Many investors have turned to other industries to strengthen their portfolios when international equities markets suffered in 2022. The promise of reliable, albeit modest yields has attracted a lot of interest from foreign investors in Japanese residential real estate in recent years.

Then came the 2022 yen bombshell. The US Federal Reserve began raising interest rates three times in a row in July, each time by 75 basis points, which caused the yen to plunge versus the dollar.

The US dollar and Japanese yen traded at an average exchange rate of 109.46 in 2021. The average rate increased to 131.46 in 2022, a decline of nearly 16.8%. The US dollar to Japanese yen exchange rate hit a low of 150.1288 on October 20. For those wishing to invest in yen-based assets like rental apartments with US dollar holdings, this has been a bonanza.

In line with the historical exchange rate fluctuation that took place in the second half of 2022, Real Estate Japan has noticed an increase in the number of queries on properties that are for sale across the country. Investing in Japanese residential real estate has several good arguments in favor of it. There are risks to be aware of, of course.

As one of Real Estate Japan’s partner agents, we have listed the top five hazards associated with investing in Japanese residential real estate below:

Risk of Vacancy: One of the major hazards associated with investing in a rental property is that it won’t be instantly rented out or that it will be empty for an extended period. As an owner, you will lose your source of income and be forced to spend more money advertising to find new renters.

The risk of vacancies may rise at particular seasons of the year. For instance, if you purchase a home during a time when rental demand is low, you might discover that you are unable to rent it out right away and must carry the mortgage, property management costs, and reserve costs until rental demand picks up. Vacancy risk can also be impacted by local market conditions.

For instance, the closure of a college campus would undoubtedly have an impact on the demand for rental properties in the neighborhood, leading to a greater vacancy rate for student housing.

GA Technologies also runs a property management company in addition to being a real estate firm. With an average stock turnover rate of 29 days, GA Technologies claims that its facilities have an occupancy rate of roughly 99%.

Rent payment delays could happen: The return on your investment will be impacted by a late rent payment as well. When this occurs, you should either speak to the tenant personally or write a notice for payment as soon as feasible.

It is quite advantageous for you to have a local property manager working on your behalf if you are an international investor in this case.

The potential for costly repairs: Buildings become less livable as they get older. The plumbing, outside walls, and common halls will eventually need to be repaired, rebuilt, or remodeled. Therefore, it is a good idea to account for repair costs when calculating your profit and loss while creating an investment strategy.

To cover potential major building repairs, Japanese condominium owners are required to pay monthly repair reserve fees.

As a building age, more and more parts will need to be renovated, which will lead to an increase in repair reserve expenses. When initially calculating the cost side of the equation, some investors neglect to adequately account for this risk.

Potential for rising interest rates: You run the possibility of higher interest rates, which would raise your monthly mortgage payment if you pick an adjustable-rate mortgage. Interest rate increases will be accounted for in a solid financial strategy!

Nature-related disaster risk: In Japan, landslides, tsunamis, and earthquakes are common. While it is strongly advised, homeowners in Japan are not forced to purchase flood or earthquake insurance; nonetheless, they are still required to purchase fire insurance.

You should do your due diligence before purchasing a property in Japan and be aware of the potential dangers of the neighborhood experiencing several types of natural disasters, such as landslides, earthquakes, or flooding. You will be informed of this information as part of the explanation of critical issues, and you may also find it on danger maps published by the local government.

How to reduce investment risks: To reduce the dangers of investing in an investment property, GA Technologies suggests that investors take the following actions.

Pick a reliable management firm: In Japan, the majority of investors in residential real estate delegate actual property management to a PM firm.

You should pick a management business that has a track record of successfully finding renters, resolving a variety of tenant difficulties and complaints, and, most crucially, negotiating with tenants who are late on their rent payments.

You should think about choosing a management business that has expertise acting as a seller’s agent if you intend to sell your property in the future.

Last but not least, remember to factor in the cost of property ownership, which includes the property management fee, in your calculations.

The place is important: In real estate, location is everything. Renters choose houses in Japan that are roughly ten minute’s walk from a rail or metro station. The vacancy rate will typically be lower for a property close to grocery or convenience stores, hospitals, universities, parks, and business centers.

The demand for properties in areas earmarked for renovation will increase in the future. If you invest in a neighborhood before a redevelopment project is finished, the property might appreciate and have a decreased risk of going vacant as the community becomes more handy and modern.

Think about all of your investing expenses: Here are just a few examples of the principal costs to consider when investing in a rental property.

  • Fee for property management
  • Reserves for repairs
  • Building maintenance charges
  • Insurance for earthquakes and fires
  • Asset-based tax
  • Tax on city planning
  • Technology AG

A bilingual real estate agent and property technology business with headquarters in Tokyo is called GA Technologies. They specialize in using their own proprietary AI to choose homes with high ROI potential, and they offer a vacancy income guarantee for all of their properties (occupancy rates above 99%).

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