Documents & Points to check
When you find good a real estate property on the internet that matches what you want, make an inquiry.
Try to check everything you can check before you actually visit the property.
The most popular way to inquire is by email.
A real estate company will send you a property outline and a rent roll for the specific property that you have inquired about.
On these documents there are many things to look at.
Here are the some points below.
The most important matter in real estate investment is the location of a real estate.
It is possible to change up some stuff about the property but the location cannot be changed later on.
The property outline should says the property address so try to search it on the internet.
Make sure what’s around it in the area and see if there are demands for lease.
Places where there are any stations, supermarkets, universities, or hospitals are very convenient so high demand for rental properties can be expected.
Factories and offices are also a positive sign but keep in mind that this may be influenced by the economy up and down.
NIMBY (Not In My Back Yard) can be a negative factor for tenants.
It’s not necessary to understand the technicality of a building but it’s important to know what type of structure your building is.
Because depending on property structure, legal life span defers in every type of structure, which would change the loan period and the depreciation cost.
These changes may cause different cash flow.
Here are types of property structure and its legal life span.
・Wood - 22 years
・Light Steel – 19 years
・Steel – 34 years
・RC (Reinforced Concrete) – 47 years
There are many types of room layout from 1K or 1R single type to 2LDK or bigger family type.
A modular bath (Bath, toilet & wash stand in the same space) is not a recent trend. It might be difficult to find a tenant for a room that’s bigger than 20㎡ with the bath and toilet separate.
However such a small room has high profitability per square meter. If rent can be set relatively cheap, you don’t have to worry about getting a new tenant.
Check what’s out there in the area and try to see the balance when choosing a property.
Age of building
The newer a building is, the lower the investment return would be.
On the other hand, older property yields higher return.
As the building ages its rent stops dropping and gets stable about the point of 20 years past.
Of course new building looks better but aging building can be good when other factors like repair status and high yield are taken into account.
However the old earthquake resistance standard is a concern.
It means the building was built and examined before 1981.
This kind of property has higher risk of collapse and banks are much more reluctant to finance on. Past legal life span building doesn’t mean it is banned from leasing.
You are still able to find tenants for it. Tearing the building and making the land vacant could also be an option.
As a result, buildings in the old earthquake resistance standard are cheap and make good return. As long as you can control any risks, it could be worth a shot.
Building any buildings is regulated by the Building Standard Act.
To prove a building is in compliance with this law, “Certificate of verification of building construction” before the completion and “Certificate of completion” at the completion of the building are issued by administration.
Be careful about a property that yields high return and is located in the good area yet NOT in compliance with the Building Standard Act. It has high possibility that financial institutions would not finance. Even though you could purchase it with your own cash, it would be very difficult to sell the property since a buyer also has trouble with getting a loan. This is not a good investment. We highly recommend to check if a property you are thinking to purchase follows the law.
Things to check on rent roll
Check how long tenants have been living and see if rent has been about the same price over the years.
If rent paid by newly tenants has dropped, it is likely that the rental market in the area could be decreasing. This indicates that next time you are likely to have to advertise your room for cheaper rent.
It is recommended to recalculate full occupancy gross yield at market value rent for any vacant rooms.
Along with rent and lease period, a security deposit needs to be checked.
If the deposit has been brought down, it is likely that the current owner is struggling getting new tenants.
In contract, if a security deposit is set big like 3 month deposit, this is a positive thing because it still has room for price negotiation that might happen with new tenants.
A corporate leasing contract is basically stable and it has less risk of rent idle.
However a corporate subleasing contract may have some risk that all the rooms get empty if the company were to go bankrupt or move somewhere else.
A property with high rate of female tenants is considered to be low risk of any trouble.
Tenants such as a pauper might be a trouble so this needs to be checked carefully.
Those factors above are basic things to check.
After all the checks are done, if you still want to go forward and purchase a property, ask the following questions.
Yearly running cost
Even if a property generates huge rental income, running costs are too high, cash flow will be low.
Here are major costs associating with running a property. Property tax, trash disposal fee, electricity and water for public area, fire inspection fee, elevator inspection fee, regular cleaning fee, managing fee, parking fee, etc.
For some used real estate properties, there aren’t any repair history reserved. These types of property may cause trouble down the line. If you are thinking about purchasing these types, you should prepare repair reserve fees for any damages that may occur in the future.
Reason for selling
You might be able to purchase a property cheap due to some selling reasons the current owner has.
Property on sale due to foreclosure.
The seller wants to cash out because of inheritance.
The seller purchased the property cheaper than what he is selling for.
Or any other reasons.
If the current owner is rushing to sell the property, price negotiation may be possible.
To negotiate the price, check reasons for selling the property.
- Sale by Private Contract & Sale by Auction
- Price Limit Order
- Settlement & Ownership Transfer
- Ways to Search for Properties
- Documents & Points to check
- Ways to find legit real estate agents, narrow them down, and become their favorite customer
- Gross Yield & Net Yield
- Letter of Intent
- Important Description & Sales Contract