Good morning Ziv. Thank you for taking the time to speak with us.
Can you please tell us a little bit about yourself? What did you do before getting into real estate investing?
I suppose you could call me an IT geek turned property geek. I was in corporate IT project management for many years, mostly working for large organizations. Not the startup types, but the big and heavy beasts that expected detailed ROI reports, efficient use of resources, specific budget restraints and with a whole bunch of stakeholders to please every step of the way. In short, this was excellent training for the turnkey operator or portfolio manager that I’ve become these days, though I never would have thought so while doing it at the time.
Why did get into real estate investing?
This may sound cliché, and you’ve probably heard this quoted a lot, but I got into real estate investing to secure a financial future for my family and to maximize our savings. I wasn’t particularly considering real estate as opposed to anything else, but was more weighing the pros and cons of different investing strategies. In the end, it was the regular and potentially high monthly returns that investment properties provide, in addition to the more speculative potential for growth. My dad, who’d been investing in properties for his retirement for most of his life, always said “If it doesn’t work, your family will at least always have a roof over their heads”. It’s really that type of reliability that cemented the choice for me.
When did you begin investing in real estate? Also, why Japan, why not invest closer to home in Australia, or maybe in the United States?
I got my first property in 2009. Not that long ago really, but the time was perfect from my perspective. The market was offering great deals all over the world right after all hell broke loose in 2007-2008. There was this big slump, though it wasn’t felt as strongly in Asia and Oceania as it was in the United States and Europe. People who’d been sitting on their funds were suddenly “pouncing” on real estate all over the place. Japan was a natural environment for me considering my location in the world – Australia. I “married into the country” in 2003, and have been going back and forth ever since, staying up to a year at a time when my son was born. I also knew about other places in the region such as Singapore, Hong-Kong and Thailand, having visited and following their economies with interest for many years. So, investing overseas wasn’t an alien concept for me, and Asia seemed to be where things were happening.
As I’ve repeatedly stated in my first few articles in REI Wealth Magazine, choosing your market is, first and foremost, a personality thing. If you feel out of water, you probably are. I recommend that anyone, particularly those getting their feet wet for the first time, go to where they feel most comfortable. In my case, the US was out of the question. The tenant profiles, property managers, bank personnel, insurance companies etc., seemed quite difficult to juggle at a distance, especially for a “wet behind the ears” investor like I was at the time. Plus, the distance meant a serious long-haul if things needed a personal touch, which I felt they often might in the US (no offense to our US-based readers). Australia, Japan, Hong-Kong and Singapore are all more highly regulated and manageable in that regard, and were also more accessible physically for me. Now, almost five years down the track, I’m more comfortable with my deal evaluation and remote management skills and I do invest in the US now. Though, I confine my investing to note structures and similar deals, which are more contractual financial arrangements than actual property investments and require very little maintenance post-setup.
For geeky scaredy-cats like me that prefer everything as reliable, quiet and by-the-book as possible, Japan wins hands-down! Japanese are among the most honest, reliable and downright honorable folks on the planet, and are well aware of being a rarity in that regard. Traditionally, they are very wary of conducting business with foreigners. Once you break through that barrier, though, it’s the most relaxed and enjoyable business environment a geek like me could hope for.
In previous REI Wealth Magazine articles, you discuss building a team. Could you quickly cover the types of team members needed?
Sure – Many people think it’s all about “getting those deals” and that getting as many realtors, financiers and potential buyers on their “lists” as possible, is the way to go. Those who come from a self-employed background, like a small business or shop, believe that this is what works best. I suppose if you’re a wholesaler, flipper or “serial” investor who works a certain market hands-on, it does.
I’m a firm believer in “setting up the infrastructure” first and foremost, in any new market. That infrastructure is always the legal and financial representation. My perspective comes from being mostly a remote investor, more diversified and hedged geographically, and also from my project management background. You’ll rely on legal and financial representation heavily when you’re new to any market, and may need to refer to them time and time again, regardless of which deals you’re considering. So, get them right the first time, even if it means it’ll take longer and cost a bit more to start off.
The rest of your team members are secondary and, although they’re significant to your success as well, can be far more numerous, and allow for more flexibility and changeover. Switching property managers or stopping to work with a realtor, or even a renovation or repair contractor, while occasionally painful, is relatively easy to do. Changing accountants or lawyers mid-project, is far less so.
Since Japan is half way around the world for some of our readers, how do you recommend that someone get started investing in real estate there?
Not just in Japan, but for any country that’s not your country of residence or origin, local partnerships are key. The world’s our oyster these days in a very practical way, with technological, legal and financial advances paving the way to REI “global domination” in every sense of the word. But, that doesn’t mean you should jump head-first into the waters of any country in the world, Japan included. Cultural differences, legal and practical terminology, as well as the language in some cases, are vastly different. Partnering up with a verifiable and reliable local entity, whether as an equal business partner or as a turnkey operator, will save you from numerous mistakes that local know how could easily sidestep. Partnerships also help you bridge the cultural gap that should be carefully understood and never underestimated. Misunderstanding a country’s mentality, values and practices can cost a lot.
