Some concern that we often hear surrounds the confusion that there is no credit check system in Japan…
“How is it possible to check out a potential tenant for my downtown Tokyo apartment or any other place?”
“Are there credit guarantee companies and, if so, how reliable are they?”
Surprisingly enough, there are NO official credit check systems in Japan, due to privacy concerns and legislation, but it is possible to check a tenant’s credentials. The best way to do this is through credit guarantee companies, more accurately known as “rent insurance” companies.
The Three Types of Securities
Rent insurance is one of the three types of securities available. The other two types of securities would be a personal guarantor and the well-known security deposit.
1: Personal guarantors
A personal guarantor is the lowest form of security one can get from a tenant simply because they’re only as good as their own profiles.
Here are some examples why…
If the guarantor is an employer, then that guarantee is only good as long as the tenant is employed by that same employer.
If the guarantor is a family member, they may be old or destitute… or become old and destitute over the course of the tenancy.
If it’s a personal acquaintance, work colleague, etcetera, there’s obviously going to be a limit to what a landlord could potentially ask from such a contact in case of tenant debt.
2: Security Deposits
A security deposit is better than a personal guarantor since that’s money paid in advance and any debt to damages can be deducted from it if and when a tenant owes anything.
3: Rent insurance
Rent insurance is the best security for a few reasons:
- It will usually cover up to 3 months worth of rent payments in case of delinquency or damages (whereas the security deposit is normally only 1-2 months).
- Rent insurance companies cost less for the tenant (normally, they cost the equivalent of two weeks of rent to sign up so it’s much easier to get tenants who can actually apply and qualify for rent insurance compared to a hefty security deposit).
- For landlords, it provides an added level of security because these companies check on any potential tenant who signs up for policies before they actually approve coverage. It isn’t exactly the kind of credit check that we’re used to seeing in other countries, but is a very thorough check nonetheless.
- It checks for the potential tenants’ employment status, verifies their financial history through recent paychecks, and requires documentation and contact information regarding the current job. In the case of pensioners and welfare recipients, it verifies the local government department which issues the potential tenants’ monthly welfare payments.
If any of the items don’t check out for the potential tenant, the rent insurance company will refuse to issue the policy, which would usually mean that a landlord shouldn’t be taking on the potential tenant.
One exception to this rule is in case you’re dealing with foreigners who are new to Japan, where rent insurance companies tend to be wary simply because it’s possible that a foreign national may have the option to simply abscond back to their country of origin, leaving debt collectors without any means of retrieving any debts that they left behind.
If you, as a foreigner yourself, don’t mind leasing to other foreigners, that’s great! In that case, however, it’s probably best to ask for a security deposit and ensure that it is large enough (1-2 months) to withstand the chance of having them leave without any reasonable recourse. Also, if the potential tenant still doesn’t have a job and cannot provide pay slips because they’ve only just arrived in the country, it might be a good idea to charge rent in advance for 6-12 months just to cover for any potential loss of income, especially if they do end up leaving or causing any damages, etc.
Japanese tenants do tend to be good tenants even if they’re not as officially verifiable via credit checks as in other countries, since they’re generally very reliable. They may have payment issues, of course, particularly if you’re dealing with the lower end of the residential market. Smaller and older buildings tend to generate the highest rental income percentage-wise. Missing rent payments would usually only be a temporary thing and if these issues should turn out to be chronic and repeated, you can simply ask the tenants to leave and keep the security deposit.
What are the odds?
As a company in over 160 properties currently managed on behalf of our clients, plus a dozen or so on portfolio, we have never (not even once!) had to forcibly evict a tenant from a property. All you have to do is send them a registered letter informing them that they have to vacate the property by a certain date and that’s exactly what’s going to happen.
There are two reasons for this…
- The legal and court related matters are considered an unpleasant nuisance in Japan as are all other types of confrontation, and people tend to avoid it at all costs if they can
- Culturally, doing the right thing is a very important part of Japanese culture and the Japanese psyche. People here are very aware of what family members, colleagues, friends, and bosses think about them and their behavior and the last thing that they want is debt collectors or property managers contacting those people and informing them of any debt or other similar problems, let alone shamefully ask them to cover any payments owed by that acquaintance! The Japanese generally want to save face above all and they’re always very conscious of any shame that their actions or mistakes may bring to their families, or even worse, to their employers.
There are exceptions to this norm, of course, nothing is 100% guaranteed. If you’re dealing with tenants in particular debt, bankruptcy can (and does occasionally) happen. Your chances of having to deal with damages to a property are slightly higher than these circumstances, although damages to property are also quite rare and almost always unintentional in nature.
In conclusion, though credit checks unlike those is some other countries are not available in Japan, rent insurance is thorough and reliable in screening potential tenants for your investment properties. Other securities are available, as outlined above, but it is ultimately up to you and the specific situation of your properties (locations, demographics, etc).
If you are ever curious to know more or have questions that you’re itching to get answered, don’t hesitate to send us an email or message on SNS!
Until next time, happy investing!