Making a Japanese Property Investment Strategy

You want to profit from the weaker yen and invest in Japan, but don’t know where to start? Before diving into the market here, you’ll need a general investment strategy, something that will help you decide on where, how, and what to invest in. For those that have never stepped foot into the country, it may seem like an extra challenge with finding the best locations and criteria. Let’s break it down to make better sense of it… Follow these rules!

Bridge

Like any good investment strategy, you’ll want to try and ensure that you’re gaining as much profit as possible while reducing any potential risks and losses to the bare minimum. 

Rule #1: Focus on Cash Flows NOT Capital Gains!

First and foremost, from a macroeconomic perspective, Japan has been a deflationary environment from the early 90s up until about 2012. Some major issues such as population decline and the Debt-to-GDP ratio are still a concern. The priority for investment purposes should be monthly returns in cash flow and normally wouldn’t assume any capital growth.

If and when values rise, that would be considered just a bonus from our perspective, but the basis of your portfolio should prioritize rental returns as a primary criteria for property asset selection strategy.

When choosing locations, you should search where the population isn’t in rapid decline considering the potential tenant base. Searching in places where a capital growth potential does exist is fine, but you’ll want to focus mainly on monthly returns and maximization. It’s best to avoid the top hotspots, like central Tokyo and central Osaka, Niseko, Hakone, and other popular places. Prices there remain high and you won’t often see the higher yields in such areas. 

Rule #2: Play the Currency Exchange games!

Another factor to take into account is the currency exchange. Japan is a huge participant in currency wars, similar to the US and China, where it partakes in quantitative easing policies, sometimes coined by economists as printing money. The central bank of Japan pours huge amounts of money into the economy in various projects, spending sprees, and new policy items to try and actively push down the value of the local currency by flooding the market with liquid cash. 

Money also loses value when supply increases, which in turn helps the country’s export market. If the Japanese yen is cheaper compared with other currencies, then Japanese products also become cheaper, which theoretically helps boost the economy. The only problem is that Japan is not the only country doing this, so whenever the central bank pushes here, other central banks around the world tend to push back. This creates what is referred to as currency wars, and it means that the value of all these major currencies (usually the Japanese yen, US dollar, Chinese yuan, and the euro) fluctuate quite rapidly and are constantly peaking up and down. 

Foreign exchange traders capitalize on this volatility on a minute-by-minute basis as part of their daily routine, but any investor who has reasonable amounts of liquid cash in various currencies can profit from these swings (regardless of whether or not they’re held in the country of residence, in multiple accounts, or various locations worldwide).

Sunset Castle

The key is to monitor these exchange rates on a daily basis so that whenever one of them peaks against the other, it’s time to sell the currency that’s shot up and buy the one that’s gone down. It’s worth leaving these cash reserves liquid (or as liquid as possible) and accessible. You don’t want to lock them down in any interest-term deposit in a bank because these the interest rate of these term deposits relies on you not withdrawing those funds for a number of months or years. Meanwhile, these swings of the currencies will always net you a lot more than any interest on a term deposit account will. 

Therefore, if you’re going to be investing in Japan, repatriating your Japanese yen income back to your country of residence on a regular basis would not be worthwhile (even if you have an interest-bearing account at home). It’s much better to keep monitoring the rates for whenever the yen shoots up or your home currency shoots down, and then to transfer those funds across when the time is right.

Also, don’t wait for the last minute before a property settlement to send funds across over to Japan, but rather monitor the rates on a daily basis and exchange when the yen is weaker and your home country is strong. NOTE: Many clients are taking full advantage of the current situation at the time of this article ($1 USD = 135.01 JPY)!

This is a clever deal, as the very act of conversion will already make you a profit, while the funds will be ready for a property purchase here in Japan whenever that might happen. Much better option as opposed to a last-minute settlement transfer when you will need to meet at a settlement deadline, for example, and end up taking

whatever rate the market happens to be offering you at that time.

Rule #3: Find the Sweet Spot of Property Age!

The third factor to consider as another one of the advantages brought from many years of deflation is that properties in Japan are extremely affordable. 

Of course a trendy penthouse in central Tokyo can cost a million dollars or more, but these large and newish properties generate very little cash flow, so they don’t really sit well with our first rule. 

Since the population is declining and very rapidly aging, the biggest potential tenant base in Japan is composed of singles, many of them elderly. 

Combining these factors, you can see that the easiest property to populate (which also happens to be the highest yielding in monthly return terms) is smaller studio or single bedroom apartments. 

Fine wines may age nicely, but investment properties do not… To further maximize that monthly return we’ll want to hit the sweet spot between too old (which means a lot of renovations and repairs on a regular basis) and too new (which means lower returns and quicker depreciation). 

Tax depreciation life spans for reinforced concrete blocks in Japan, which is most of these older apartment buildings, is 47 years. The best purchase criteria age-wise is somewhere between 1982, when the latest earthquake-resistant building standards for these structures were introduced, and all the way up to about 2000 or so, when general floor plans and layout started becoming wider more spacious with more modern features, and as a result – more expensive with a lower return. 

You will occasionally see some very well-maintained older buildings that can be partly retrofitted for earthquake-resistant standards, so this rule isn’t set in stone, but it is a fair guideline to refine search criteria.

These small, older apartments are also very affordable and average between 2 million and 10 million JPY (around $14,000-$75,000 USD currently). Another advantage of the deflationary cycle is that it also allows us to diversify and hedge funds over several assets in several geographic locations and over different cities. This also means that you’ll be diversifying in different industries, different social economic profiles, different tenants and income streams. 

If somebody moves out, a large portion of your income stream is still in play, as opposed to putting the entire money into a newer, bigger, and more expensive apartment or house – which means a tenant moves out and we are left with zero income.

Tokyo Night

To summarize, a general property investment strategy for Japan is…

1) to focus on high cash flow yielding assets in stable, second-tier metropolitan centers with a stable tenant basis and local economies,

2) to keep liquid cash in both your country of residence and Japan, monitoring and exchanging when the time is right, and 

3) to focus on smaller, older, and cheaper apartments (but not too old) that can host singles or childless couples in all ages, which allow us to diversify and hedge our portfolio as much as possible. 

Happy investing! 

(Source: Japan Real Estate Property Investment Strategy / Photos: Flikr)

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