It’s been a week or so since my last post. I am still (very much) trying to buy a real estate investment property here in Japan. I explored a new city two weeks ago, and (informally) looked at a lot of property there. I had a meeting with a local broker in that city (someone I have done business with). Since my last post, I’ve had two meetings with my broker (in my city), and looked at least six more properties – almost all of them Japanese duplexes.
Today, I’ll update on my progress on the duplexes, and talk about the properties I saw, and about one in particular that interests me.
My stated goal is to buy a solid multifamily property here in Japan, something like eight+ units. I am currently studying “wholesaling real estate” (I want to understand that aspect of the business), but I typically focus my study/research on multifamily (and will read Christian Osgood’s book next). So it is a bit of a surprise to me, and my broker, that I am looking at two-unit “duplexes” in Japan; the local Japanese call these properties “nisetai.”
I said I’ve had two meeting with my broker; both have been productive, interesting meetings. We were batting around two properties (probably both priced too high, given their desperate needs for capex), and I brought in the idea of investing in a duplex. Why change my focus away from multifamily apartment buildings in Japan? I haven’t abandoned larger multifamily at all, but the reason I am interested in duplexes is: There are only so many apartment building in my price range, in the areas I’m focused on, and we’ve looked at most of them.
If you’re a relatively inexperienced buyer, and “the good deals” are not coming to you, and you’ve seen a lot of the current inventory, what do you do? If you’re me, you expand your buying parameters. I want to get started, and I’m increasingly open minded.
In my first post about buying a duplex in Japan, I talked about some of the interest and rationale that makes me curious about the potential of a duplex as an investment property in this market. After I spoke with my broker (maybe it was three meetings ago?), he listened, took me seriously, and looked up about seven more duplexes for sale in my target areas.
In our working relationship, I consider my broker my mentor and teacher. I call him “sensei” (which he is reluctant to accept). I call myself “gakusei” (student) or “akachan” (baby). I tell him that I will do anything he says, and I will look at any property he sends me. I tell him, “I am dying for more homework.” That is why I decided looking at duplexes; it gives me more deals to look at, more possibilities to find something that works. As he gave me a bunch duplex properties to look; I was eager to go take a look.
For each of the properties he gave me, I did a little online research, and tried to find them on Google maps – so I could go drive by, and check them out. While apartments for sale include the full address, duplexes are considered “residential,” so for many of the listings there is no address, just the general area. I try to make this easier for my broker, so I chase down all the properties on my own. In this case, I screened out three of the eight (they were too far away, and I don’t think the tenants I want will like those locations), but I jumped in the car to see the other four.
I’ll share pictures of three of the four, and then tell you about the one that interests me the most (unpictured).
This property is great looking property. Very nice. Built in 1997, but… it has a classic “Western” look, so, it has aged well. It is in a middle-income neighborhood, on a quiet street, about 25 minutes from the biggest station in the city.
One of the things I’m noticing is that the duplexes I’ve seen in Japan is that they are 10X nicer than the investment property at similar prices. This particular property is about 5000万円; that is two units for just a little less than the eight-, ten-, and 15-unit buildings I have looked at. Why own two units when you could own 10? Well, it’s very possible hte cash flow is about the same (different quality property, much higher rent). As I said in my first duplex post, could be a higher quality tenant, and less turn over on bigger, nicer units.
The question is: how about the ROI? What is the NOI on a Japanese duplex, vs the same amount of capital invested in value-add Class C apartment? Well, I don’t know, but I am inching towards finding out.
Check out this place:
When I took this shot, I intentionally framed it so it would look especially good. Does it look good to you? It looks good to me. It looks amazing. I would certainly live in a building like this. If I was “house hacking” in Japan (and had a car, which I have now, but didn’t have for my first few years in this country), this would be a winner.
I call this property “the Castle.” It was built in 1987, but castles never go out of style. The neighborhood in Japan where this duplex is located is A+ for the city; does not get any better. It is not close to a station, it is not central, but it is not that far away, has two parking spaces (one covered), and the neighborhood is beautiful. It faces a quiet “private” street (which just means the city doesn’t do maintenance), with a street immediately behind it with better access. It’s a short walk to a very nice park. I love this property. My own house is much more central (I can walk to a major station), otherwise I would trade my single-family “ikodate” for this “nisetai” (and probably “live for free,” as the renter in the second unit paid the mortgage).
