How to purchase a property in Japan?
It’s difficult enough to know how to go about buying a property in your own country. To help you make this decision, below is an article with an expert in purchasing properties, Tony Collins, who works for IFG Asia Mortgages.

For a foreigner, buying a property in Japan can be a confusing, difficult and frustrating experience if you don’t know how to approach it. According to Tony Collins, IFG make the whole process a less daunting task by helping to arrange property finance based on each individual’s needs. With a good understanding of what the Japanese banks require, IFG help you to tailor your application to greatly increase your chances of obtaining a bank loan. In addition to arranging property finance, IFG also provides advice on the purchase process and how it works, whether or not they think it is a good idea for you to go ahead with a purchase, tips and advice on how to purchase a property and the various ways to evaluate properties.

Interview with Tony Collins of IFG Group, January 30, 2008

Tony Collins is a mortgage adviser for IFG Asia Mortgages. IFG Group was established in 1989 and has been operating in Japan since 2004. The core role of IFG is to help people get loans; they also offer advice and assistance to foreigners wishing to purchase property in Japan and other investment services.

What general advice would you give people who are looking to purchase a property in Japan?

The type of place you purchase will depend on the reasons why you want to purchase a property. I recommend putting pen to paper and writing down all the reasons as to why you wish to purchase a property. This will help you to better understand your own reasoning behind your decision on whether to buy or not.

First ask yourself two important questions
1) do I want an investment property? OR
2) do I want to a residence?

Your answer to these questions will influence your decision on your purchase. If you are purchasing because you want a place to live in and stay a while, your considerations will be more a personal selection than if you looking for an investment property. If you intend to live in the property for a long time, you will be saving on the rent, which makes the decision a lot easier. If you intend to live in Japan for more than 5 years I generally recommend purchasing a property as opposed to renting.

There are personal and market considerations. Make sure you choose a unit which is suitable now and the future. If your job is likely to change, make sure you can rent or easily sell it. In terms of preferred location this will obviously differ from person to person. For example, one person may want to live in Yokohama near sports facilities while others may want to live near Roppongi to enjoy the night life. Some may just want something cheap.

You don’t have the safety blanket of knowing that you are saving on rent if you are only purchasing the property as an investment, so the risk is greater. If you are looking for an investment and do not feel the asset is going to increase in value then you are better off not purchasing. A simple question to ask yourself is “Can I get a better return than the cost of the loan?”. Last year there were some increases in property prices, making it more difficult to achieve positive yield (positive yield means you are making more money from renting your property out compared to the total of your borrowing and other costs). If one is buying then a longer term commitment is required, so it could be a costly mistake if it doesn’t suit your purposes.

Is there any law against foreigners buying houses/apartments in Japan?

There is no law or legal restriction against foreigners buying a property in Japan, either as a non-resident or resident. The biggest problem for foreigners and especially for non Japan residents buying property in Japan is getting the loan. If you have been a resident of Japan for some time (at least 2-3 years) it helps with the loan application. A stable income and time at the same company for at least three years dramatically increases your chances of getting a loan. Those who have a Japanese spouse will also find it easier to get approved for a residential loan.

It’s important to note that tax treatment differs depending on who purchases the property, where they are resident and over which term the property is held. Acquisition tax is reasonable in comparison to other countries, which is based on the taxable value of the property. Get the property tax value from the tax office and ask for an assessment or a judicial scrivener to help. Tax on sale is important to check and is cheapest if you hold the property for 10 years and are resident in the property at the time of sale. Please ask us for more information and we can help or refer you to a tax specialist for formal advice.

How do non-residents of Japan go about purchasing a property?

If you are a non-resident it is necessary to set up a special purpose company through which their real estate properties are held. This used to be done through a Yugen Gaisha (or YK) which are now obsolete. There are several companies you can use which are known as special purpose vehicles for holding real-estate. The costs involved in doing this differs depending on the structure; up to 1/2 million yen for simple purchases and more for complex ones. If you are a resident of Japan it will not usually be necessary for you to do this and loans are easier to come by if the application is in the name of the client.

IFG can help clients to understand the process and help with company formation and loan application if the client wishes to proceed.

What is the main reason why people get refused by banks when applying for a loan?

This obviously depends on the individual applicant, but based on my experience the main reason is carelessness in submitting applications combined with a lack of knowledge about what the banks look for when processing applications. Some people blame racism but I don’t think this is the case. Applying for a loan in Japan is quite a long process but the chances of success do depend on how thoroughly the application is made.

Some people are refused certain loans because they don’t qualify either because their salary is too low, non-resident status, valuation reasons or documentation, which banks cannot understand.

