Buy to let investment

[Matt_Black]

I'm exploring a possibility of purchasing a buy to let property. This forum as well as articles such us Buy to Let in Japan 1 | Retire Japan (https://www.retirejapan.com/blog/buy-to-let-in-japan-1/) have been very helpful.

I was wondering if anyone here can share their experience with such investment.

Why buy to let? My wife (Japanese) and I purchased a second-hand detached house last year and although we hired a local komuten to do most of the renovation jobs, we also got actively involved; after receiving the initial quotation, we considered how much time can we dedicate to the renovation work and took on some of the scope. Cost reduction was certainly a factor that lead to our involvement, but we also wanted to be a part of making the place our home. In addition, we learn that we enjoy doing things ourselves and would be happy to take on more jobs in the future. Another reason would be the fact that both of us feel like we want a new challenge and although we enjoyed the renovation of our home, the buy to let must make sense financially.

I think it's important to mention our circumstances and the initial plan:

-We live in Kansai.
-Both work full time, but my wife could reduce her hours if needed.
-Both take full advantage of NISA and iDeCo already.
-Would likely to be cash buyers- this really depends on what the bank would have to offer. I understand that putting the cash to work in another way could make more sense.
-Have experience of purchasing a second hand property in Japan and learnt lot when buying our home.
-Would take on a lot of the reno jobs ourselves and contract professionals for what we cannot do ourselves. We have some professional like that in our network though family connections.

The property:
-A detached house in a reasonable condition where the value of the structure has depreciated, but still worth to renovate.
-As new as possible and definitely post-1981 and compliant with the Shin-Taishin regulations.
-Conveniently located to help with getting a tenant- hoping to leverage the knowledge of the estate agents.
-Depending on the distance from my home to the property, the reno could take some time to complete if only worked on at weekends.

I'm planning to meet with an estate agent in early January to better understand potential returns and understand if the plan makes sense.

Thank you for reading and appreciate your input.

[mighty58]

Sounds like you’re already aware of most points you need to be looking at. It’s also a very difficult question to answer because every property is different, and whether it makes financial sense will come down to several aspects that will all be unique to the house you choose.
So just a few general points, many of which I'm sure you've already thought about:

• Even if you want a loan, you will likely have difficulty finding a financial institution to give you one, as most real estate investment loans specifically rule out older structures. Your agent may know somewhere that might go for an older property for investment purposes, but it’s rare. If you do find one, investment loans will be around the 3-4% mark for interest, and with a shorter maximum term than 35 years. This all comes into play in making your financial calculations.
• You may be able to get a loan for the renovations though. This will also likely be in the 3-4% range, but it will reduce your initial out-of-pocket cost. A full reno of a detached house (kitchen, bathroom, toilets, sinks, flooring, wallpapering, roof repair, siding, caulking, etc.) will cost upwards of 1,000man+ by itself... for a "standard" reform. Add some fancy design touches, and it goes up, but if you are doing some of the work, you could probably get that down significantly.
• As a cash buyer, you’re right, it's likely not a great investment, assessing it purely on a financial yardstick. You’re tying up a lot of cash into an illiquid investment that is extremely concentrated, ie. a vacancy happens and you are returning literally zero. However, it sounds like you know that and want to do this as a bit of a side project as well… so you need to balance that out. There are different ways to measure "return".
• You’ve likely heard of the 1% rule (monthly rent as a percentage of total purchase price), but that guideline doesn’t even come close to working in Japan. If you can find something approaching 0.5%, you’re looking at a very good property here in Japan.
• Rentability for detached homes is lower than manshon’s in Japan, so it might take you longer to secure a tenant, and one long vacancy can really ruin your return calculations. But the upside is that once you secure a tenant, they are likely to stay longer. But then, the downside of that is that you cannot raise rent even if they stay 20 years.
• Obviously, you can up the rentability factor with a good location and a nicely designed interior reno, but these will add to your costs, so factor all of it in.
• Depending on your municipality's minpaku regulations, running an AirBnb may net you better returns. This is very hands-on though, and it might be difficult to manage it while working full-time jobs (subcontracting is of course an option).

[Matt_Black]

Sounds like you’re already aware of most points you need to be looking at. It’s also a very difficult question to answer because every property is different, and whether it makes financial sense will come down to several aspects that will all be unique to the house you choose.
So just a few general points, many of which I'm sure you've already thought about:

• Even if you want a loan, you will likely have difficulty finding a financial institution to give you one, as most real estate investment loans specifically rule out older structures. Your agent may know somewhere that might go for an older property for investment purposes, but it’s rare. If you do find one, investment loans will be around the 3-4% mark for interest, and with a shorter maximum term than 35 years. This all comes into play in making your financial calculations.
• You may be able to get a loan for the renovations though. This will also likely be in the 3-4% range, but it will reduce your initial out-of-pocket cost. A full reno of a detached house (kitchen, bathroom, toilets, sinks, flooring, wallpapering, roof repair, siding, caulking, etc.) will cost upwards of 1,000man+ by itself... for a "standard" reform. Add some fancy design touches, and it goes up, but if you are doing some of the work, you could probably get that down significantly.
• As a cash buyer, you’re right, it's likely not a great investment, assessing it purely on a financial yardstick. You’re tying up a lot of cash into an illiquid investment that is extremely concentrated, ie. a vacancy happens and you are returning literally zero. However, it sounds like you know that and want to do this as a bit of a side project as well… so you need to balance that out. There are different ways to measure "return".
• You’ve likely heard of the 1% rule (monthly rent as a percentage of total purchase price), but that guideline doesn’t even come close to working in Japan. If you can find something approaching 0.5%, you’re looking at a very good property here in Japan.
• Rentability for detached homes is lower than manshon’s in Japan, so it might take you longer to secure a tenant, and one long vacancy can really ruin your return calculations. But the upside is that once you secure a tenant, they are likely to stay longer. But then, the downside of that is that you cannot raise rent even if they stay 20 years.
• Obviously, you can up the rentability factor with a good location and a nicely designed interior reno, but these will add to your costs, so factor all of it in.
• Depending on your municipality's minpaku regulations, running an AirBnb may net you better returns. This is very hands-on though, and it might be difficult to manage it while working full-time jobs (subcontracting is of course an option).

Thank you for you input mighty58 and happy new year. I totally agree, finding the right property and balance will be key for such investment. I met with my builder contact today who suggested to be open to option of selling immediately after completion the reno; list the same property as rental and for sale. That might be good too, so if everything works out it could be buy to let or buy and flip investment.