My agent and I called the real estate company with the listing, and there has already been an offer on the property. I’m not surprised. It’s a winner.
Talking with my broker today, he doesn’t consider nisetai in Japan to be “investment property.” It’s just not the way the Japanese think about duplexes; the Japanese think of nisetai as “two generations of the same family” living in the same building; main family on one floor, “grandparents” upstairs. That is the expectation for this class of real estate. From my agent’s point of view, my pursuit of duplexes as investment property is novel.
Months ago, I was asking him about loans for real estate investment here in Japan. I had been studying David Lindahl and Brandon Turner, and I had head there can be better loans for multi-unit properties with under five units.
“Income properties with four or less rental units are classified as residential real estate. This can be advantageous when getting a mortgage. Residential classification creates competitive lending terms, low down payment requirements, low interest rates, and long-term, fully amortized financing.”
— Rod Khleif, from his book Lifetime Cashflow Through Multifamily Properties
Are there loans for smaller multifamily properties in Japan, but with interest rates more like residential properties? I asked my broker about “loans for small multifamily”, and he said such loans don’t exist in Japan. I then asked someone on my staff to research that concept, and, we found some limited evidence that such loans do exist.
While loans to buys to buy multifamily apartment buildings in Japan are called “aparto loan,” in my (barely educated) experience there is a type of investment loan in Japan called “chintai fudosan konyu loan” which applies to two-four family buildings. That is exactly like what exists in the US and other markets. We called enough banks to know this type of loan is rare, but (at least with some banks) they do exist.
If the building has “four families” in it, they can’t all be blood relations, right? The expectations is tenants paying rent, yeah? That is an investment loan, correct? Maybe you have to live on the property – and if that is the case, maybe I would be willing to move (and I’ll rent out my current home).
Here is another duplex.
This is an example of modern Japanese duplex; built in 2015. A lot of the current construction in my city looks like this; which is to say it looks “just fine,” clean, very “useful,” but not particularly interesting. It also looks “new,” though, and the Japanese (and Asians, in general) like “new.” There is just one door that opens to the exterior in this duplex, but she is a “nisetai.” A small one, less than 50% of the living area of the other properties, and just as expensive. Pass.
There was one that I liked more than these. It was about the same price, but in my neighborhood; which is just a coincidence, but I live in a high-demand neighborhood, so that is a good thing in terms of tenants. This particular duplex (no picture, for now, but if I get it under contract, I promise to write about it) was built in the 1990s, and is… very nice. The neighborhood isn’t quite as special as where “The Castle” located, but it’s more central. And even though it is about 15 minutes from the nearest station, it’s walkable, and has excellent local resources (like a supermarket).
It’s a winner. I’m not saying it would be a good investment, but I showed it to my broker and he didn’t kill the idea. In fact, he called the real estate company where the property is listed, and we have an appointment for a property tour next Friday (six days from now).
My broker wants to see if I can get a loan for this property. We already asked this one lender we have been talking to (one of the only banks in Japan that has been friendly to me as an investor), and the rep at that bank said they do offer loans for nisetai, but said I could not change the structure after the purchase; I couldn’t add or combine units. I’ll contact that bank tomorrow to see if I can some estimates about rates and loan terms. Because this property has wood construction, it’s very possible the loan will be for a shorter term, and thus a higher monthly payment, and an unappealing investment opportunity.
My general plan is basically the same as the classic duplex house-hack: I want to get a renter to pay off the mortgage. By renter, I mean one renter, with the income from the second unit for after-debt cashflow. This property is not a “fixer upper,” but it could generate real cash-flow. If one unit was steady income, I might be able to offer the second one as a furnished, “mid-term” rental, and boost income from there (even there were some months when that unit was empty).
Too early to tell, so we’ll park this post here, get our work done this week, and see if this comes to anything.
Happy investing.