Apartments can be owned as income-generating properties for many years through repairs and renovations.
However, as the years pass, deterioration progresses, the number of tenants decreases, repair costs increase, and the time will come when rebuilding becomes necessary.
Apartment rebuilding is not something you experience frequently, and many people may not know where to start.
That is why this article explains the basics of apartment rebuilding, including costs, financial planning, and tips for keeping expenses down.
Whether you are considering rebuilding now or anticipate needing to do so in the future, please use this as a reference.
First, Understand the Apartment Rebuilding Process
Let's get a grasp of the overall flow of apartment rebuilding.
In practice, the contractor will guide you through the preparations, but understanding the big picture will help you request the rebuild more smoothly.
Develop a Rebuilding Plan and Financial Plan
When considering apartment rebuilding, costs are probably the biggest concern.
To continue stable apartment management after rebuilding, you need to carefully think not only about the rebuilding plan but also about the subsequent financial plan.
When constructing an apartment, in addition to the construction costs of the building itself, you will also need funds for ancillary work such as exterior construction, taxes, and application fees.
Construction costs also vary depending on the structure and equipment grade of the property being rebuilt, the number of units, and site conditions, so pay close attention when making your financial plan.
Set a Schedule
Ideally, the apartment's completion date should coincide with the peak move-in season.
If the building is close to full occupancy right after completion, you can expect stable rental income immediately after rebuilding.
If possible, plan for the apartment to be completed before the peak season.
Since demand for tenants peaks from January to March, if the building is completed before the new year, you can start running move-in advertisements from January.
However, one important thing to note is that unlike regular apartment construction, when rebuilding, there are already tenants living in the apartment.
Even after issuing eviction notices, it is not guaranteed that all tenants will vacate smoothly.
In such cases, a long-term plan that includes the period until eviction is complete will be necessary.
For elderly tenants with lower incomes who may find it difficult to find a new property, you may also need to introduce alternative housing.
Conduct Eviction Negotiations
As mentioned above, rebuilding an apartment requires asking the existing tenants to vacate.
Even if you own the property, you cannot legally require tenants to vacate without a valid reason.
Tenant consent is also required for an eviction to be finalized.
When requesting eviction, "just cause" and "financial compensation" are required, and in cases where eviction is requested at the landlord's convenience, eviction compensation will generally need to be paid.
The timing of vacating and the amount of eviction compensation can sometimes require considerable time to negotiate with tenants.
Since eviction negotiations are a significant burden for landlords—such as introducing new housing options or covering moving expenses—many rely on professionals for assistance.
Contracts for Demolition and Construction
While it is possible to hire separate contractors for demolition and construction, having one contractor handle both often results in smoother progress.
Demolishing a large apartment requires not only a demolition contractor license but also a construction contractor license.
Additionally, work that generates loud noise or heavy vibrations may require filing a notification with the local government for designated construction work before commencing, so be careful.
Loan Agreement
Many people take out a loan when planning a rebuild.
If a loan is needed, plan your schedule accounting for the time required for screening, signing the monetary loan agreement, and disbursement of funds.
Financing can be obtained from private financial institutions such as banks, as well as from the government-affiliated Japan Finance Corporation.
When taking out an apartment loan from a bank, having 10–30% of the construction cost as equity tends to make loan approval easier.
The Japan Finance Corporation, on the other hand, is characterized by lower interest rates and long-term fixed rates compared to banks.
Choose the option that best suits your situation.
Inspection at Completion
After construction is complete, a building inspection is conducted before handover.
The construction company provides regular inspection reports during construction, but at completion, the company representative and the landlord conduct a final joint inspection.
Carefully check for any defects in the construction and whether any corrections are needed, right down to the finer details.
If there are any issues with the work, you will need to request corrections from the construction company.
Subsidy Application
Depending on the municipality, subsidies may be available when rebuilding an apartment.
Check the availability of subsidies and eligibility conditions on each municipality's website.
Subsidy applications require specific cost details related to the rebuild.
Proper expense summaries and supporting documents as evidence may also be required, so check the conditions and necessary documents in advance.
Registration
Prepare the necessary documents such as the building confirmation certificate and proceed with the registration process.
Since apartment properties have higher property values than typical single-family homes, the taxes incurred during preservation of ownership registration will also be substantial.
Property taxes will be higher compared to the previous building since it is now new.
Real estate acquisition tax notices are sent some time after acquisition, so make sure to secure funds in advance.
Breakdown of Apartment Rebuilding Costs
It may be difficult to imagine just how much the total cost of rebuilding will be.
Here, we introduce the three main cost categories required for rebuilding.