I’ve been fortunate enough to find this partner, in my wife, who’s a bright and hard-working mover and shaker (in a very polite, honorable, Japanese kind of way). Believe it or not, I’m considered a rude oaf in Japan. If it wasn’t for my wife, I very much doubt any of the professionals we normally work with would even entertain my presence for longer that one first meeting.
What would be a typical type of property to invest in (condo, houses, etc.)?
Japan’s most active markets are residential condos and commercial properties. Houses do exist, but are not built to last as long as the concrete monsters Japanese cities are “blessed with”. As such, they carry far more “hidden” maintenance costs, due to the nature of the building materials used.
Do you invest in certain cities or neighborhoods in Japan?
We drift with the flow of the economy. Since the big earthquake and tsunami disaster of 2011, we’ve been seeing a lot of business and family traffic migrating south-west, to the Kyushu landmass (equaling about half of Japan’s mainland). This is the gateway to China, South Korea and Taiwan, to the west. Core family numbers (couples plus young children) are on the rise and increased tourism and other business is coming in from Central Asia. All of this is evidenced by recent property price hikes. But, we also follow the deal trail to other areas of the country. We stick to medium or big cities of not much less than a million people, whenever possible. But, we also do “requests” for clients seeking holiday homes on the ski slopes of Hokkaido and other similar profiles.
Can these properties be financed, or do you need to purchase them with all cash?
Financing is not available to foreigners who aren’t Japanese residents at the moment, unfortunately. Some of the international banks like HSBC and Citi occasionally lend against Japanese securities, but these cases are very rare and have fairly strict criteria for these arrangements. The vast majority of our clients are cash buyers, or are those who have secured their finance in the form of non-secured personal loans, lines of credit, etc. But, with affordability as low as $20,000 and yields as high as 16% pretax, it’s really a no-brainer for cash buyers, big or small to invest in Japan.
What types of real estate investing strategies (e.g. wholesaling, flipping, lease options) work or don’t work in Japan?
Japan is mostly a buy and hold market, with tenants staying 4-5 years on average, and with 15 and 20 year leases quite common. You really want to keep that reliable cash flow going as long as you can. With larger portfolios, where you can start claiming depreciation, purchase expenses, etc., it may make sense to “cycle” properties every few years, to reset those claiming cycles. Wholesaling and flipping does exist, but only if you’re a Japanese company or local resident. Our clients sometimes buy from a local dealer of this sort. Owner financing schemes and other creative lease options are very rare, as home ownership is also rare. Most Japanese rent for their entire lifetimes.
Can you walk us through a typical deal?
Not that different from any other country, except for the almost complete absence of the need for background checks on realtors and wholesalers, double-checks on titles, debt etc. You’re all but guaranteed not to have to resort to those tactics in Japan, due to the nature of the practitioners involved. This doesn’t mean there’s nothing that needs to be checked, but simply that you can get right down to the actual deal analysis, which consists of the following:
1. All relevant data regarding monthly income and payments normally appear in the body of the MLS listing itself. After entering these numbers into your spreadsheets and receiving the “green light” on your selection criteria, you would then submit an offer. Bear in mind that in Japan, negotiations to more than 10%, or thereabouts, are fairly rare and are sometimes considered an insult. We’ve had some sellers in the past, who wouldn’t take a further offer from us, after having been “deeply offended” by our “rude” first offering.
2. Once the offer is accepted (or refused and re-submitted, then accepted), the realtor will provide the complete information package. This should include the tenant history, renovation history on the block itself (internal renovations are quite affordable in Japan, and tenants would never let things deteriorate in a state of non-repair, so there normally isn’t much to discover in that regard), and of course the status of the holding company’s “accumulated funds pool”. This is known in other countries as the “sink pool”, “repairs fund pool” or various other names. It is essentially money collected from all owners of all units over the years. The building’s renovation history and accumulated funds put together should make sense. If that pool is depleted and there aren’t any major renovations to speak of in the last decade, you know something’s wrong – most likely financial mismanagement or troubles of related sorts.
3. Assuming nothing untoward has been uncovered in the course of due diligence, you would proceed to a contract signing meeting, where a government licensed “official document reviewer” will read aloud and elaborate on all official documents (a good chance to re-confirm all of the above before signing anything), at the end of which all documents are signed, and the deposit (normally 10%) is the paid.
4. On settlement day, the realtor or judicial scrivener that is handling the sale, receives the remaining funds and settlement adjustments. He then proceeds to transfer true ownership of the property to the buyers, after confirming that any outstanding debts have been settled prior to the new registration taking place.
That’s it, in a nutshell. Of course, investors who have never been to Japan and do not speak Japanese, find this hard to achieve without hands-on translation services, preferably from an experienced real-estate professional or investor. Additionally, locals are still largely unaware of the nuances involved in working with Westerners – which, for the Japanese, are vast and intimidating – so Japanese partnerships become even more significant, in order to find the good deals.
