The Real Estate Market in Japan
In 2000, after the bubble, the Bank of Japan was attempting to promote economic growth. Their strategy was to reduce their interest rates to unbelievably low numbers, going from 6%, to 0.5%, to eventually 0.1%. Today the interest rates are actually negative, hovering at -.018%!
Japan is not the only place to propose negative interest rates, and according to BBC, “Denmark, Sweden, Switzerland’s central banks have decided to have a negative rate on commercial banks’ excess funds held on deposit at the central bank. In effect, private sector banks have to pay to park their money.”
In other words, if banks have to pay to park their money, that gives them a greater incentive to lend it out to people and businesses, in turn fueling economic growth.
With extremely low rates, investment trusts took advantage of the opportunity and began buying up property. This large wave of transactions gave rise to a mini financial boom/ From 2010 there has not been any extreme dips or jumps in the real estate market in Japan. Prices have been relatively stable with prices neither too high nor too low. Year by year, all types of property and land prices have increased slightly, but at rates that are expected with normal inflation and population increases.
However, with the 2020 Tokyo Olympics coming up in just less than 2 years, the economy is expected to benefit from increased tourism and potential buyers. With the stable current market, investors, both foreign and domestic, have been able to confidentially invest in a variety of both residential and commercial properties.
That said, there is a lot of construction going in Tokyo right now, probably in part to the ease of lending out money for construction projects. After the Olympics and in consideration of the population decline, what will happen; is the construction sustainable? How low can negative interest rates go without hurting consumer confidence and bank confidence? This is open to debate but an important question to ask before deciding to invest in property in Japan.
Why Japan is Attractive
Overseas investors are primarily focusing on properties in Tokyo. In the first quarter of 2014, Tokyo gained first place as the city with the largest amount of investment in real estate (according to research by Jones Lang LaSalle). Reasons for this trend include the rise of the shareholding ratio of overseas investors in Japanese real estate companies and the country’s low geopolitical risk.
Even though Japan’s population is decreasing, Tokyo is currently witnessing an increase in the number of single-person households. The reason is simple: people are moving from the countryside (old and young) to Tokyo to seek better healthcare facilities and job opportunities. One-room apartments are particularly popular properties due to their salability and market liquidity.
A few stats to back this up:
Cities with the World’s Largest Population in 2030
1st place — Tokyo: 3,783 million people
*Source: document published by the United Nations in 2014
Real Estate Investment City Ranking
1st place — Tokyo: 10.1 billion dollars
*Source: Jones Lang LaSalle, first quarter of 2014
Gross Regional Product Global City Ranking
1st place — Tokyo: 1.52 trillion dollars
*Source The Brookings Institution
Global Power City Index
4th place — 1st place in Economics, and 2nd place in Research and Development
*Source: Document from the Mori Memorial Foundation (2014)
Number of Fortune Global 500 Company Headquarters
2nd place — Tokyo: 41 companies
*Source: Fortunes Global 500 (2014)
Number of large companies with capital stock of over one billion yen
2,666 companies (approx. 45% of the whole of Japan)
*Source: “Economic Census for Business Activity” by the Ministry of Internal Affairs and Communications and the Ministry of Internal Affairs and Communications
The Upside of Real Estate Investment in Japan
Generally speaking this applies to people who are already residents of Japan and make a certain level of income (above the 9m yen range/year). The reason I decided to buy properties was simple. I wanted a little bit of passive income (it’s not much) and also reduce my tax burden. The life insurance policy is a plus.
Tangible Assets. Apartments are tangible assets that can be left behind. Dealing with securities such as stocks and shares run the risk of being affected by financial slumps, and in extreme cases they may even lose their value completely. With apartment rentals, you’re dealing with a property that remains physically in your possession regardless of changes in the economic climate, so the value of this asset cannot go down all the way to zero. This is an investment that is considered to be low risk with long-term returns.
Inheritance Tax Benefit. Rental properties can provide advantages in terms of inheritance tax. When inheriting assets, cash and stocks are taxed based on the market value at the time; however, in some cases the valuation of apartments can be approximately ⅓ of the price.
Rental Income/Passive Income. Rental income can become your personal pension. Japan is going through a period of uncertainty where people are becoming unable to rely on the provision of public pensions. As the retirement age rises, there is also an increase in people’s mistrust with regard to the public pension system. With apartment rentals, you can obtain a long-term rental income that is stable, providing you with extra peace of mind in addition to your work income, public pension and personal pension. This makes sense if you choose to stay in Japan for a long time.
Life Insurance. Peace of mind even in unexpected events. Mortgages and group credit life insurance policies come as a set. In the case of an unexpected event, any remaining debt is repaid, leaving the property as a debt-free asset. Basically, if you die, the remaining debt is wiped out and your family/spouse gets the property.
