Unpaid rent risk : Risks in private real estate investment in Japan (Part3)

Obviously, getting tenants is a prerequisite for making money from your rental property. However, getting just any tenant does not guarantee your investment.
If you get bad tenants, you run the risk of your rent not being paid on time while repayment for loan and maintenance costs being accumulated.
Additionally, depending on how bad your tenants are, your rental property might get more damaged that normal use.
If you have a really bad tenant, you might even have to deal with an eviction.
Today I will discuss the risk of rent being unpaid and how to eschew the risk.
If you own investment real estate, there are expenses you have to pay monthly.
・Payment of administrative expenses · repair and maintenance.
・Monthly repayment for loan
If there is rent income properly every month
you can pay the above cost from the rent, but once the rent is unpaid your income statement will become negative.
How to deal with unpaid rent ?

There are two main measures to avoid the risks of not having unpaid rents in Japan.
1. Ask payment guarantee by the management company or the guarantee
company
2. Make sure you conduct your due diligence on the tenant to ensure they have the
financial background to make all the agreed upon rent payments.
Let’s take a closer look.
1. Ask payment guarantee by the management company or the guarantee company
Each payment guarantee company offers the different terms.
Some offers the service only for credit risks at time of the default.
– Duration for the guarantee
The period of change by the management company will differ, but in most cases, it is about 6 months mostly, some companies will change it for 12 months. Also, instead of rebuilding, you can also ask residents to pay for them instead of owners.
– Any exception?
In the case of “Owner change property” which you bought from the previous seller while the rooms are already leased, there may be cases where the guarantee period is shorter.
Because the owner change property does not necessarily assume the
terms and conditions the payment guarantee you contract.
If you buy the real estate as “Owner change property” , please make sure
the existing payment guarantee company is involved and check
the terms of the contract.
– What are the cost of using the payment guarantee company?
Every thing costs and it is not cheap.
Generally it will cost 5-6% of monthly rent.
2. Make sure you conduct your due diligence on the tenant to ensure they have the healthy financial background to make all the agreed upon rent payments.
Landlords in Japan are allowed to check a tenant’s financial solvency by requesting
a copy of their pay roll showing their income.
Many owners also request a joint guarantor by their relatives.
Get all these documents before signing any lease agreement to make sure the tenant is reliable.
-What are the risks of tightening the tenant selection ?
The disadvantage of tightening the selection is that
your vacancy rate may go up.
Potential tenants may hesitate to sign in because of the strict rules you set.
Keeping a good balance is important.
Tenant rights in Japan are well protected by the law
and contain clauses that limit landlord rights.
As a countermeasure to the aftermath, you will have to go to the local court, file a notice, schedule a court date, show up on that date, empty the property, and repair it. Actually, evictions are very costly and time-consuming procedures.
Thus, it is crucial that you do everything possible to choose good tenants.
Here I illustrate the general Eviction process as follows.
1.Putting on the official reminder for the payment
2.Official notice of cancellation of contract
3.Prosecute for building eviction judgment
4.Petition for enforcement
5.Forced enforcement (forced eviction by law)
What is the cost of eviction ?
If you have contract with a guarantee company,
usually the guarantee company will pay all the expenses.
If NOT, the landlords must bear the cost.
There are three major expenses.
-Attorney fee
-Actual cost of trial (judicial cost)
-Assistance in execution
Q:Can we evict a bad tenant without hiring a lawyer?
It can be done without a lawyer.
However, because it is so troublesome for a foreign investor,  I strongly recommend to hire a lawyer.
Q:How much is the attorney fee?
It varies and usually in the range between 200,000 yen to 800,000 yen per case.
Q:How can I find a lawyer?
Ask your broker or property manager.
Or you can easily find a lawyer on the internet.
Q:How much is the judicial cost ?
If the property is about 100,000 yen in rent in Tokyo, 100,000 yen to 120,000 yen will be a standard rate as actual expenses to pay the court.
Q:How much is assistance in execution ?
Cost is in the range of 200,000 yen to 300,000 yen per room.
Q:How long is does it take to evict a tenant ?
It usually takes about three to six months.
Conclusion
To try to avoid the risk of having bad tenants, go through the process of selecting tenants carefully. Please make sure you get some sort of guarantee by the third party and consider hiring a payment guarantee company to get the peace of mind.
They can save your time and cost.
Having bad tenants could give you a serious head ache.
Please note you have a counter part risk of the payment guarantee company.
Sub-leasing contract
Toshihiko Yamamoto
Real estate investing consultant and author.
Toshihiko is currently writing a book about the real estate investing in Japan
for foreign investors.
Founder of Yamamoto Property Advisory in Tokyo.
International property Investment consultant and licensed
real estate broker (Japan).
He serves the foreign companies and individuals to buy and sell
the real estates in Japan as well as own homes.
He holds a Bachelor’s degree in Economics from
Osaka Prefecture University in Japan
and a MBA from Bond University in Australia 

 

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