As previously confessed, my Japanese is not very good. While I am semi-conversational, I am not (really) ready to discuss real estate in Japanese. When I want to study and learn, I can’t easily study real estate materials written in Japanese (although I have read every book about Japanese real estate published in English).
Because I want to learn, I study US-based podcasts and I read the books about real estate investing published (mostly) for American real estate investors. I believe that methodology is a perfectly get to what is important about real estate in Japan; what is fundamentally true in American real estate investment culture, will be true in Japan also (for the same reasons).
In this post, I’m going to talk about LoopNet.com: a public, online listing of real estate investment property for sale in the US. In theory… investors can find a “good deal” on LoopNet.
I am mostly going to mock and deride LoopNet. But then, at the end of this post, I’m going to try to show why I think these “bottom of the barrel” real estate websites present one of the best opportunities for new investors to break into a market.
Here is a quote from a guest on Rod Khleif’s podcast, talking about how he bought used LoopNet to buy his first real estate investment. That deal, by the way, was a failure.
“I go to LoopNet, right? Otherwise known as, ‘The place where deals go to die.‘
— Dr Buck Joffrey, from episode #171 from Rod Khleif’s Lifetime Cashflow Through Real Estate podcast
Joffrey and Khleif then laugh and giggle about how naive it is to think LoopNet is the place to find value. This is what you’ll pick up as you study; most investors with experience in real estate don’t consider LoopNet a serious source of deals.
On the surface, LoopNet provides a marketplace where sellers can certainly list property for sale, and an investor might ostensibly find a deal to buy. The underlying reality (or so I believe I am learning) is that the best deals, and even the “good deals,” are sold off-market, and basically never end up on sites like LoopNet.
“I’m here to tell you that absolutely no apartment complexes get sold on websites. Apartment complexes don’t get sold online. I’ve never sold something on LoopNet, or Costar. It goes on the website just to satisfy an uneducated seller, just so he can see it out there.”
— Beau Beery, real estate broker and author of Multifamily Investors Who Dominate
If the “good deals” are not on LoopNet, who is buying property on websites like that? The answer is mostly investors that don’t know what they are doing. Mostly. But not only that.
Experienced investors have access to better resources. The best properties are traded between insiders. The “good deals” are good enough that they don’t need to be marketed; the brokers have buyers lined up that will purchase those properties, at fair prices, when they become available.
I have been quoting Beery a little too much lately (I loved his book, and he is great on podcasts), but as he is an insider in so many multifamily deals, he knows the habits and working process of the best buyers and sellers. Beery says the percentage of “good” multifamily properties that are sold off-market (meaning *not* on a public website) is “92.5%” (he ran a big study in his own market to produce that stat). As he says in the quote above, his properties never go on public websites like LoopNet (which are only for “uneducated sellers,” or institutional sellers that are required to publicly list property).
Okay, so what does any of this have to do with buying investment property in Japan? Does Japan have something like a LoopNet? Are there “good deals” (I *wink* a little as I type that) available on on websites that list investment property for sale in Japan?
Japan does have websites similar to LoopNet. The two most common online websites for investment properties in Japan are Rakumachi.jp and Kenbiya.com. Unlike the bigger, more well-known real estate portal sites in Japan that focus on residential property (Summo and AtHome), sites like Rakumachi presumably specialize in investment properties.
These sites have indeed come up over and over in my search to find my first deal. Of the properties I’ve been shown by my broker, most can be found on these sites (or on REINS).
Can I find a “good deal” on these Japanese investment property websites? A “good” deal? Well…
I think it is safe to assume the answer in Japan, like in the US, is “no.” The kinds of deals that high-end multifamily owners want or buy will mostly not be found online.
“Finding those properties is really the key to success. However, such distressed or otherwise attractive properties are normally not listed online. Instead, that information is typically circulated discreetly between agents. That’s why having a good connection with an agent is important.”
— Toshihiko Yamamoto, from The Savvy Foreign Investor’s Guide to Japanese Properties
I like this comment from Yamamoto, but he’s wrong about “distressed” properties. You can certainly find properties in poor condition, or of generally very low quality, on Rakumachi. They are available, but overpriced. So you can buy them, but the returns are modest, and they would require real capital expenditure to attract better tenants or otherwise create additional ROI.
Established and successful real estate investors in Japan (just like in every other country) buy their property off-market. The same realties about how rental-income properties are bought and sold in the US apply to Japan.
“When commercial brokers get a listing, they try to sell it to their private buyers list first. If these favored buyers don’t like it, then it goes to the rest of their list. If they don’t buy it, then the broker share the deal with everyone in the office, because they at least want the office to survive. If it’s still not sold, it goes on LoopNet or a similar site.”
— David Lindahl, real estate investing book Multi-Family Millions
In that quote from Lindahl, there is yet another reference to LoopNet (from 2008). Lindahl says the available deals are shown within the broker’s network of professional investors. Only if the professionals pass, does that property ever end up online.