Demolition Costs
Here are the typical demolition costs for a general apartment, broken down by structure.
・Wood-frame: approx. ¥40,000–50,000 per tsubo
・Steel-frame: approx. ¥60,000–70,000 per tsubo
・Reinforced concrete: approx. ¥70,000–80,000 per tsubo
To convert to tsubo area, 1 square meter equals 0.3025 tsubo, so multiply the square meter figure by 0.3025.
For example, a steel-frame apartment with a total floor area of 100 tsubo would cost approximately ¥6–7 million in demolition costs.
Demolition costs vary depending on the size and structure of the property and the surrounding environment.
Construction Costs
The general market rate for apartment construction costs by structure is as follows.
・Wood-frame: approx. ¥700,000–900,000 per tsubo
・Light steel-frame: approx. ¥800,000–1,000,000 per tsubo
・Heavy steel-frame: approx. ¥900,000–1,100,000 per tsubo
・Reinforced concrete: approx. ¥1,000,000–1,200,000 per tsubo
For a two-story wood-frame apartment with 10 units (30 sqm each), the total floor area across both floors is 300 sqm, or approximately 90 tsubo.
At a unit price of ¥700,000 per tsubo, the construction cost would be approximately ¥63 million.
Eviction Compensation
When planning apartment rebuilding, make sure to factor in eviction compensation.
The landlord's notice to vacate must be given at least 6 months before the lease expiration date.
Under the law, tenants are not required to agree to termination without a valid reason.
The fact that the building is aging and needs to be rebuilt does not constitute just cause.
Therefore, eviction compensation is paid to facilitate a smooth transition during rebuilding.
The standard for eviction compensation is 6 months' rent.
However, if negotiations are not successful, there is a possibility that moving expenses will also be included in the eviction compensation.
To keep eviction compensation down, it is advisable to issue eviction notices once the number of occupied units has decreased.
When tenants move out on their own, rather than accepting new tenants, you can watch for the right timing to proceed with rebuilding, which helps keep eviction costs low.
The three categories above are the costs required for rebuilding.
Keep in mind that prices vary depending on the structure and scale of the property, and that costs such as eviction compensation also arise, so create a more concrete financial plan accordingly.
What Is the Average Cost of Apartment Rebuilding?
How much does it cost to rebuild an apartment?
The necessary costs include demolition, construction, and eviction expenses if tenants are present.
While costs vary depending on scale and structure, here we introduce the average cost ranges for apartment rebuilding.
Construction Costs Alone Average ¥500,000–1,000,000 per Tsubo
When rebuilding an apartment, the average market rate is ¥500,000–1,000,000 per tsubo.
However, this is an average market rate, and it varies by region.
Some apartments may fall within this range, while others may significantly exceed it.
Varies by Scale and Structure
Apartment rebuilding costs also vary depending on scale and structure.
Since demolition and construction costs change significantly based on structure, a substantial amount may be required depending on the structure chosen for rebuilding.
Even for wood-frame buildings, the cost of rebuilding varies depending on the type of foundation.
Costs also change depending on the materials used and the design.
If earthquake resistance is prioritized, construction costs will inevitably be higher, so be aware that rebuilding costs are affected by differences in scale, structure, materials, and environmental conditions.
Required Reserve Funds for Apartment Rebuilding
As discussed above, apartment rebuilding requires a large amount of capital, and most people secure funds through financing from financial institutions.
Here, we explain the reserve funds required for apartment rebuilding.
Receiving Financing from the Government
When rebuilding an apartment, one option is to receive financing from the Japan Finance Corporation.
The Japan Finance Corporation is a government-affiliated financial institution.
It is characterized by low interest rates and long-term fixed-rate borrowing, making it accessible for small and medium-sized businesses.
Interest rates are lower compared to private financial institutions, which is advantageous for repayment.
However, there are several conditions for borrowing.
These include owning collateral property, being engaged in real estate rental business, and having no unpaid taxes or public utility charges.
The collateral property is assessed at approximately 30% of its estimated value, and the borrowing period is a maximum of 15–20 years.
Men have a 15-year term and women a 20-year term, with full repayment required by age 79, so work backwards to determine the term.
Using an Apartment Loan
Apartment loans can also be used to fund apartment rebuilding.
General financial institutions offer apartment loans for apartment operators, which can be used for borrowing.
To use a financial institution's apartment loan, having 10–30% of the construction cost ready as equity tends to make the loan process smoother.
Having sufficient equity available will make it easier to proceed with apartment rebuilding.
Creating a Financial Plan for Apartment Rebuilding
If you are thinking about rebuilding your apartment, try creating a financial plan.
