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As mentioned previously, Japan has an acute lack of hotels and other lodgings, especially in major urban centers. With the Olympics and other major world sporting events coming during the next three years and the country’s surging popularity as a destination, that is a major concern.

The new Minpaku [Private Lodging] Law—passed by the government in 2016 that took full effect in mid-June 2018—is meant to help address the shortage of places to stay and bring order to an unregulated market. The concept of temporary private lodging outside of the usual places, typified by Airbnb and similar services, has so far provided a welcome and needed alternative. However, the specifics of the new law promise to have a chilling effect on such private lodgings, and will also affect the real estate industry and property investors intent on setting up such places to house travelers.

On its face, the Minpaku Law seems straightforward enough. It permits people to run minpaku by simply registering houses meeting certain criteria, with no hotel license required, thus allowing short-term housing rentals under certain conditions. Individuals can utilize idle assets such as empty houses and empty rooms for profit.

However, the law limits such home sharing to 180 days a year. Some hosts say the 180-day cap makes it difficult to turn a profit. The law has strict provisions that minpaku owners must meet. Local governments, which have final authority to regulate services in their areas, are imposing even more severe restrictions, citing security or noise concerns.

In addition, the prospect of regularly having strangers in the neighborhood puts off many Japanese. Tokyo’s Chuo Ward, where the famous Ginza shopping district is situated, has banned weekday rentals on the grounds that allowing strangers into apartment buildings during the week could be unsafe. The ancient capital of Kyoto, which draws more than fifty million tourists a year, will allow private lodging in residential areas only between January 15 and March 16, cutting out stays during the popular spring and fall tourist seasons.

In short, some renters and experts say, the new law and local regulations are doing more to hurt than help, and will likely force many homeowners to stop offering lodgings. The minpaku industry has vast potential, however, and is evolving dramatically. For example, Seven-Eleven Japan Co. reportedly launched an automated check-in service for minpaku that allows guests to collect and leave room keys 24 hours a day, a service developed jointly with Japan’s largest travel agency, JTB.

 

To Be Continued

We look for properties in suburban areas of Tokyo. There are similar places in Kansai (western Japan), but we don’t cover those areas because it is too far to visit the sites.

The key is selecting a property where you can expect stable demand for housing, meaning a region with a reasonably concentrated population base. You don’t have to worry about the distance from the station in suburban areas, by the way, because unlike people in big cities, most residents commute by car.

The goal in this type of house flipping to rent is to leverage the market distortion. The average value of property in central Tokyo is about 20 to 30 times more than that of some suburban areas of the city. However, that ratio doesn’t hold for the rent you can charge for the same property. Here’s an easy-to-understand example based on a 50-square-meter property:

Value
Central Tokyo: 60 million yen (US$600,000)
Suburban area: 3 million yen (US$30,000)

Rent
Central Tokyo: 300,000 yen per month (US$3,000)
Suburban area: 50,000 yen per month (US$500)

This is where you can leverage things. To be on the safe side, we usually target the low end of rent in the region when making the projection. That also reduces your chances of losing tenants. The goal is to consistently outperform the competition.

The prime target is a property in decent condition in the right region that could generate 50,000 to 60,000 yen in rent (after the renovation work). Otherwise your math won’t work. The properties meeting those criteria change hands quickly, so it is vital that you make a decision within a matter of days.

A typical deal
In many cases, the total investment is between 5 and 7 million yen (US$50,000 to US$70,000), including search fee, land, house, renovation cost, transaction cost and *consulting fee.

*If you locate a property yourself and flip it, obviously there will be no consulting fee charged.

Finance costs
Finance costs are usually high in the home-flipping business, and banks are not willing to underwrite a mortgage loan. Most customers use cash to finance the deal. However, let’s suppose that you can borrow the money from the Japan Finance Corporation, and manage to obtain financing for the deal at 3 percent pa over ten years.