You get that? When a seller has a “good deal” to sell, brokers present that “good deal” to preferred buyers, the healthy deals get picked off.
“[A] startling amount of real estate deals happen ‘off-market.’ Real estate changes hands without ever being officially ‘listed’ with anyone. Relationships are important everywhere, but they are crucially important in Japan.”
— Anton Wormann, from the book Free Houses in Japan
I’m not complaining. I’m not. The point is to understand all this. To really understand it. And then to make a plan to move forward. It is not as if “today’s” investors are locked out from decent property forever. Most of this struggle to see anything worth buying is a problem for new investors, but once you become established, thing (reportedly) open up.
Okay, but how do get that first deal? The one that somehow works, and allows you to create a track record that makes you eligible for better access to deals (and better financing)?
Did you think we were done with LoopNet? Wait, wait… there’s more.
This week I was listening to yet another Rod Khleif podcast (I have no affiliation, I am just getting a lot out of his material). This time, I went back to his earliest episodes, and I saw he interview Jake and Gino (who are famous multifamily investors, podcasters, and authors of Wheelbarrow Profits).
Jake and Gino have their own prolific real estate podcast, they are usually the hosts, but in this case, they are the guests. I was interested to hear something from Jake and Gino from early in their career (because I am early in my career).
It turned out that was a good idea; this early version of Jake and Gino (from 2016) was much more raw, and candid. It was a great episode, but my ears were “on fire” as I heard a positive story about LoopNet.
“Eventually, this one deal came along. It was ignored for the longest time. People didn’t want to touch it. It was on LoopNet for… two years.”
— Jake Stenziano, from episode #2 of Lifetime Cashflow Through Real Estate Podcast
From my position as someone that is relatively new to real estate investing, that comment was interesting. Didn’t we say the only deals on LoopNet are “bad deals” that are passed over by the real investors? Isn’t LoopNet “the place where deals go to die?” Yes, we did. And Jake is agreeing with that. In this case, it was because the deal was passed over and lifeless that they were able to make it work.
“Gino: There are deals on the market that are great. Our first deal was on the market. You just have to be able to see where the value is. See where you can raise income and cut expenses.
Jake: The stuff that’s been on LoopNet for a year or two years, that is where we’ve actually found opportunity – because everyone’s already given up on it.”
— From episode #2 of Lifetime Cashflow Through Real Estate
That is how Jake and Gino got their first deal. They found a “bad deal” on LoopNet. That deal was so bad, it had been sitting on LoopNet for years. They negotiated terms that worked. Then, they put in some forced appreciation and they had a winner.
I learned a lot studying Beau Beery, and his comments about the top echelon of multifamily owners. He is right, most of the “good deals” in multifamily never touch real estate websites like LoopNet or Rakimachi – they don’t need to. Those brokers know too many buyers, they anything “good” is so quickly (and painlessly for the seller).
“You don’t even see the good offerings in real estate. They show that to the big investors they’re dealing with. It’s not an easy game to play from a beginner’s point of view, real estate. [Y]ou don’t even see the opportunities when you’re a young person starting out. They go to others.”
— Charles Munger, from the 2017 Daily Journal Annual Meeting
Munger is right you don’t see the “good deals” as a beginner. If someone like myself is looking at publicly marketed investment properties, it is only because the professional investors didn’t want that property. But that doesn’t mean it’s hopeless.
The point of this post is that: One of the best (and only) opportunities for new investors is to go “find a gem” in the trash heap that is LoopNet – or in my case, Rakumachi.
The assignment for new investors is to comb through the trash, and fish out something that is not inherently valuable, but can be reshaped into something valuable. It’ll probably be a smaller property; less than 50 units (bigger properties require too much capital, and attract more competition from the bigger operators). These overlooked properties will almost always be overprices. They will usually need a lot of work. They will probably have been on the market for a long time.
This is where I am in my market, exactly. I have never closed a real deal in Japan, so experienced brokers would be foolish to bring my offer to a seller (unless I was dramatically overpaying for the asset). So, I don’t get to work with the seller’s brokers. I don’t get to see the best deals. No one is going to bring me a hot deal or make it easy for me; I haven’t proven I can get a deal financed, and I haven’t proven that I am serious.
I have to go find some junker building, probably negotiate down to a more realistic price, and then do the work to clean it up and stabilize that property.
I am currently looking at two junkers now. One, is the investment property in Japan I passed on four weeks ago (it is messy deal, in terrible conditoin, way overpriced, but the seller is in trouble – he is not paying his mortgage). The other property is the same (just lowered it’s price, but still too expensive, also needs a lot of work, and I can see why other investors have passed on it).
I had a good meeting with my agent a few days ago. He is traveling this week. We are also in the middle of the big Obon holiday here in Japan, so everything is stuck for a few days. I have a motley crew of rag-tag properties to look at this week.
I’ll keep at it; we’ll see if we can bring down some sloppy deal, and then do the work to turn it in to a great place to live (and a great source of incomce). That is what I want.