The last hurdle, which companies like ours help alleviate for foreign investors, is the difficulty of opening a local Japanese bank account. While the law doesn’t prohibit this, almost none of the Japanese banks allow non-residents to do so, as part of their anti-money-laundering policies. While local registration, normally achieved with an investors or business visa and a temporary lease contract for a small apartment, may solve this issue, this isn’t a particularly cost effective solution. Plus, not all investors visit their country of investment, particularly for smaller deals. So it becomes essential, again, to have a Japanese partner, like ours, in place. Someone who can evaluate and facilitate the property purchase, arrange for insurance, collect the rent from local, “old-school” property managers (who will most likely never be able to wrap their heads around the concept of transferring funds overseas), hold it in local bank accounts until they accumulate to an amount worth transferring, or until exchange rates are profitable, then send it overseas.
This partnership can take the form of a split-all-profits-and-expenses-down-the-middle kind of arrangement, or can simply be a services package purchased from a firm like ours, for a small percentage of the incoming rent (normally less than a property manager). That partner can then also handle all correspondence with local entities, which is the last main barrier between foreign investors and the Japanese property market. Receiving maintenance requests, approving quotes, finding new tenants etc., can become quite challenging when one doesn’t speak the language. Even a “shark-less” business pool like Japan can cause many frustrations until they’re resolved, through no fault of either side involved – which is exactly why Japanese professionals also prefer to avoid dealing with non-Japanese entities.
What are some of the biggest real estate investing mistakes that you’ve made?
I remember my very first deal – a package of three units, all sold be the same owner, in Kitakyushu, one of western Japan’s bigger Industrial and blue-collar hubs. Although the yield was phenomenal, the tidy IT geek in me couldn’t handle the fact that one of the three was slightly lower in the rental income than the other two, and for no reason that I could see.
And so, without consulting with the property manager, and without verifying market conditions at the time, I proceeded to an “all-guns-blazing” approach, and notified the tenant, whose lease was just ending (“What perfect timing!”, the greedy westerner in me rubbed his hands together) of a rent rise – to the tune of something like $20 a month. This was less than 10% of the rent price. Even the property manager’s complaint that they had just notified the tenant they may continue their lease as it is, didn’t deter me.
My tenant promptly moved out.
He most likely rented one of the four available units in the block – the ones advertised by the same property manager for over four months at the time, and all asking for a rent lower than the one my tenant was paying at the time. All facts that I would have found out in a heartbeat had I listened to my very own property manager, who happened to be placed in care of most units in the block and knew everything there was to know about what rents can be expected at any given time and for any unit of similar profile.
I’ve since had to put up with a series of short-term government supported tenants that came and went. Not as big a deal as in Western countries. The worst these guys might do is to abscond, disappear altogether, or stink the place up a bit. They normally come with a guarantee or insurance policy in place, which covers the cost of removing their belongings and cleaning the place up. But, still far more hassle than the tenant I lost. One who was already in place for four years, and might have stayed at least another four. But, that’s the price you pay for waltzing into a foreign land and trying to do things “your way”. I was greedy and arrogant, and paid the price accordingly.
Fortunately for me, the rest of my portfolio has been doing far better. I’ve since learned to listen to those who have been living, breathing and working in the market for far longer than I have. In short, to trust my team and follow their advice, since that’s what they’re there for.
What would be your dream deal?
A well-diversified package of small, affordable residential properties, spread out over several cities and socio-economic profiles. All in developing cities, unknown to foreigners, and yielding 12-16% pre-tax in p/a in net cash flow, with tenants in place 4-5 years, with no financial issues on either the tenant side or the holding companies. “Sweeeeet”, as we say in Australia – and quite achievable if the right kind of due diligence is performed in advance.
What advice would you give to a beginning investor?
Follow your dreams, not dollar signs. Find a business environment and strategy that works for you as a person. One that will make you wake up every day with a hungry glint in your eye and not because you’re dreaming of the money. Money is just a form of energy that you can direct and utilize for your goals. Instead, get that kind of glint that comes from enjoying what you do every minute of every day. The rest will follow naturally enough, no matter what the naysayers tell you. But, if you follow the lure of fast and easy money to a place that doesn’t “turn you on” as a person, you’re bound to suffer long-term, and so will your business. It needs the best of you to succeed, like any relationship really – and you can only give your best when you’re living your dreams.
Best of luck! 🙂
Ziv Magen is an Australian, and has been deeply immersed in Japan’s culture and business environment for the past decade. In 2003, he forsake his career as an IT corporate project manager, wishing to spend more time with his family and secure their financial future. Having made the transition to real estate investment and successfully building his own portfolio, he subsequently established Nippon Tradings International (NTI) together with his Japanese partner, assisting others in capitalizing on Japan’s vast and lucrative property market.