 

To Be Continued

One unconventional type of investment is to buy abandoned houses—called akiya in Japanese. These houses are very cheap, going for almost nothing. There are more than eight million such distressed or abandoned properties in Japan. You can find great deals on these places very quickly at relatively small risk, but you have to find the right property in the right location. I’ve even seen listings for houses in Kobe, which has a population of more than one million, going for half a million yen (US$5,000).

However, akiya generate huge social issues related to safety, such as fire, weeds, pests and burglars, not to mention the effect on neighborhood property values.

If you can find one of these properties and flip it into apartments, for instance, you can make some money. The big attraction is that your initial investment is so low, say half million yen for a house and land as close as twenty minutes from a station.

 

That’s the beauty of property investment. It’s a real asset, but a lot depends on the seller’s circumstances. Even if the property has a value of five million yen, because they are desperate they’ll dump it for virtually nothing. If you’re savvy and look for such opportunities, you’ll find a property with unique attributes. You could even convert it into a Seven-Eleven shop or a parking lot and make money.

 

Here’s how it works
As I said in an earlier chapter, in the real estate business you generally make your money when you buy a property, not when you sell it. That’s because if you don’t buy the property at the right price and/or terms, you won’t make a solid profit when you sell it. This is especially true for investors hoping to flip a property, taking into account the high transaction costs.

House flipping in the U.S. is usually viewed as a short-term strategy—buy and renovate a place, and then sell it at higher value. A flipper usually needs to get out in less than six months. In Japan, however, this is not a common practice.

As an alternative, I’d propose buying and flipping akiya into rental properties. These places are naturally very affordable, and one of our business partners is actively investing in akiya. Here’s a simple strategy we recommend for this.

Where We Look
We look for properties in suburban areas of Tokyo. There are similar places in Kansai (western Japan), but we don’t cover those areas because it is too far to visit the sites.

The key is selecting a property where you can expect stable demand for housing, meaning a region with a reasonably concentrated population base. You don’t have to worry about the distance from the station in suburban areas, by the way, because unlike people in big cities, most residents commute by car.

The goal in this type of house flipping to rent is to leverage the market distortion. The average value of property in central Tokyo is about 20 to 30 times more than that of some suburban areas of the city. However, that ratio doesn’t hold for the rent you can charge for the same property. Here’s an easy-to-understand example based on a 50-square-meter property:

 

To Be Continued

 

It’s not that common in Japan to invest in houses for rental purposes. But one of the most popular investments—among Japanese investors at least—is having a small multi-home or multi-apartment housing complex and living within that complex—often with two stories.

 

A typical scenario would be somebody who has property with an old house on it. They knock the house down and build a duplex or a triplex, or buy the land and build such a complex.

 

If you build a complex and rent out everything, it will be treated as investment property only. But if your house occupies more than 50 percent of the total area, the whole property is considered as a house for taxation purposes, you can borrow money as if you are buying only a house.

 

The advantage of this investment is that the interest rate on a loan is much, much lower than borrowing for a straight investment—just 1 percent compared to 3 to 4 percent. It also gives you more options for borrowing money. This option is probably of most interest to foreign investors living in Japan, since they can build their own house and derive income from renting out the other units.

 

If you have such a property and want to sell, however, the design or structure may look a bit odd to potential buyers because of the combination of house and rental apartments, making it more difficult to sell. Issues of privacy and things like that would probably also come up. One strategy to overcome this is to renovate the owner’s part into apartments before you sell, turning it into a conventional apartment complex. You’d have to invest some money for renovations, but it’s a viable option.

 

The main house or property and the other units must be attached in some way, by the way, like a two-generation house.

 

Boutique hotels for major profit

Japan has a lot of foreign tourists visiting these days, and the country is facing a serious lodging shortage. Hotels in Osaka and Tokyo are hitting occupancy rates of almost 100 percent every day. Big companies like Nomura Real Estate have recently announced they’re going to open up new hotels all over Japan.

 

To Be Continued