In the beginning, I foolishly believed the hardest part of buying a building in Japan would be the down payment. I know many investors struggle to find that initial down payment. That may be true for me as well on my next deal, but not on this one.
Since I had some capital, I thought I could get started. That was when I began what was a series of time consuming setbacks that have lead to what is now almost a two year process to buy my first real investment property in Japan.
It may be easier for you, but it has not been easy for me. In addition to my own personal dysfunction, the delays and difficulties are due to both my foreignness in this country, and to my lack of history as a local investor.
In reality, finding a deal is not all that hard. Finding the money to make the deal happen, is where the trouble lies for many investors.
— Rod Khleif, from the book Lifetime Cashflow Through Multifamily Properties
I read this quote almost a year ago, and I took it as evidence that “I was right”; since I had the down payment, the deal should have been going faster than it was. Now, many months later, Khleif’s line does seem, in fact, to apply to me. While I assumed the down payment, I did not anticipate how difficult it would be to get a loan.
While a mortgage to buy your personal residence is almost always based on the ability of your personal income to repay the loan, and loan to buy a rental property is usually based on the ability of the building to produce enough rental income to cover debt service and other expenses. Buying a rental property with positive cashflow is not guaranteed to be successful, but is not a particular risky business proposition.
There is not such thing as “pre-approval” to buy Japanese investment property. In theory, you should bring the deal to the bank. The bank will underwrite the property and your business plan, and the decision on the loan should proceed from there. While the bank cannot say “yes” in advance, in theory, they might be able to say they could imagine working with me as a borrower, given the property was suitable for a loan.
It is a fact that foreign buyers are much more difficult than equivalent local real estate investors. The agents know this, and are more reluctant to get involved with out-of-town buyers. I’m local, I’ve lived in Japan for over six years, but I am easy to identify as “foreign,” so I get a lot of the hesitation I would get if I were an over-excited tourist, drunk on travel vibes, flirting with “buying a condo” or with an under-planned dream to set up an Airbnb minpaku, or worse yet, wanting to buy an “abandoned home in Japan.” The naive foreign akiya hunters are mostly a plague to local Japanese real estate professionals.
Because I know foreign buyers are generally more difficult, I didn’t want to start looking at property until I had a banker that was signaling some possibility. I know I cannot have a “preapproval,” but a knowing head-nod and some vague encouragement would have been enough to get me to go start looking at property. That was what I wanted from the banks in the early stages.
Before I went to the banks, I had already solved the permanent resident part (which was neither easy, nor fast), and set up a local godokaisha company to as an entity to buy the property. I have had a local Japanese tax guy for years (it turns out, his firm is well respected). I had a local broker. I even got an introduction to a local Japanese property management company. I documented my residency, my available funds, my rough plan for the loan I wanted, and all the details of the members of my team.
While I did not have a lot of experience (some, some even in this market), I felt prepared to meet the bankers.
These many months later, I have had five meetings with local banks, and I may have received a subtle, soft “maybe,” but I have also definitely heard several polite “no’s.” We tried several banks, mostly “no.” They didn’t care that I had a solid down payment. They didn’t need to look at any properties I might bring them. They didn’t want to discuss terms, or LTV. It was just “decline” to work with me.
I’m not convinced that is the final answer, but I could not get a bank to encouragingly say they could foresee working with me.
I have much more to say about loans for foreigners to buy investment property in Japan, but for now I will repeat again that my foreignness and my lack of proven experience in the market has bought me a quick “no” from the banks.
I should confess that my Japanese is not great. I get compliments almost everyday where locals tell me “Your Japanese is good,” but those compliments are from people that expect no language ability at all. I was a full-time student of Japanese for two years, and it was punishingly hard. I took lessons for another year, learned more, but am still barely semi-literate. In a banking meeting, I cannot understand much of what I going on at all. “Your should learn Japanese,” you might say. I think that would be great, but I could spend another year in full-time study and the banks could probably still dismiss me on that point – if they wanted to.
I don’t personally think that if I spoke more Japanese that the banks would be more eager. My wife is local. Everyone on my team is local. And my education in real estate is high. Understanding the terms is not the issue. I think the banks can and do use the requirement to speak Japanese as an easy way to dismiss borrowers. That is not a crazy practice, I get it.
As for the other objection: I assume that once I get a building up and running, once my investment is demonstrating cashflow, once they can see security deposits and monthly rent deposits in a business account attributed to my local Japanese company, I assume then, everything will open up.
Until then, I have a catch-22, where I can’t get a loan unless I already have a flowing real estate business. And, at least for now, my plan is to use a loan (in a very dry, common, proven way) to fund the creation of that business.
I could, in fact, “pay cash” for a (much) smaller property, get it working, and then show that operation to the banks. But I can imagine those bankers still wanted to see that I had already borrowed money and made it work in this community. Can you imagine that? “Yes, you do have an investment property. It is cash-flowing. But you bought that in all cash, like an outsider. We can see a history as a borrower, so… we’ll pass.”
It is essential to me showing up as a legit investor that I can show evidence of being a legit borrower. So that remains the plan.
In other posts I can talk about the path I have taken since these initial “no’s.”