Investing in real estate in Japan is not easy. Some even claim that real estate investment is not profitable at all.
Is this real? Well, continue reading and you can find an answer.
Return on investment (ROI) = (Annual Rent Income – All Costs) / (Property Price + Other Purchasing Costs)
To make an estimation of your ROI on any real estate investment in Japan, it is essential to understand all parameters involved in the equation above, especially the All Costs and Other Purchasing Costs.
Now let me go through every parameter in the equation and analyze how they influence my final ROI.
Annual Rent Income
This one is easy. Let’s say you own 1 property and your tenant pays 80,000 JPY every month. The Annual Rent Income is simply calculated as 80,000 x 12 month = 960,000 JPY.
Notice that the monthly rent is subject to change and can be influenced by many factors, one of which being the local population. According to the World Bank, Japan’s population growth rate has been negative since 2010. And there are only 2 cities with a positive population growth rate in Japan, namely Tokyo and Kanagawa Prefecture.
Less local population means less demand for housing and lower rent price in the region. Keeping an eye on your local rent price chart and modifying your investment strategy according is the only way to maintain a healthy Annual Rent Income number.
This is also an easy one. Property Price is simply the total amount of money you need to pay for a property. In Tokyo, the average property price for a new 40 m2 size RC mansion is around 40,000,000 JPY and a second handed one is around 36,000,000 JPY.
Also notice the Property Price can change dramatically, and the average property price in Tokyo has been in an up trend since 2012 until 2020 COVID seasons. In my personal opinion, the property price in Tokyo has plateaued and will remain on this level for the coming 5 years.
Other Purchasing Costs
Other Purchasing Costs mainly include the taxes and fees incurred when you purchase a property. The taxes include, but not limited to, registration license tax, stamp duty, real estate acquisition tax. And the fees may include real estate brokerage fee, judicial scrivener fee, loan administration fee, loan guarantee fee, non-life insurance fee.
Since each city in Japan may have different rates for those taxes and fees, you may want to consult your real estate agency for a simulation. FOr a quick estimation, the total amount of Other Purchasing Costs is 10%~20% of the Property Price.
This is the most complicated, also the most important, parameter in the equation. All Costs include taxes and fees for maintaining and renting a property. Taxes include income tax, inhabitant tax, property owning tax, city planning tax. And fees include repair costs, management costs, advertising costs, loan repayment costs, non-life insurance cost and tax accountant fees.
All Costs parameter plays a crucial role in the ROI equation, and it alone can decide if you can maintain a positive cashflow or not.
As a summary, maintaining a positive ROI rate is everything in real estate investment in Japan. Given Japan has strict regulations and heavy tax on real estate investment, studying what taxes and fees you need to pay and how much are the homework you need to do before putting money in any properties.