Those who have never created a financial plan or are unsure what to include should use this as a reference.
Create Income, Expense, and Cash Flow Categories
To rebuild an apartment, create a plan covering income, expenses, and cash flow.
These income, expense, and cash flow categories are closely tied to apartment management.
Without a clear grasp of them, you will not only lose track of money flows but may also end up with unplanned apartment rebuilding.
For income, calculate based on rent as well as parking fees, key money, and the number of vacancies (reductions).
Expenses include property taxes, management fees, repair costs, fire insurance, common area fees, and loan repayments.
Cash flow is the calculated monthly and annual take-home amount.
Try calculating each category while reviewing actual figures.
Fill in the Numbers for Each Category
Once you know the amounts included in income, expenses, and cash flow, fill in the numbers for each category.
However, there are a few points to note when entering each category.
【Notes on Each Category】
◎ Income
・Rent
Understand the market rent rates for apartments in the same area and environment.
Setting it slightly lower will result in a more conservative plan.
Note that rent can change future plans significantly.
When recording cash flow, calculate as: rent × number of tenants × rental period.
・Parking fees
Parking fees vary by region; use ¥40,000 as a guideline for urban areas.
In suburban areas, use ¥10,000–15,000 as a guideline.
Calculate as: number of parking spaces × 12 months.
・Number of vacancies (reductions)
Do not calculate as if the apartment is always fully occupied; assume a certain number of vacancies.
This is also effective when allowing for margin in your plan and accounting for non-payment risk.
・Key money
This is paid by the tenant to the owner, averaging 1–2 months' rent.
Enter this while factoring in tenant turnover.
◎ Expenses
・Property tax (city planning tax)
This is a tax on land and buildings.
The city planning tax is paid by those who own land or a home within an urbanization promotion area.
Calculate these together as 5–10% of rental income.
・Management fees
This is paid when the apartment is entrusted to a management company.
Consider an average of 5% of rental income.
・Repair costs
A plan that accounts for daily maintenance, restoration to original condition, and age-related deterioration is necessary.
An average of 5% of rental income is considered ideal, but avoid calculating too high.
・Fire insurance
The amount varies depending on the structure and coverage of the apartment.
Research in advance and calculate an average price.
・Common area fees
This is necessary for maintaining the apartment.
Calculate using approximately ¥3,000–5,000.
・Loan repayment
Set a repayment amount that is manageable.
The ideal repayment ratio is 40–50%, but exceeding this ratio will affect your plan, so be careful.
Calculate the Actual Yield
After calculating each category, calculate the actual yield.
What matters most in a financial plan is whether profit can be expected.
An approximate figure is fine—this allows you to understand whether the rebuilding investment can be recouped and over what timeframe.
Since unexpected situations may arise along the way, make sure your plan can accommodate unforeseen circumstances.
When to Consider Apartment Rebuilding
When managing an apartment, there will come a time when rebuilding must be considered.
However, many people may not know when exactly apartment rebuilding should be done.
Below, we explain the timing for when apartment rebuilding should be considered.
Age of the Building
Residential buildings, including apartments, have a legally defined useful life.
Many use this figure as a guideline for when to rebuild.
The legally defined useful life indicates the value of the building and does not mean it becomes uninhabitable once that period has passed.
Therefore, it does not mean you must immediately rebuild once that period is exceeded.
The legally defined useful life is 22 years for wood-frame, 19–34 years for steel-frame depending on material thickness, and 47 years for reinforced concrete.
While reinforced concrete has a long legally defined useful life, buildings over 40 years old may have layouts and designs that no longer match current needs.
Since equipment also becomes outdated, fewer prospective tenants will be interested.
If rebuilding is aimed at reducing vacancy risk, consider the period after depreciation and loan repayment are complete—around 25–35 years—as a guideline.
High Vacancy Rate
As an apartment ages, vacancies become more noticeable.
While some older apartments always have tenants, this is the exception rather than the rule.
Even with an aging building, a consistently full occupancy rate is typically limited to cases with excellent location or added value that offsets the building's age.
If you feel that tenants are decreasing despite a good location, it may indicate issues with the facilities or exterior, and rebuilding should be considered.
If the issue lies with the area where the apartment is located, rebuilding may not solve the problem.
To prevent this, it is important to conduct thorough market research to determine whether rebuilding will provide benefits.
If the land seems unsuitable for apartment management, consider other land utilization methods.
Exterior and Floor Plan
As years pass, the exterior and floor plan of a building become outdated.
Even if they were perfectly fine at the time, needs change significantly over 20 or 30 years.
Comparing 20–30 years ago to today, nuclear families with a couple and one child have become more common.
