Property management in Japan is not complex, and yet a lot of traditional property managers here carry on their business as if it is. There are a number of reasons for this.
One of them is that traditional property managers here, even in a megapolis such as Tokyo, have an entrenched focus on closing deals and palming off properties, rather than ensuring long-term return on investment (ROI).
A related, and common, problem lies in a tendency in Japan for property managers to gloss over due diligence. Including lack of clear communications in Japanese or English and rushed negotiations, due diligence is often considered a burden rather than a benefit.
The upshot is that rental property management in Japan can leave investors feeling short changed. In some cases, investors have to endure short- or long-term diminution in revenue, or, in the worst case, face serious liabilities.
For expat property investors in Japan, poor property management can lead to a seemingly endless list of hidden costs. Top among them are issues around building integrity, defaulting renters, and cash flow crises caused by unforeseen rent roll cycles.
A building’s integrity covers a wide range of potential liabilities, from malfunctioning elevators in high-rise properties to leaking roofs and walls to the very structure and age of the property itself.
If you buy a 6-story property only to find out months later that the aging elevator has ground to a halt, then what is to be done? Should your property manager ask the renters to grin and bear it, or seek to find new renters if the ones in the property begin to move out?
Fixing such a problem will more often than not incur out-of-pocket costs of around 20-30 million yen. What’s more, the oversight can strain the investor-property manager relationship, and this is not to mention the inconvenience it can cause for renters.
Apart from broken elevators, water leakages are perhaps that most common—and costly—liability that property managers and investors are likely to face. These can be caused by cracks in roofs, walls, or pipes.
Because of poor due diligence work or bad communications by a property manager, it is not unusual for an investor not to know that the rooftop coating of a newly-acquired property, for instance, will spring a leak—often as a result of earthquake damage. Depending on the damage, repair costs can reach 4 or 5 million yen.
A concern that is often overlooked by traditional property managers in Japan is the renters themselves, including residents who have no guarantor.
Should a renter default on their rent, it can be a long and expensive process to remove them, leading to sudden and long-term reduction in revenue. It is worth noting that, by law, a defaulter can stay in a property for nine months—or longer in some cases.
As part of due diligence best practice, property managers should ensure that all renters have a guarantor, or, where necessary, a guarantor company.
RENT ROLL CYCLES
Another risk of hidden costs are students. Properties where a large of portion of renters are in college can be a challenge in part due to their high rotation, every three-to-four years, as they leave university.
When students leave in a large cluster it can cause a sudden collapse in cashflow. This is especially so during the mass exodus that occurs at the end of March, when they graduate.
But won’t leaving students be replaced by incoming ones at the beginning of April? Well, it depends.
If freshmen start renting April 1 while graduates leave March 31, and you need at least one week to clean the units, you may be left without renters for months—or until the next cycle a year later—as the new students find other, immediately available, property.
BUILT-IN BEST PRACTICE
In such cases, an investor ought to be able to check the average length of stay of renters in the property by checking rent roll cycles when doing due diligence on the rent roll.
By doing so, the investor should be forewarned of the number of renters who are students, and thereby be able to anticipate—and plan for—their movement in and out of the property.
If a property manager in Japan does not have the rent roll going back a number of years, that should be a red flag.
Ultimately, due diligence should be front and centre of all property manager-investor discussions. Failing to do so can—and often does—lead to any number of hidden costs and liabilities.