Vacancy risk: Risks in private real estate investment in Japan (Part2)

Vacancy risk
Previously I discussed the defect risks when you acquire the property.
Today I will discuss the risks while you are owning the property.
In fact, there are several challenges while you own and manage the property.
Vacancy is one of them.
Vacant rooms obviously do not generate any income so it is very important
to fill your property (whether it is a rental house or a small multiunit rental property) with good, rent-paying tenants.
However in practice, you will see vacant rooms for certain time period over the years and there are tenants who don’t honor the leasing contract.
Let’s look at the ‘vacancy risk’ and how to mitigate such risk.
The beauty of real estate investment in Japan is that your can expect very
stable income every month. Rents are usually  paid monthly.
Therefore finding stable trustworthy tenants is a key for success.
However, due to certain reasons such as inconvenient location of the property,
Investors may face the situation where the property being vacant.
If your occupancy rate is very poor, you may have the problems to pay back
the loan. That is the ‘vacancy risk’.

What kind of property is likely to be vacant?
First of all, let’s know about properties that are likely to be vacant.
In general it is said that the following properties are likely to be vacant.
-Location is not good,  such as being far from the nearest station
(Remember unlike other world-class mega cities, majority of people who live in big cities in Japan usually commute by train or subway)
– It is not being maintained regularly and “The building is stale”
– The layout and facility of the room are not updated  and doesn’t meet
the current needs of targeting tenants.
-There are no supermarkets and convenience stores nearby
-Living environment is not good.
What property is more likely to be resistant against vacancy ?
In general,  the following properties are unlikely to be vacant.
-Property with good convenience
-Property in the place where the rental demand is existing.
-Property that can be differentiated from competing properties
-Properly managed and maintained well
Let’s take a closer look.
1. Property with good convenience
It’s a good idea to pay attention to routes that pass through the area where many large companies are lining, such as within 10 minutes walk from the terminal station.
In addition, it is expected that the aging society will advance in Tokyo.
The number of aged people living alone will also increase.
They usually wish to live in a convenient place in the city center close to hospitals and commercial facilities.
The demand for city center is ever-increasing.
2. Property in the place where the rental demand is strong.
Rental needs are evident where people live or work.
I know it sounds too obvious but please be reminded that recently in big cities such as Tokyo or Osaka, people have a tendency to live close to
their office. Young couples in 30s and 40s hate long commuting these days.
In that sense , in Tokyo special 23 wards would be the prime local for the investment.  There are many commercial facilities and amusement facilities, and the number of headquarters of the large companies are located.
It is fair to say risk of vacancy in Tokyo 23 wards is limited.
In addition, we are seeing increasing number of foreign students in Tokyo that should contribute to the low vacancy rate.
3.  Properly cleaned and managed property
The property that is cleaned up and properly managed keeps good-looking
and stands. It naturally looks better than comparable properties.
The Reason making a difference is often depending on the quality of management company. The property management company can be responsible for all operations including marketing (leasing), tenants selection,
rent collection and maintenance of the property.
Therefore Hiring a good management company is a key for success.
In the meantime,  let’s see how to mitigate the ‘vacancy risk’.

Vacancy guarantee service (in other words, sub-leasing contract)
There is the vacancy guarantee service widely available called
“vacancy guarantee service” often offered by the rental management companies and or private guarantee companies.
a. What is vacancy guarantee service ?
The vacancy guarantee service is a system whereby the rental management company guarantees fixed rent regardless of occupancy of the rooms.  It is also called subleasing. If you do not want to see any vacant room,
you can earn stable rent income every month.
b. How much is the cost to guarantee the rent ?
The vacancy guaranteed rent is often about 80% to 90% of the full rent (the actual rent with the tenants).
For example, if the full rent is 70,000 yen, due to the vacancy guarantee, the monthly rent which is guaranteed shall be 56,000 yen to 63,000 yen.
For those who cannot take any vacancy risk, hiring a vacancy guarantee company can secure the peace of mind
while paying 10-20% cost.
However the counter part risk (solvency risk of the guarantee company) must be taken by the owner.
So you need to check the credibility of the guarantee company before you entering into the 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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