If you happen to buy a property report from us, we are pleased. What we love even more is when customers take the time to send us some feedback on their success or failures. One of my customers bought our Philippines report, so I was pleased to have the opportunity to ask him about his progress buying a foreclosed property in Japan.
They bought an old house near Oota station, in Tokyo-ward. He bought this house 18 months ago (Jun 2009) for Y6 million ($US60,000); Y5.5 million being the nominal value of the land lease and Y0.5 million for the old house. The house is 75m2 in floor area, on two floors, and occupying 40m2 of land. This close to the city residential lots are significantly smaller because land values are far higher. They bought the property with a 20-year land lease due to expire in just 5 years at a fixed lease fee of Y3,000 per month. They were able to extend the lease for a further 20 years at a fixed lease rate of Y4800/month. i.e. Just 5% of the rental cost for such a property. This is a good deal for 2 reasons:
1. The lease rate looks like a significant mark-up but it was fixed for the last 20 years
2. The new lease rate of Y4800/month is fixed for 20 years, which is very attractive when you consider the prospects of inflation in Japan. People are so accustomed to low inflation, they have forgotten how savage inflation can be.
3. Rather than absorb a Y200-300,000 lease renegotiation/contracting fee, they agreed to incorporate the fee in the monthly lease rate.
Buyer: "We would have preferred to own the land, of course, but houses (including land) are rare in this location and expensive in the foreclosed market. The Japanese consider land ownership as very important. So competing for house and land packages in good areas is not an appealing deal".
"The lease rates [for land] are cheap and the rights of the the leasee are very strong. We could destroy and rebuild, and rent the house without asking for permission".
The auction required a minimum bid of Y5.5 million, and they won with a bid of Y6.0mil. They were the only bidder. They believe they would be able to rent the house for Y125,000/month, at a nominal yield of 25%. The place did need some minor improvements, like fixing the drains and repairing wallpaper. Some of the floor boards are not properly leveled, and there is a ventilation problem as a result of a neighbour's extension to their house. These issues would cost Y1.2 million to fix. This would reduce the effective yield to 20.8%, however they are happy to live there in the interim. In the West, properties so close to the city will sell with a yield of 2-5%, and yet in Japan, they were able to buy a place with a yield of 20.8%. This will mean rental income (or 'rent replacement') will pay the house off in 4-5 years. The house is 46 years old, and was valued at just Y0.5 million ($5,000) in the auction documentation. Of course many Japanese are prepared to pay Y30-35 million ($350,000) to build/buy a new home. Such is the premium paid for new homes with land. Of course they offer a nicer, modern ambiance, but many people spend their day outside, so they might question this price premium given its value depreciates. Some would prefer to pay just $5,000 for a house. The issue is whether the house is livable for not just the five years (until to pay off the house cost), but for the lease period, as the owner could require you to destroy the house (Y2mil perhaps in the city) at the end of the lease period. The lease period is therefore very important. These buyers were able to extend for 20 years at the new lease rate. You need to decide whether you are there for the long term. Does the lease term justify building a new house? Or will you be stuck in the short term potentially with a house you don't want to live in, that is too old to rent or which you cannot afford or justify fixing up. The lease period and your capital are the critical issues, however your relationship/visa status and language skills might also be issues. Professional people are much more likely to speak English. I met a Building Project Engineer who spoke English in my local pub.
They are 4.3km from Tamagawa Station, which is a 25 minute train ride from Shinjuku Station in central Tokyo. Their house is just 400m from a smaller train station, as well as a small supermarket, and 100m from a convenience store. They have a large open area along the river several blocks away, suitable for riding a bike or jogging. There are also tennis courts and baseball facilities there. This buyer seems very happy with his purchase and is now looking at the Philippines.
The house does not come with any car space, however they can be leased if required close to home. Many Japanese living in the inner city go without cars for this reason.
Small old houses on small lots offer economy buying. They looked at buying house and land for a nominal price of Y10mil, but after bidding it sold for Y28 million because of the competition. The moral of this story is that in Japan, its sensible to simply do something different from everyone else. There are many Japanese people who are prepared to pay too much because they are not commercially astute.
Buyer: "Japanese people are stuck to what they think is the proper normal lifestyle; graduating university, finding a girl, buying a new home. They don't consider alternatives. So its easy for people who have a different view of things".
"I highly respect and appreciate your [the author's] lifestyle. I am impressed by the amount and accuracy of your research about real estate and foreclosed property".
