):

Retaining a leasing broker to get a new tenant as soon as possible, and negotiating/executing the new rental contract including the payment of security deposit(*1)/others.

Others:

Paying the utility bills for the rental unit in case of vacancy, etc.

*1: Tenants usually pay the following items to the landlords at the time of the lease contract. It varies regionally.

*2: Unless you find the tenant by yourself, you need to retain a broker and pay brokerage commission anyway. The fee is regulated by the law and is equivalent to one month's rent + consumption tax. But, some desperate owners push the brokers for quick leasing with additional incentives, which can be legally ambiguous. Watch out!

REIKIN or Key Money:

- A one-time (usually non-refundable) payment by the tenants to the landlords. REIKIN literally means ‘gratitude money’.

SHIKIKIN, or Security Deposit :

- This is paid by the tenant together with REIKIN. The amount usually ranges from one to three months of rent.

- This fund is used to offset the unpaid rent, and repair/restoration cost caused by the tenant. The landlord shall return the deposit less the cost incurred to the tenants.

4-2. Leasing manager

- This is considered the most common way for your leasing management.

- In this case, you can simply outsource all of the matters mentioned above 4-1 to the manager. You still need to bear the risk of vacancy and rental fluctuation, though.

- The fee varies but the ballpark figure can be as follows.

Leasing management fee: 3 - 10% of rental income

Others: Reimbursement of the actual expenses and changes for inspecting the property condition at the tenant departure and giving guidance to a moving-in tenant, etc.

The fixed or variable charges/service fees for estimating/executing restoration/repair of the property, etc.

Brokerage fee: You need to pay a brokerage fee for leasing up. Please see above 4-1.

4-3. Sublease

If you’d like to hedge the rental market risk or leave every leasing operation to a third party, this is the answer. Of course, you need to watch out for some pitfalls.

✔ You leave most of the leasing elements to a sublease firm/sublessee, and usually get fixed sublease rent for the agreed-upon period.

✔ The sublease rent is usually guaranteed by the sublessee and is naturally lower than the passing market rent.

✔ You should carefully study the financial reliability of the sublessee, the escape clauses where the guaranteed sublease rent w be reduced or even deferred, etc.

✔ Also, you need to clearly understand which party (you or the sublessee) is responsible for what items, such as property tax, cleaning, repair, maintenance, leasing fee, capital expenditure, etc.

✔ The renewal timing to review the sublease rent, and the expiry/extension clause of the contract shall be closely checked as well.

✔ As you may see, this scheme is fit for those who have no time/expertise to take care of the property business.

5. PROPERTY MANAGEMENT

5-1. Overview

On top of leasing management, you’d need to handle the property in terms of the following aspects.

- Common area cleaning (assuming each rental space is cleaned by its tenant)

- Occasional repair and maintenance

- Planning and execution of major renovation/ capital expenditure

- Making mandatory property inspections / regulatory reports if any

- Observation of relevant laws/regulations, including regular evacuation drills

- Response to regulatory reports/obligations

- Property tax payment and other regulatory requirements

5-2. Outsourcing Method

Nowadays, many Japanese real estate owners tend to let a professional manager take care of these matters. They are usually called Property Managers and the operation is called Property Management.

Property Manager (Total management)

- Again, the easiest (probably the most efficient) way is to outsource all of the above items (see 5-1.) to one particular company, called Property Manager.

- Property Managers can usually handle leasing management also. It means that you can outsource all of the property related operations to the Property Manager.

Manager for each item (Individual management)

- While, some of the owners prefer to appoint a company to each particular object, such as X for leasing, Y for daily maintenance, and Z for renovation and capital expenditure.

- Each of them can be called a building manager, leasing manager, construction manager, or else.

Your choice

It’s up to you to pick the method ( total management or individual one). On top of your investment purpose, the factors such as the type, size, and physical condition of the property matter usually.

As for the selection, you can easily find either Property Managers or other individual managers with different backgrounds/expertise in Japan. So, you may want to pick the right one(s) through a bidding process.

In case you need to communicate in English only, the candidates for the bid could be limited. You can still shortlist them either via an internet search, advice from your local contacts/word of mouth.

5-3. Fees

The fee varies, but you can get quotes from each prospect manager for your comparison.

- As for the leasing fee, you can refer to sections 4-2 above.

- The cleaning/ maintenance fee can be quoted as per the space (square meter) to take care of.

- The one for construction management may be calculated based on the total amount of the project, etc.

6. TAX

There are a variety of taxes levied on the transaction, registration, ownership, and disposition of property in Japan. Frankly, none of my friends perfectly gets the whole picture. Anyway, let’s take a look at the major ones below. This is just a rough excerpt of the related taxation. Please consult with your accountants, tax consultants, or property professionals for the details.

6-1. Transaction related

Stamp Duty:

To be paid at sales contract execution. The amount is calculated as per the transaction value.

Registration Tax on Title Transfer:

To be paid at the registration of your title transfer. The tax is calculated based on the property tax assessment value and the tariff.

Consumption tax:

To be levied on the building portion of the sales price subject to the nature of the seller’s consumption tax status, etc.

Property acquisition tax:

To be levied by the municipal government sometime after the purchase of the property.

6-2. Ownership related

Property tax:

To be levied by the municipal government and usually paid annually or quarterly.

Consumption tax on rent:

To be levied usually on non-housing rent with an exemption for the landlords whose annual rental incomes are below a certain ceiling, etc.

Needless to say, you are required to pay income, corporate and other taxes on your rental, disposition, or other property related revenues.

7. EPILOGUE

Hopefully, you’ve got a very basic picture of the property game in Japan.

The nature of the business is quite universal. But the laws, taxes, and practices differ a lot in each country.

Hopefully, this article help you start or continue enjoying the exciting property game in Japan.

[Disclaimer] This article is provided for general guidance purposes only without any guarantee nor assurance of the accuracy/completeness of the content. Nothing in this article constitutes any recommendation, solicitation, or professional advice. Before making any decision or taking any action, you shall consult your qualified professionals such as accountants, tax consultants, and lawyers with relevant knowledge and expertise.