Investment properties are only as good as their tenants.

Stable and reliable rental income, increased if possible, or at least maintained as consistently as possible, over the course of an investment property's life-cycle, is the main factor which makes or breaks a portfolio - at least for the less speculative among us, who prefer to rely on monthly cash-flow, rather than on capital growth potential - which, as attractive as it may be, is always a bit of a gamble.

Making sure a property is always operating at highest and most profitable occupancy level, therefore, is crucial - and the best way to do this, is by making sure the property remains attractive to as many potential tenants as possible, and for as long as possible.

So, what does this mean in Japan?

What do Japanese tenants look for in a potential home?

Below is a paraphrased transcript of one of our PodCast episodes, published last year, in which we answer all of these questions and more.

---

A few weeks ago we spoke about selecting and screening tenants – and today we’re going to look at the other side of that coin, and talk about how tenants select properties. Or, to put it another way, the factors that make properties in Japan attractive to tenants.

Occupancy = Equity

Naturally, some of these factors are similar to what you may be used to in other countries. But in some cases, the things which make a particular type of property attractive to a particular tenant profile here in Japan could be quite different - depending on location, size, rent price, and a host of other factors.

It's therefore best not to make any casual assumptions when shopping for investment properties, because you may find that making a mistake here could be a bit costly.

The first thing to remember is that, in Japan, properties that are primarily investment properties - meaning, smaller units in older buildings, that cater mainly to low income earners, and tend to generate a higher rental yield - these properties are always priced based solely on their rental yields.

What this means in practice is that, if you’ve purchased a property which, for one reason or another, is harder to populate - meaning, it’s not easy to find tenants for that property - or if for some reason the rental income generated by that property becomes lower than it was when you first purchased it, which often happens, for various reasons – that property’s re-sale price would most definitely drop significantly as well.

Now, if you’re purchasing up-market, meaning, family sized properties and/or newer properties located in attractive neighbourhoods, well maintained buildings, etc - you may be able to sell to an owner-occupier, as opposed to an investor. In this case, rental income capacity wouldn’t be an issue, and the price would be based more on the usual property market fundamentals, at that particular location and that particular time.

If you’re buying an older, smaller property, however, and aiming for higher cashflow - that property is very unlikely to be purchased by an owner-occupier. It will be attracting interest only from other investors. In this case, you may find yourself in a bit of a pickle should its rent generating potential drop for any reason.

It’s really crucial, therefore, when dealing with investment properties in Japan, to ensure that they’ll remain attractive to tenants - at the profile and level of income relevant to that particular property.

The Golden "10 Minute Walk" Rule

One of the top priorities for tenants who do not own a car or motorbike/mopad, etc, for instance, will always be the walking distance to the nearest station, as discussed here in the past – and the importance of this one factor simply cannot be emphasized enough.

Simply put – properties that are beyond the acceptable distance of 10 minutes walk to the nearest subway, train or tram station, will always be extremely difficult to populate and command far lower rents.

Cater to the Single & Elderly Population

So, what other factors matter to tenants? Well, it really depends on the tenant’s profile. Bear in mind that, due to the country's rapidly ageing population and a growing tendency to stay single, the frame of mind should be to cater to the largest possible tenant base - which means single, elderly and usually low or medium income earners. These tenants are not all created equal, of course, but keeping in mind certain factors would contribute towards the widest possible demographic inclusion.

Single females, for instance, would avoid ground floor units, if their windows or balconies could potentially be viewable from street level – that is, unless the building is surrounded by a wall or fence, and has a secure keypad entry system installed - which is a feature single females here value dearly as well, for security and privacy reasons.

Elderly tenants or single mothers would avoid units that are located on the 3rd, 4th and 5th floors, if the building doesn’t have an elevator (any building which has more than 5 floors, ground floor included, would always have an elevator in Japan, as per construction standards and regulations).

People who spend a lot of time at home, which is rare among working people but common among retirees, disabled folk, welfare recipients etc, would prefer balconies facing south or south-east, which allow for plenty of light.

The Common Denominators

Lastly, just about everyone would prefer a property which comes with a dedicated laundry machine area setup (laundry rooms are rare in Japanese apartments, dud to their tiny sizes). These alcoves come complete with a floor drain fixture, water taps to connect the machine, etc. Buildings built prior to 1995 or so, would generally not have this feature installed in units by default, and often compensate by installing a laundromat, or “coin laundry” room on the ground floor. Using these coin-operated machines costs money though, and people tend to walk in and out of these rooms at all hours – so of course, having the option to do your own laundry freely, and in the privacy of your home, is always preferable – again, single females are extremely sensitive to this factor as well. As opposed to the other factors, discussed, however, this one is relatively easy to upgrade to - and normally would only cost 700-1,200 USD or so to install - assuming there's enough space in the unit to install it, that is - otherwise a similar arrangement can be created on the balcony, if building management allows it.

Corner units, or units located at the end of the hallway on any floor are always preferable, because they’ve got more air and light, and tenants can leave their door open without worrying about anyone passing and peering inside at exactly that moment; squarish layouts are preferable to rectangular layouts, because they feel more spacey; units without balconies, although rare in Japan, are less desirable.

Location – within the city itself, this isn’t normally a big issue as far as securing a tenant is concerned - as long as the afore-mentioned "ten minute walk to the nearest station" rule is followed. There are people living in any and all suburbs of any city, and Japan doesn’t really have “ghettos” per se – so finding a tenant would not necessarily be a problem. A less central or otherwise unpopular location may affect rent and re-sale prices down the track though.

Rents can also drop quite significantly whenever new developments are constructed in any given area, which of course does happen in the city’s most central locations as well – and lastly, in a very Japan-specific way, rents and re-sale prices also fall off a cliff if it becomes known that any units in the building have been populated by offices of organized crime – “yakuza” branches – which, surprisingly, isn’t as un-common as you may imagine.

Houses and larger units, which normally come with a parking spot or two, will generally be leased out to families, who are far less sensitive about the walking distance to the nearest station - or at least far less sensitive to it than tenants of studios and single bedroom units are.

Lastly, properties where someone has died which, again, isn’t a very rare thing in a country where the population is ageing as rapidly as in Japan, will require a Buddhist purification ceremony before they can be re-leased. The next tenant in line, who must be made aware of the death by the property manager, may be harder to source - and generally will be paying less rent as a rule.

In Summary

This may look like a lot to remember - but it's all part and parcel of the due diligence process, which should be performed on each and every potential property investment prior to purchase. We do this on a regular basis on behalf of our clients of course, but if you’re buying on your own, you may want to revert to this article for reference, before kicking off your Japanese property investment portfolio.

What are your thoughts on the criteria above? Are tenants in your market looking for similar things? Please share your comments or questions below!

Similar to this:

Is co-working and co-living Japan's next big thing?

Tokyo: Japan's capital and the world's biggest metropolis

Affordable residential properties: what’s hot, what’s not?