Blog Archives

Evaluating and Managing Properties

Have an Exit Strategy Ready

Investors often consider buying a property the goal of their business. When you buy property, though, you always have to think about your exit strategy. I recommend that investors consider an exit strategy in five years’ time. You can own a building or condos forever if you wish, but you should always consider worst-case scenarios. It seems contrary to common sense, but investors make their profit in real estate when they buy property, not when they sell.


That obviously affects your decision to buy a property. For instance, even if you can buy properties in rural areas with good financing and good yield, those properties are usually difficult to get out of.


So savvy investors always think about exit strategies. Places like Tokushima on the island Shikoku—which I mentioned in the last chapter—could offer a good yield and good financing now, but maybe in five years’ time nobody’s financing or nobody’s living there because the population is shrinking. Buying a solid property is imperative, and decides maybe eighty percent of the actual result of lifetime investment. In the balance, twenty percent always comes from the exit strategy, so you always have to think about that twenty percent of your investment journey.


Monthly cash flow is also a crucial element. Obviously you don’t want to buy property that does not create monthly cash flow. In Japan, a condo or apartment building can create income gain, which is cash flow plus capital gain. You want to find properties that create enough cash flow and also appreciate in value in five years’ time, which is a win-win.


Normally you can’t get information about cash flow from the current owners. You have to make your own forecast, which is actually not very difficult because rental prices are widely available online.


To Be Continued

Insuring Your Investment

Insurance is another key that not many property investors really pay attention to. In Japan, insurance is normally provided through your real estate broker when you buy the property.


Compared to the actual amount of money you are paying for the property, the insurance premium is rather small, but still it costs the equivalent of around ten thousand dollars to cover damage from fire, flooding and earthquakes for ten years. The premiums, however, depend on the price and size of the property.


Once you buy the insurance, it pays to review the terms of insurance periodically. It can hurt you if you don’t, as I found out when there was flooding in Chiba because of a typhoon. Water got into the ground floor of my building, which is being used as an office. It damaged computers, and the tenant complained. I put in a claim against my insurance, but the insurance broker told me this case was not covered, so I had to pay ten thousand dollars out of pocket.


As I said, it’s normal for the real estate broker to provide the insurance company, and a broker may also be an agent of the insurance company as well because the insurance company knows they deal with owners.


Since the broker is the insurance agent for a particular insurance company, he or she will naturally propose using that company’s insurance. They just propose Package A or package B, and ask you to choose. This is true of almost all insurance agents in Japan—they’re basically just sales agents, so you need to be very careful when you buy insurance in Japan.


To Be Continued



Finding the Right Property Management Firm

The fee a property management firm charges is normally equivalent to about 5 percent of the income the rental payment of the building.


Finding a good property management company is not easy in Japan, unfortunately, especially one that is comfortable dealing with foreign owners and can communicate in English or another language. I still find it hard after eight years, despite dealing in my native language, and I’ve changed property management companies a couple of times for the apartment building I own. Common issues include not returning my calls, not answering my questions properly, and occasionally plain rudeness.


I outsource daily management to them, and yet they sometimes ask questions about minor issues they should already know the answers to. On the other hand, sometimes they make big decisions without my knowledge or approval that affect my bottom line. That includes work costing ten thousand dollars, which is not petty cash.


Good property managers are very quick at finding replacements for departing tenants, which is crucial because rental properties all over Japan are in surplus, which means rental properties are competing quite fiercely. It’s a tenants’ market. If your property managers are slow and not remedying problems, tenants will just leave. If your property manager is slow in finding tenants for vacant rooms, obviously that has a negative effect on your cash flow.


One problem with property management people is that they often think you, meaning the landlord, are their only customer. You need to find property managers who treat the tenants fairly, because tenants are your customers.


For a foreign investor, especially one living overseas, retaining a property management company that needs minimal instruction and oversight is a priority, because if you’re constantly having to worry about what’s happening and you can’t go visit your building and talk to the property management company face to face, it causes worry. It’s also much easier for the property management company to just say oh yeah we’re taking care of it, but not do so.


The sad fact is that most management companies just want to get paid, and are always looking to reduce their workload. And they know owners don’t want to get involved in everyday management.


To Be Continued

Always Assess the Owners Association

Checking out these associations is imperative for potential investors. They are sometimes not very active, since investors who don’t live there may own some or even a majority of the condos, and they don’t really care about everyday stuff because they just invest the money and pick up tenants who cover their cost of the investment.


Both foreign investors and Japanese investors should do their due diligence on the performance of the association, and fund management is very important. If you buy a badly managed condo building, it can be troublesome. It would be a wise move to confirm how effective the association is and how well the funds are being managed. Nicely maintained buildings and property also create a favorable impression, and boost the value of the property.


Having a few tenants or owners who aren’t paying the management fee won’t cause major problems. Some people may have legitimate and understandable reasons for missing payments, such as tenants or owners losing their jobs or having a financial crisis. If you have 30 or 40 percent doing that, though, it can cause problems serious enough to affect the funds needed to maintain the quality of the building, such as roofing or repairs to the walls.


Bottom line: If you go to a condo building and you see that these repairs obviously haven’t been made for a while, that’s a very bad sign.


I found that some owners don’t care and don’t want to spend the money to maintain the property, so if the association announced major repairs of the roofing and walls that are normally done every ten years or fifteen years, some people are against it. People can be very stupid and selfish about the management fund. We always vote on whether to do it or not, and fortunately those people are normally in the minority.

To Be Continued