How do i evaluate an apartment Building? (japan)

Question

so im looking to learn more about the specifics of purchasing japanese real estate, more specifically single occupant units.  Im trying to figure out what kind of operating costs and tax's i should consider before purchasing a small or medium apartment building.  I do know that the type of structure makes a difference when acquiring a loan (steal/wood/concrete). If anyone knows the specific usable years for these structures that would be great.

It would be immensely helpful if anyone could enlighten me on what to expect on the subjects of fire, elevator and water tower inspections (frequency/cost), building maintenance, insurance, property management, etc.

I believe 5% each month and a 2-3 month fee for finding tenants, please correct me if im wrong.

Also with buildings essentially being disposable, and "reforming" only able to be done after 1990 something. does anyone have a plan for the investment when the usable life span begins to run out and vacancies begin to increase? I figure just tear it down and build a new one, but to my understanding it is very difficult to get people out once they are in.

Also with prices shooting up here in tokyo would it be advisable to look in another population center, or wait for a good deal locally?

Jim Adrian · Answer

Yesterday at work I found this great link on building product lifespans (see below). This will help answer some of your questions. As for structure lifespan, usually some other event/issue causes a building to be torn down like seismic or natural disaster. I would expect to see 50 - 75 years. At some point you will need to do a major renovation of hvac, plumbing, interior finishes but that was already assumed. Do a quick google search for "building life cycle span" and play around with the wording too. I know this link is US based but may be relevant for Japan as well.

https://icap.sustainability.illinois.edu/files/projectupdate/2289/Project%20Lifespan%20Estimates.pdf

Dan Baker · Answer

That would be great! I'll shoot you a message, in the next few days, hopefully we can set something up soon.

@Dmitri L

It's ok, your welcome to keep bugging me about it. Hopefully soon I'll be able to drag my butt to town.

@Jim Adrian

I appreciate you taking the time to find that link for me, I'll definitely check it out. I'd like to know more about the subject for the US markets. But  things here are quite a bit different, the banks have very strict rules on the usable lifespan of the building, and won't give you a loan past that time.  Many buildings are considered disposable,  and some cannot be " reformed"  if their built after certain year. It has to do with earthquake laws.

Bill Baldwin · Answer

More than happy to share them around :)

Dmitri L. · Answer

Yep no worries, I'll just keep bugging you about it ;) I think last time we ended up staying til past 10pm

@Bill Baldwin - would love to keep at those spreadsheets also ;)

Bill Baldwin · Answer

Dan let's grab that long overdue beer again sometime, I can bring out my spreadsheet from my places and share what I know and have learned, way too much to type all here posting from my phone :)

Dmitri L. · Answer

@Dan Baker

You should stop by our meetup in Roppongi, there are a few guys with some good experience on this front.

One thing I can say is, take the sellers/agents pro formas with a serious grain of salt. Most of them use 15-20% expense ratio, but I think a safer bet is something like 35-40% for an RC building in decent shape.

Once you have the cash flow aspect figured out, the most important question is exit strategy. As you pointed out, the older buildings will eventually no longer produce (it's probably possible to fill a building by dropping the rents low enough, but do you want the tenant class that comes with those rents?).

Given that prices have come up quite substantially in the last 5 years, especially around Tokyo, I really think that you need to have some sort of value add opportunity, as well as strong enough cash flow to pay off the loan quickly in case option 1 falls through, in order to justify the risk of investing.

If you have any specific property you're looking at, happy to take a look at the numbers as well

Cheers

Dmitri

Dan Baker · Answer

@Bill Baldwinundefined

hope you could help me out a little, if thats not to much trouble.

How do i evaluate an apartment Building? (japan)

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