Tax Reduction. Any expenses can be declared as necessary expenses. For taxation purposes, necessary expenses are allowed in the management of apartment rentals, and in some cases these can allow you to enjoy reductions in income tax and municipal tax. In particular for individuals earning 9,000,000 yen or more, it serves as a good tax hedging strategy.
A Japanese Tax Law Quirk
Unlike the United States, the tax law in Japan does not limit passive loss deductions. This means that depreciation deductions for a rental property can be used to shelter other ordinary income in Japan. Since income tax rates quickly hit 33% and go as high as 40% in Japan, depreciation deductions produce large cash tax savings for investors.
Another key difference is that the Japanese law allows a 5 year write off period for rental properties that were built using wood more than 20 years ago. The reason for this very generous schedule seems to lie in the nature of wooden Japanese buildings – they are typically torn down and rebuilt after 20 years. Although the law is written with Japanese property in mind, the same schedule would apply to any rental property built from wood.
Japan vs. Overseas
A bit more on the tax breaks, as it’s probably one the most relevant points for people interested in this (at least it was for me). Interestingly, if you are a resident working and living in Japan, this tax break actually applies to properties overseas, too. This is a double bonanza for investors in Japan.
For example, the typical property in California was built of wood over 20 years ago and thus qualifies for accelerated tax deductions under the Japanese tax rules.
Although it’s challenging for overseas investors to purchase and manage property, there are a host of real estate investment firms that help locate properties and manage the process for you.
It’s possible to use depreciation (with properties as well as other assets like cars) to reduce your income tax burden. In Japan it is only possible to depreciate the building, not the land. When purchasing a new structure, often the breakdown is given. However, when purchasing a second hand property it is not clear how much can be declared as building value.
One way it to look at the possession tax valuation of the building and land and take that ratio. Another option would be to use the Rosenk for the land valuation. When a property is sold, capital gains tax will have to be paid over the difference between the sales price and the book value. As depreciation reduces the book value, it will increase the capital gains tax when the property will be sold.
To calculate the depreciation you can depreciate the building in an amount of years, depending on what type of structure it is. This is called the ‘useful life’ in Japan.
|Building Type||Useful life|
|Steel frame reinforced concrete buildings or reinforced concrete buildings||47 years|
|Brick, stone or block construction||38 years|
|Metal construction (thickness of internal frame exceeds 4 mm)||34 years|
|Metal construction (thickness of internal frame exceeds 3 mm)||27 years|
|Metal construction (thickness of internal frame is 3 mm or below)||19 years|
|Wood or wood composite construction||22 years|
|Wood frame mortar construction||20 years|
Foreigners living in Japan for less than five years in the previous ten are taxed only on their Japan source income and any income they remit into Japan. Therefore they should invest in properties located in Japan.
- Bob buys a property in Japan for JPY100m (possibly a 3LDK in central Tokyo). The building is made of wood and is more than 22 years old.
- The value of the land JPY40m and the structure is JPY 60m.
- Bob rents it out at JPY 2m per year.
- Under Japanese tax law, Bob can claim JPY15m as a depreciation expense over the next 4 years. So he will make a loss of JPY13m every year for four years.
His taxable income is JPY 40m so he will pay about JPY 18 million yen in tax.
By including this property in his tax return, his taxable income will be reduced to JPY27m, and his tax bill will be JPY 10m (rough estimate). Therefore by investing in this property he will save JPY8m in tax each year for the next four years.
Now, let us look at a slightly lower property and how it works out good for tax liabilities as well.
- Property 40m yen. (2-3LDK)
- Taxable income 8m yen.
- Tax 3.6m yen
- Value of land 16m, value of structure 24m.
- Rental income 1m per year
- Depreciation allowed 6m yen
Taxable income reduced to 3m yen and tax = 90,000 yen. Savings of tax almost 3m yen! Statutory useful lives vary depending on the material and its use (commercial versus residential).
- Wood is 22 years
- Brick is 38 years
- Concrete is 41 years
The six steps to real estate investment in Japan
The process more or less looks something like this:
- Prepare your financial plan
- Search real estate properties in Japan
- Visit Japan and check properties
- Sign the purchase & sales contract
- Pay and complete registration of your properties
Prepare your financial plan
- What is your budget ?
- Costs of purchasing real estate in Japan
- Stamp duty, loan fees, Insurance premiums, property registration tax, registration services fees, property tax, brokerage commission, real estate acquisition tax etc.
- Total costs will be 6-8% of the price of real estate
- Costs after you purchased real estate properties: Property tax, city and planning tax, Income tax, utilities, property management fees, reserve funds for repairing
- Costs when you sell real estate properties: Stamp duty, capital gain income tax, brokerage fee
Search real estate properties in Japan
- Search on the internet to have a rough idea of Japanese market
- Decide which area you want to purchase
- Contact certified real estate broker
- The most important point is find a reliable real estate broker
Visit Japan and check properties
- Check property itself : e.g. sunshine, natural ventilation, noise etc.