For family-oriented apartments, simply changing to studio or 2–3 person layouts can increase the number of interested tenants.
Updating facilities to the latest options will also make the property more attractive.
Design preferences have also shifted between now and then.
If you are considering a full renovation to match current needs, rebuilding to a new construction may be more likely to improve occupancy rates.
If major renovations have become necessary, consider rebuilding as an option.
Should You Rebuild or Renovate?
In addition to rebuilding, there is also the option of renovating the existing building.
Some landlords may be unsure which of these two options to choose.
To address that uncertainty, we will explain the differences between rebuilding and renovation, the cost differences, and the pros and cons of each.
Difference Between Rebuilding and Renovation
The biggest difference between rebuilding and renovation is whether the foundation is kept or not.
Rebuilding involves completely demolishing the existing building down to bare land before constructing a new one.
Renovation, on the other hand, retains the foundation, columns, beams, and other structural elements of the existing building while carrying out remodeling, repairs, or additions.
The scope of renovation varies widely, from partial work such as replacing wallpaper or flooring to what is called a skeleton renovation, where everything except the foundation is removed and replaced.
When the situation calls for a skeleton renovation, many people find themselves torn between that and a full rebuild.
There are key points to be aware of when deciding between rebuilding and large-scale renovation.
One is that rebuilding may result in a smaller structure than the original building, and another is that properties built before the Building Standards Act and Urban Planning Act were enacted may not be eligible for rebuilding.
Since the Building Standards Act and municipal ordinances are periodically revised, keep in mind that properties built under pre-revision standards may face such issues.
Additionally, large-scale renovation may be difficult for some properties.
Apartments with structural systems that rely on walls and floors for support cannot have their floor plans changed.
Taking all of this into account, it is important to carefully determine whether to choose rebuilding or large-scale renovation.
Which Is More Cost-Effective?
The cost of apartment rebuilding varies depending on the total floor area and the unit cost per tsubo for demolition.
A rough market rate is ¥30 million or more.
Of course, costs vary by location, so it is important to gather information in advance.
Large-scale renovation, on the other hand, has a market rate of ¥10–25 million.
Rebuilding is inevitably more expensive since everything is constructed from the foundation up.
However, since some structures do not allow floor plan changes through renovation, there are cases where rebuilding is the only option.
If the foundation is determined to be too damaged to withstand renovation, rebuilding must also be chosen.
When deciding between the two, consider factors such as how long you plan to use the property, whether you want major floor plan changes, and whether you plan to pass it on as an inheritance.
If you are considering inheritance in the future, rebuilding with an apartment loan is recommended as it can reduce inheritance taxes and other costs.
If the property will end with your generation or you are considering other forms of land use, renovation rather than rebuilding may be the more cost-effective choice.
Pros and Cons of Rebuilding
Many people may think that rebuilding is all advantages since it results in a new property.
However, there are also disadvantages, so caution is needed.
【Pros】
・Can reduce vacancy rates
・Asset value increases
・Leads to reduced depreciation and inheritance tax
・Rent can be set higher
【Cons】
・High cost for rebuilding
・Long period until rebuilding is complete
Since it involves significant costs and a long time investment, it is important to carefully weigh whether the benefits justify the investment.
Pros and Cons of Renovation
Renovation has different pros and cons compared to rebuilding.
Since these serve as criteria for deciding which to choose, review the pros and cons of renovation as well.
【Pros】
・Lower cost than rebuilding
・Shorter construction period than rebuilding
・Can also be expected to reduce vacancy rates
【Cons】
・Repair costs continue to arise even after renovation
・Difficult to achieve a complete overhaul like new construction
・The effect on improving profitability is limited
Even after large-scale renovation, rents will not reach new-construction levels.
Also, since not all deteriorated parts are replaced, there may be cases where additional repairs are needed in the near future.
While it can be expected to help improve vacancy rates, do not expect a dramatic increase in revenue-generating capacity.
Tips for Keeping Apartment Rebuilding Costs Down
Apartment rebuilding involves high costs.
This may cause some landlords to hesitate about rebuilding.
There are certainly landlords who want to keep rebuilding costs as low as possible.
Finally, to address those concerns, we explain tips and points for keeping costs down.
Tips for Reducing Demolition Costs
Tips for reducing demolition costs are as follows.
Always Get Multiple Quotes
When requesting demolition work, always get multiple quotes.
Start by searching for a house builder, and consider having them handle both demolition and new construction together.
House builders have connections with demolition contractors, which helps you find more cost-effective options.
Letting the house builder know you want multiple quotes from demolition contractors increases the likelihood of keeping demolition costs down.