What are the most common mistakes people make when applying for a bank loan?

The most common mistakes I see are:

1) Leaving it too late
- A common mistake is not being able to get the financing in time. People will sign the sales contract and can often not come up with the financing within the required time period (usually one month). In the sales contract there is a special agreement, called ‘tokuyaku’ in Japanese, which is a subject to financing clause, so if you don’t come up with the money before the deadline then the contract is void and your money is returned.

2) Only applying to one bank
- For various reasons many people decide to only apply at one bank of their choice or the one recommended by a friend. You should always apply to as many as possible whether using a broker or applying independently.

3) Sloppy application
- The other common mistake is not putting enough care and attention into the application. It is plausible that the same person could put the same application in to the same bank and will or will not get the loan because of careless mistakes. People sometimes unwittingly put something in which will disqualify them for a loan because they don’t understand the banks requirements. Obviously, this is where IFG can help.

Is there official criteria which Japanese banks use when processing loan applications?

Each bank has official criteria which they adhere to (E.g. applicants must be above age 18 etc), and which is publicly available. Banks deliberately don’t however post detailed information, otherwise people would copy the criteria and the banks risk management would e compromised. Although we don’t know all the underwriting criteria of the banks we have a good understanding.

If someone was trying to get a loan by themselves what advice would you give them?

If you are attempting to get a loan by yourself you should try to understand in as much detail as possible what the criteria are for the specific loan product you are applying for; ask questions and find out what the specific bank you are applying to is and isn’t going to like.

If you have the time and energy there is nothing to stop you applying for a loan yourself, or you can use a real estate agent who may be helpful. But it is imperative that you submit the form carefully with all required documents.

What are typical mistakes that people make when choosing an apartment or house to buy?

People sometimes don’t think carefully enough about what they want. Again, you should write down the considerations, which are important to you. A lot of people look at apartments at weekends when they are in a good mood and relaxed; this
means they have a tendency to forget about less pleasant things like having to get the train from that particular station every morning. I would advise that people think about what the same area will be like for them on weekdays and would even recommend commuting from the train station in the morning to work (on a weekday) to test out the commute (e.g. is the train overcrowded at that station, the time it takes to get to work etc.)

Some people also make the mistake of not checking the area out thoroughly. You should assess the location near the property you buy and make a checklist against your wish-list - e.g. does it have a supermarket, are there any sports facilities nearby etc. When you look at a lot of properties it is hard to remember which places had which facilities so making a checklist and marking it against your own list is a good idea.

Some people buy for tax reasons as a form of depreciation to lower their income tax. People who do this sometimes make the mistake of only considering tax breaks in the first few years and do not think far enough ahead.

What are the most important aspects to consider about the place you intend to purchase?

There are a lot of considerations, some of which are listed above. I would say the most important things in order of priority are:
1) Location
2) Noise considerations (Is it quiet are or not?)
3) Light (you don’t want a dark room)
4) Space vs Cost (biggest space for the smallest cost)
5) High floor in apartment block and corner room if possible (corner rooms are better for re-sale).
6) Competitive price.

Look for places which suit your conditions first and then look at the price. It is
more important that the property matches your profile.

Noise and seasonal differences are quite important factors as well. For example, when you look at a property at the weekend, the type of noises around you may be different than if you went on a weekday.

I would also recommend looking out for construction; some construction sites can go on for years and depending on your work hours this could be a major headache. I would also ask the real estate agent if there is any construction planned in the surrounding area in the foreseeable future.

Some people naturally weigh up these things without thinking about it but others have trouble understanding what to consider.

What deposit is usually required when purchasing a property in Japan?

This depends on how much the bank will lend, but generally you are looking at about 10-15%.

What is the best way to calculate the capital value of a property?

The capital value of the property can generally be calculated by annualizing the rental payment and multiplying it by 17 to 20, on the assumption that the yield stands at around 5 to 6 percent of the market value of the property. An apartment that rents for 1 million yen a month thus is estimated at about 240 million yen.

In layman terms, Capital value means the price at which the unit can be sold.

What ongoing taxes should people be aware when they purchase a house?

Check the Koteishisanzei as before.

What is the price per square meter in Tokyo?

This depends a lot on location. For example, Aoyama will be far higher than Shibuya-ku. It is best to make comparison for similar property in the same area.

How do you increase the chances of obtaining a loan? What is your success rate?

The way we operate is to apply to different banks to broker the best deal possible (i.e. using choice as a competitive tool to increase the value to the client. We also screen carefully and check with the bank first to make sure there is a reasonable
chance of getting a loan. We operate at approximately an 80% success rate.

What is the make up of your clientele and what sort of loans do they apply for?

