Introduction

Overseas real estate investors are looking for the best opportunities in the world, where prices are low and returns are high, among other criteria. So, why choose Japan? What you might not know is that unlike many countries, there are currently no laws or regulations in Japan prohibiting the purchase of real estate by foreigners. This allows 100% ownership of deeded, freehold property, registered to a foreign address.

To help you understand what to look for when purchasing property in Japan, I am providing a series of deal analyses in which I present a sample property and the various factors which contributed to the successful sale. This is the second in the series.

In this analysis, I use the popular purchase of a one-bedroom unit in Fukuoka city’s most populous district of Higashi-ku, meaning “east ward.”

Higashi-ku. Fukuoka City, Japan (Click for Image)

1 Bedroom + Living Room/Kitchen Area and Balcony 20.65 sqm

2.95 mil JPY (app. $24,500 USD) | 9.45% yield (net pre-tax)

Nippon Tradings International

Location, Location, Location

Overseas investors look for locations which attract tenants - safe area, close to transportation, leisure and shopping. The ward of Higashi-ku has a population of 296,576 with no shortage of tenants. In this example, the property is close to the Kyushu University Academic Medical Center and Fukuoka Institute of Technology. The ward is also home to the city’s Korean Elementary School. The building itself is close to a park, supermarket and local shrine.

Higashi-ku takes pride in its 400 public parks, set in Fukuoka’s greenbelt area, deemed safe for recreation. One of the largest parks, Maidashi Ryokuchi, was land formerly occupied by an abandoned railway. The park has been designed as a children's playground with a public water fountain and a barrier-free nature trail, enjoyable for older adults as well as students from the nearby Fukuoka Junior High School.

Of interest in the area is Hakata Bay. On the bay lies an artificial island, “Island City,” on which the tallest building in Fukuoka, known as the Island Tower Sky Club was built - a 145 metre, 42-storey skyscraper. Also of interest, with the Hakata Bay in the background, visitors enjoy the local aquarium featuring dolphin and sea lion shows, as well as a display of sea otters, spotted seals and more than 120 sharks of 20 different species.

Property Type

Unlike the U.S., U.K. and other countries, properties in Japan are often purchased within a few days of listing. In Japan, namely Fukuoka and other popular cities, the most attractive properties only remain on sale for a day, or sometimes even just a few hours.

Small properties with one or two rooms and a kitchen/kitchenette are an investor favourite because a smaller unit means lower maintenance and renovation costs, low property taxes and higher return from rental income. Plenty of sunlight shines on this unit’s south facing balcony, and the toilet and bath are separate, rare and popular features attractive to tenants.

The unit is extremely affordable, at approximately $24,500 asking price. The property tax is approximately only $193/monthly, with building management and accumulated funds approximately only $92. Insurance is shockingly low at less than $1.50/month. For this surprisingly low cost, your income is approximately $206 (net pre-tax)/month.

Building Profile

Hhere are building factors taken into consideration when this unit was purchased: the 52-unit building, in this example, was built in 1990 – after the latest earthquake resistant building standards were updated (1981). The building maintenance report shows that it has been well maintained: 2015 – mobile/wireless antennas replaced; 2012 - intercom system and water supply pump replaced; 2007 – exterior entrance renovated, mailboxes replaced, and cracks on the exterior walls repaired; and most importantly, 2001 to 2002 – exterior walls renovated, repainted, restrengthened and the roof re-waterproofed – a most comprehensive and costly renovation, which guarantees these items will not be required again, at least until 2020-2025 at the earliest.

 A well-maintained building mitigates the risk of any unexpected and sudden renovation debt or hike in building fees. Investors look for sufficient accumulated funds in its reno/repair pool or sink fund, as it is commonly known in the U.S. As of Feb. 2015 the accumulated funds shows a sufficient budget of 16.58% of the purchase price per unit available for additional repairs.

Tenant Profile

Tenant stability ensures secure cash flow for an investor and there is no shortage of tenants in Fukuoka. In this example, we have an ideal situation - the tenant of this particular unit is a single 26 year old male who has been residing in the unit since March 2013. Likely the tenancy could become long-term. Additionally, to the investor’s benefit, the tenant secured his tenancy with a personal guarantor.

Summary of Investment Advantages in this Example

• Even at a high yield of 9.45% annual yield net pre-tax, the investor benefits from a safe, relatively low risk investment.

• The modern, developed city of Fukuoka attracts investors for both, quality of living, and a lower cost of living than Osaka and Tokyo, and is one of Japan’s fastest growing cities. The ward of Higashi-ku is Fukuoka city’s most populous.

• Tenants are attracted to the location of this unit, in the vicinity of universities and schools, close to parks and near a supermarket. The nearest train station is only a walk of approximately 13 minutes.

• A smaller unit means lower maintenance and renovation costs, low property taxes and higher return from rental income.

• The building is well maintained with no immediate need of renovations and has adequate accumulated funds for repairs, if and when the need arises.

• The unit is occupied under a stable, possibly long-term tenancy, with securities in the form of a personal guarantor.