Do Not Neglect Consideration for Neighboring Residents
If consideration for neighboring residents is insufficient, unexpected costs may arise from handling complaints.
It is recommended that the site manager and landlord make the rounds to greet neighbors together.
It is also important to have a system in place where the site manager can be reached promptly when issues arise.
If you plan to build a new apartment, make sure to explain that to the neighboring residents as well.
Consider the Timing of Property Tax Assessment
The amount of property tax is determined as of January 1st.
If a building exists on January 1st, it is subject to taxation; if it does not, it is not.
If an apartment is standing, the residential land tax reduction applies.
As a result, the property tax on the land itself is lower.
However, if the building has been demolished, the residential land tax reduction does not apply, so the property tax on the land will be higher.
Factor this into your decision when setting the rebuilding schedule.
Tips for Reducing Construction Costs
Tips for reducing construction costs are as follows.
Compare Multiple Plans and Choose the Best Conditions
Before rebuilding an apartment, visit several house builders and compare multiple plans.
Comparing options creates a sense of competition among house builders, making it easier to achieve better plans.
Requesting a major house builder and choosing an industrialized construction method is also a point for reducing construction costs.
Be Mindful of the Actual Yield
While construction costs are naturally a concern, focus even more on the actual yield when rebuilding.
Smaller layouts for single-occupant tenants rather than family-oriented apartments make it easier to aim for higher profitability.
Since the number of single-person households is expected to increase, switching to layouts that meet this demand is effective.
A 2DK layout is recommended.
Setting the area at 40 square meters or more per unit also helps reduce real estate acquisition tax.
For suburban properties, also keep in mind that demand from single residents will be even higher.
Sell or Utilize Any Remaining Land
If land remains after apartment rebuilding, consider selling it or applying other forms of land use.
If there is no demand for parking in the area, seriously considering selling it is one option.
If the land shape is favorable, reconsidering the building layout—such as combining an apartment with a rental single-family home—is also a good idea.
Exploring ways to make effective use of the site and finding the optimal solution also leads to a practical reduction in construction costs.
Tips for Reducing Eviction Compensation
Tips for reducing eviction compensation are as follows.
Wait Until More Than Half of Units Are Vacant
When rebuilding, you will need to pay eviction compensation to tenants.
Be aware that the more tenants there are, the higher the total amount to be paid.
To keep eviction compensation down, it is recommended to begin the process after more than half of the units are vacant.
This also reduces the effort of negotiations, thereby lightening the burden on the landlord.
Conduct Eviction Negotiations Calmly and Politely
When conducting eviction negotiations, it is important to act sincerely.
Attempting to conclude matters unilaterally through written notices or emails has a high risk of leading to disputes.
Since such methods do not allow the other party to voice their concerns, it can be off-putting.
To avoid causing discomfort, visit in person and make the request politely.
In most cases, tenants will agree if you clearly explain that eviction compensation covering at least moving expenses will be provided.
Propose Switching to a Fixed-Term Lease
With a fixed-term lease contract, there is no need to pay eviction compensation when the contract term expires.
For rental agreements signed on or after March 1, 2000, it is possible to change from a standard lease contract to a fixed-term lease contract with the mutual consent of both parties.
However, keep in mind that while a fixed-term lease offers significant benefits for the landlord, the benefits for the tenant are more limited.
Therefore, it is common for tenants to agree in exchange for a reduction in rent.
The shorter the fixed-term lease period, the larger the rent reduction will be.
Additionally, offering options such as waiving restoration to original condition upon move-out or returning the full security deposit can help negotiations proceed more smoothly.
Apartment rebuilding involves significant costs.
Leaving the building as-is while it ages will only lead to further deterioration, making it harder to ensure tenant safety, which carries significant risk.
This will also lead to higher vacancy rates, creating larger disadvantages for the landlord.
To prevent this, it is important to rebuild at the appropriate time.
Using the information presented in this article—including when to consider apartment rebuilding and the differences between rebuilding and renovation—try creating a financial plan for your apartment rebuilding.
Frequently Asked Questions About Apartment Rebuilding
Q1. What is the average cost of apartment rebuilding?
For wood-frame apartments, the guideline is ¥500,000–800,000 per tsubo. An 8-unit two-story apartment typically costs around ¥30–50 million.
Q2. How should tenants be handled during rebuilding?
Eviction negotiations are required, and just cause along with the provision of eviction compensation is necessary. The law requires notice at least 6 months in advance.
Q3. Is rebuilding or renovation more cost-effective?
If the building is over 30 years old and has structural issues, rebuilding is more advantageous. If the building is under 20 years old and structurally sound, large-scale renovation may be more cost-efficient.
