Tips for successful property investment in Japan

Japanese property transaction – How much is the total cost?

Around 7% of property price in general but much higher for low-priced property

Transaction cost: Top FAQ about Japan property transaction

Transaction cost is the most typical question asked by overseas clients. To answer the question, we always say “Generally, about 7% of the property price” for a property priced above 50 million yen. In this context, we include brokerage fee (or agency fee), professional fee to judicial scrivener for ownership transfer registration (including registration license tax), and stamp duty for transaction agreement (and for receipt to the seller in case of receiving pro-rated rental from the seller) and fire insurance.

Transaction cost is much higher for low-priced property

However, please note the percentage above is never applied to a property priced below 10 million yen. For example, if you purchase an old house priced 5 million yen in a suburban area in Japan, like Yamagata prefecture in Tohoku, the cost sum of brokerage fee and professional fee to judicial scrivener is very likely to exceed 9% of the property price. Meanwhile, if you purchase an old RC building priced 140 million yen in a downtown area of Tokyo, the cost sum above can be around 4%. The relative cost is lower for such a building compared to an old wooden house in a rural area.

Fire insurance: Biggest hidden cost

In addition to the two cost items of brokerage fee and professional fee, do not forget about fire insurance. This one can be the biggest hidden cost for a property transaction here particularly for low-priced properties.

The 7% we indicated above does include this cost item for a wooden apartment or an RC building priced well over 50 million yen while the percentage tends to be much higher for an old LOW-PRICED house. For the RC building mentioned above, say residential building NOT commercial property, 3-year fire insurance with earthquake coverage may be around 780,000 yen for lump-sum payment. On the other hand, you must pay 160,000 yen for a similar plan for your 5 million yen house (i.e. 3.2% of the property price!).

If you plan to purchase an old house priced below 5 million yen, please be aware of the transaction costs. For a house price 3.5 million yen, you may have to pay over 17% of the property price for transaction costs.

Notes for fire insurance

When you choose a fire insurance plan, please also note the followings:

  • Rationale of adding earthquake option

Without earthquake option, the insurance cost is much lower. But please note fire caused by earthquake will not be covered by general fire insurance. Earthquake option also covers damage covered by tsunami.

  •  Lump-sum payment required

Unless you are a permanent resident here and have a bank account with any local bank, you must make lump-sum payment by cash in case of multiple year plan like 3-year and 5-year.

  • Earthquake coverage not available or, if any, extremely expensive for a commercial RC building

If you own an old but good-looking and reasonable yield property, you may consider a fire insurance plan with earthquake coverage. If your building is a residential property, you can find a relevant plan while you may find it very difficult to get quotations of earthquake plan for your commercial building. These days most of the fire insurance companies stopped offering earthquake insurance plan for commercial building. If any, they will offer you unbelievably expensive plan like 1.2 million yen per year for 200 million commercial building.

  • Insurance premium

On the back of  recent increase in natural disasters, overall, insurance premium has been on an upward trend. Meanwhile, you may also notice 5-year plan looks cheaper than 3-year plan in light of cost per year. Therefore, smart investors with a certain affordability prefer 5-year plan despite lump-sum payment. Of course, the choice of 5-year plan surely pushes up the transaction cost further.

 

 

How to get your housing with rentals financed by bank

As discussed in the previous article (http://bizliaison.jp/archives/371 ), you cannot have Flat 35 fully finance your housing with rentals. Flat 35 is only applicable to your residential area, and the rental part of the property needs to be financed by something else like bank loan. But banks in general give low valuation for a property mortgaged by Flat 35.

Housing with rentals may be financed by housing loan if requirements are met

For those who would like to have your investment to a housing with rentals leveraged, we would suggest  discussion with some local banks which offer both housing loan and apartment loan. Finance approach differs among banks.

<Bank B Case>

Pattern 1: Housing loan + Apartment loan

This pattern applies to the house where you occupy over 50% of the overall floor area and rent out the rest. In the case of the house above, you use the 2nd and 3rd floors for your own use and rent out the 1st floor. For bank finance, you can use housing loan for the 2nd and 3rd floors and apartment loan for the 1st floor. Please note you must talk to a bank who offers both housing loan and apartment loan. If two banks are involved, it is likely that you will have inconvenience in various aspects.

For the example above, of course, you can use apartment loan  for the entire property. But I assume you would like to make the most of mortgage tax relief even if the tax cut is only applicable to part of your property.

Pattern 2: Apartment loan for the entire property

In the case of the house above, your residence area is less than 50% of the property. You cannot apply for housing loan at all. Bank would offer you apartment loan for the entire property.

<Bank U Case>

Housing loan can be used for overall property if over 30% is used for your residence.

The key requirement is that you use 30% or over of the property. The bank will fiance your entire property at their housing loan rate. Sounds exciting!  Compared to Bank B’ Pattern 1, Bank U’s approach seems to be quite appealing. But you will have to check the rate Bank U offers. According to Bank U’s brochure, the rate ranges from 1.80% to 5.475% (as of March 2018). I assume most will tap bank finance at over 4% levels.

Good point about Bank U’s loan  is that they are willing to finance even those who are turned down by other banks (e.g. no PR holders, self-employed, non-high-income person, etc. ). If you fail to pass preliminary reviews with multiple banks, Bank U may still serve as final resort.

Potential application of Flat 35 for housing with rentals

Some property owners live in part of their acquired apartments or houses. This type of property is called housing with rentals (賃貸併用住宅 or chintai heiyo jutaku). When purchasing such a property, experienced investors might consider  use of Flat 35 as finance option rather than regular “Apartment Loan” offered by banks because the rate is flat over the 35 years.

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Banks see high yield as risk for property loan review

Investors prefer high yields but banks prefer younger buildings

Regardless of cash buyer or loan user, any property investor prefers higher yield. Particularly, those who are suggested by a bank over 4% loan rate would never consider the properties yielding slightly over 5% and tend to seek much higher one if any.

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Typical Property Transaction Flow in Japan

I think the previous discussions fully covered bank loan for property investment in Japan, but my approach might have reversed the order. From this article onward, my focus is being put on very basics of property transaction in Japan.

Regardless of cash lump-sum or bank loan payment, any property transaction follows the typical flow indicated below.

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Why Japanese banks like indirect communication

In the previous articles (http://bizliaison.jp/archives/209 and http://bizliaison.jp/archives/285), I suggested indirect communication with banks regarding your application of property investment loan. Have your agents discuss with them on your behalf.

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Japan Property Investment Loan – Required documents

Now you have determined to purchase a property priced around your target level and wonder if bank loan is available with Bank X or Bank Y or Bank Z or some other one. As stated in the previous article (http://bizliaison.jp/archives/209), don’t go to the bank in mind on your own unless you have already established good relationship with them. Have your property agent suggest most feasible option. Local investors are quite selective about property agents because they are aware that whether bank finance is available or not mostly depends on property agent’s capability and the level of interaction with banks.

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Japan Property Investment Loan – Bank X

Let’s imagine you are a qualified bank loan user for any of the banks listed below and want their finance for your property investment but don’t quite understand the information. For those who have no idea who are Banks X, Y, Z, A, S and T, the previous article (http://bizliaison.jp/archives/209) should help.

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