Japan Property Investment and Prospective Return

Property Investment and how to calculate assumed yield

Hello! Again!

I am Masaki Tanzawa and a licensed property management professional.

Today Let me review a basic matter about a return of investment, though it may be useless for you like a property investor.
It is most unlikely to anticipate capital gain of property investment in Japan with a few exceptions, as I have touched on last time.
Then it will be inevitable to expect profits from income gain by renting out or subleasing.
There are two calculation methods to find “return (or yield)” aiming for income gain.

1. Gross rate of return

2. Actual rate of return

These are world-common matters of return of investment in case of income gain.

And also, it is common that “Actual rate of return” is calculated taking into account various administrative expenses and taxes deducting from annual rent income.

Then what are administrative expenses and taxes in Japan?

Let me see them as annual expenses in the case of a room of condominium.

1. Management fee (Common charge)
2. Repair reserve fund
3. Property tax
4. City planning tax　(if any)
5. Agent fee
※　Initial cost and room renovation expenses are not included in the above.

Management fee
The cost regularly (monthly) collected to be used for building maintenance or partial repair
(average is $100 – $500/month for each owners)

Repair reserve fund
The deposit regularly (monthly) collected to be used for mainly large-scale repair
(average is $100 – $300/month for each owners)

Property tax
Local tax imposed on owners of property (standard rate is 1.4%)

City planning tax
Local tax for city planning or land adjusting project imposed on land owners when living in “Urbanized area” (up to 0.3%)

Agent fee
Agency cost for rent collection and other management liaisons
(average 2 -5 % of monthly rent)

Average yield (general view)
Gross rate of return in Tokyo Central Area 5 – 8 %
Actual rate of return in Tokyo Central Area 4 – 5%

Generally there are more properties with good gross returns, particularly second-hand condos in the Tokyo Central area, as I have been saying so far.
Having said that, it needs to look carefully, not just surface.
The following items should be considered before purchase.

1. Real yields are an indicator for more accurate profit returns.

2. Peripheral market price is referred to rent setting.

3. Vacancy risk needs to be taken into account.

4. Professional inspection in some cases should be conducted.

I would help you for the above to find preferred properties and keep good management.