- Visit site under the different conditions: Morning, evening, weekday and weekend
- Check the environment: School, supermarket, public safety, access to central, area, neighborhood, commutation (jam-packed train!)
Sign the purchase & sales contracts
- Application to purchase a property
- Negotiation with seller about purchase price, terms of payment and delivery date
- “Explanation of Important Matters regarding the property and transaction” by broker
- Signing the Purchase & Sale contracts
- Advance payments (10%~20% of the real estate price)
Payment of outstanding balance and real estate taxes
- Complete the registration of your property
- Ownership of real estate property must be registered at Legal Affairs Bureau
Appoint a tax agent/representative
- If you purchase real estate properties for investment, you need to appoint tax agent to handle tax administrative works. Tax agent can be anyone who live in Japan. Then you need to file income tax return by March 15th of the next year.
Why Real Estate Investment is a Bad Idea
Even though I’ve just spent all this time talking about why Japan is a good place to invest, nothing is without its risks. Japan’s economic and real estate situation is unique and unlikely most other countries. Often if you’re not on the ground, living/working here, it’s going to make things a lot more difficult to wrap your head around. The same risks apply to Japan as other places (repairs, hidden costs, etc.), so I’ll list those out along with those that are unique to Japan.
- Repairs. Repairs pop up unexpectedly (fence needs replaced, toilet bowl broke, laundry machine broke and needs replaced, hot water tank needs replaced, list goes on and on and on). Eventually things need to be remodeled, carpet replaced, update kitchen cabinets, etc. The other month the AC broke in the sweltering Tokyo summer, which cost about 30,000 yen for one of my properties.
- Tenets. Japan has a declining population and new apartments are still being built, so renters have options to move around. If your property is not in a popular city — Tokyo or Fukuoka, two of the only cities where population is increasing — you run the risk of having vacancies for weeks or months. Vacant units hurt, as there’s no income but you still have to pay expenses (mortgage some utilities as you can’t turn off electricity if showing to prospective tenants). This is a big deal. If you don’t have the money to pay the rent while you have no tenets, you’re going to be in a very tight spot.
- Natural Disasters. Japan has more than its fair share of natural disasters, many of which can affect (or destroy) your property. Insurance may or may not cover you — definitely worth looking very carefully at the fine print.
- Maintenance Costs. One reason houses fall apart after thirty years in Japan is that many people don’t carry out repairs and maintenance. Weatherproofing, termite coating, roof or exterior replacements may all become necessary at some point.
- Liability. In Japan you cannot just give the property to the bank and walk away. You are liable for the remaining amount of the loan, minus whatever they can get from selling the property.
There are some real estate firms who have started to accept cryptocurrencies like BItcoin as a form of payment. Japan has one of the most regulated but also most progressive policies on bitcoin, and it’s considered legal tender. The most popular bitcoin exchange, insured by the government, is bitflyer.jp
How to Invest:
Fees Associated with Real Estate Purchase
Managing Rental Income in Japan https://resources.realestate.co.jp/buy/faq-buying-managing-rental-income-investment-property-in-japan/
Investment options in Japan https://yourjapanproperty.com/real-estate-blog/best-ideas-for-real-estate-investment-in-japan/
Mortgage Loan calculator
Japan Tax Calculator
How to get a mortgage in Japan
A list of real estate terminology https://yourjapanproperty.com/real-estate-blog/japanese-real-estate-terms/
Broadbrains. This is the property management and real estate investment firm I went through when I purchased properties in Japan. Their CEO, Sakurai-san, has been in the industry for a while and deals with single room apartments only in the Tokyo area. The reason I went with them is because I didn’t want to deal with the hassle of finding tenants, managing the property and so forth — the costs are transparent and they basically take care of everything for you. Their English is questionable, so you should have some grasp of Japanese or have a Japanese friend that can help you out. You can contact them below:
Here are a list of professionals in Japan that you should know about.
- Certified public accountant (会計士 Kaikeishi)
- Tax accountant (税理士 Zeirishi)
- Lawyer (弁護士 Bengoshi)
- Judicial scrivener (司法書士 Shihoshoshi)
- Administrative scrivener (行政書士 Gyoseishoshi)
- Patent attorney (弁理士 Benrihishi)
- Social insurance consultant (社労士 Sharoushi)
- “士 (shi)” means “Samurai” in Japanese.
- Licensed professional is also called as “士 (shi)”
- For example, lawyer is 弁護士(Bengo-shi), and CPA is 会計士（Kaikei-shi)
*Disclaimer: I’m not a lawyer, accountant, or financial advisor. That means I don’t know exactly what will work for you, and that I’m not liable for the result of anything you choose to do based on what you’ve read (although I do think you’ll get a lot from it). My goal is to share what I’ve learned from years of experience, including my own mistakes. My only request is that you consult with a professional before making any big, potentially life-changing decisions.