We get a wide variety of people, but most are foreigners. The income of clients is anywhere from Y5-6 million to a very high 2 oku/year. 70% primary residence (i.e. to live in), 20% investment and 10% other.

What would you say is the most important thing banks look out for when processing loan applications?

I would say that salary is the most important factor.

What are the biggest and smallest loans you have done in the past?

One of the smaller loans we did was for a house in Shimoda for 7 million yen - the loan for this particular property was 5 million yen. The customer went to a bank and they refused him; he then came to us, we re-submitted the application carefully to the same bank and got the loan. To increase the chances we corrected a few mistakes which were in the first application and added some documentation; we also submitted it to a more senior person with whom we have a relationship at a different branch.

The biggest residential loan we placed was for approximately $U.S. 4 million.

How does IFG conduct business development?

Most of our clients are referred to by word of mouth. When find that providing a high level of service and ensuring our customers are satisfied is the best way to build the business. It is satisfying for us when we managed to get loan approvals….and frustrating when they don’t which makes us try harder with other lenders.

What banks do you usually use? How many banks do you apply to?

We use the main Japanese banks in addition to a few foreign banks. The Japanese banks give better rates but it is easier to get a loan at the foreign banks. The main banks we use are MUFJ, Mizuho, Tokyo Star (owned by a US company but is a Japanese entity) and GE.

In terms of interest rates I would say that MUFJ is one of the most competitive banks at the moment. Each bank has its own advantages, so depending on whether you want a long term vs short term fixed rate the bank you use may differ.

At the time of writing, MUFG trust is offering a 2.4% fixed rate over 20 years, but they are selective about who they talk to. To qualify for this rate you must have been employed at the same company for three consecutive years and have permanent residency (Eijuken).

What other companies provide services for foreigners in Japan trying to buy properties?

In Japan, mortgage brokers are not used so often. Generally, people tend to go to banks themselves or try to use a real estate agent who applies on their behalf for the loan. There are other companies helping foreigners get loans outside Japan.

If people choose to use a real estate agent to purchase a property in Japan, what sort of rates do they charge?

3% of the purchase price you pay goes to the real estate agent, unless you negotiate a discount. The legal rate is 3.15% of the purchased value plus JPY63,000 - inclusive of local sales tax.

Depending on the size of the loan, IFG charges 0.5% (for larger loans) to 1% (for smaller loans) of the loan value; this equates to about 1/6th of the cost of a real estate agent. This comes with a 30,000 administration fee (we call this a commitment fee). The 0.5% or 1% is only charged if we successfully get the loan for you.

What are the typical yields for apartments in Tokyo?

Yields are generally thinner for larger, pricier apartments compared to smaller ones but there are a lot of 1 room apartments on the market at the moment. Larger apartments are good for yield but not necessarily capital gain unless you are an investor and own the block of land.

The type of yields you can get depends on the location. For example, for residential areas in Tokyo you are looking at something 4-7% and in areas like Fukuoka and Sapporo it is between 7-10%. Studios in premiere locations offer the best yields of about 7 to 8 percent, or 2 to 3 percent higher than large luxury apartments with several bedrooms.

In layman terms, yield means the rental income as a percentage of the property value and capital gain means the profit realised on sale.

How important is it to choose an apartment which is ‘earthquake proof’?

I have spoken to architects who have said that buildings built to the new earthquake specifications, which came into effect from 1981 do make a difference to the strength of buildings. The architects I spoke with said you could tell at Kobe how old the buildings were by seeing which ones had fallen over and which ones hadn’t. There are still older buildings which are secure and still standing because they were built to the earthquake specifications.

But, ensuring the place has been properly inspected and has certification (architects certification of construction - ‘Kenchiku kakunin shoumeisho’), is important, especially in light of the scandals in Chiba where newer buildings were not built to spec.

We do earthquake insurance but you can not cover 100% of the property. If you buy a mansion there is the insurance held by the kanri kumiai (resident’s association) and/or the individual. The cover is a percentage of the contents of the apartment, but the amount depends on the clients preference and the policy contract – the ceiling is in the region of 50%. Fire is mandatory but earthquake is not.

Can you explain the “Buy & Hold - Positive Gear” approach

This simply means to buy and keep the property over the longer term to target a capital gain. Positively geared means that the rental income exceeds cost. Negatively geared means that costs exceed income.

Do you think people have missed the boat on property prices in Japan?

No, I think that property prices are still at good enough prices to justify purchasing - i.e. there is still room for making money in real estate but you must be careful where you buy.

Can you keep the property when you leave Japan?

Yes, you can but watch out for the loan contract, it is possible to rent out the property. The details of this is something we can discuss.

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