This is an article that explains the mortgage loan for purchasing a house in Japan where you or your relatives live. With Japanese home loans, the applicable interest rate is calculated by subtracting the amount of reduction according to the contract terms from the standard interest rate displayed at the store, so it is not possible to compare repayment terms just by looking at the low number advertised. Unlike the common view overseas of ``comparing the displayed interest rates themselves'', it is necessary to check the base interest rate, reduction amount, and conditions after the end of the period as a set. Furthermore, residential mortgage loans in Japan cannot be used for investment properties in principle, and screening and product characteristics are different from financing for income properties.
Risks of investing in renovating used properties | 7 items to check during due diligence before purchase
Even if the expected yield on the sales drawings is high, it is difficult to make a decision about investing in renovating a used property unless you have determined how much you can lend the property after construction and how much will be left over for unexpected repairs. What makes the difference between success is pre-purchase research rather than the appearance of the interior.
In this article, we will organize 7 items to check before purchasing, based on the existing housing inspection and the Ministry of Land, Infrastructure, Transport and Tourism's existing housing/renovation system. The property price, construction costs, vacancy period, and repairs after operation are considered as one income and expenditure.
Key points of this article
- We judge based on the total investment amount, including acquisition, construction, vacancy, and repairs during ownership, not the surface yield.
- For detached houses, check the frame, roof, rainwater, and termites, and for condominiums, check the management regulations, common areas, and plumbing updates first.
- Inspection before the start of construction and clear documentation of prerequisites for estimates will reduce the risk of additional construction.
- The rent after construction will be verified based on competing properties and the recruitment period, not the desired amount.
What is the income and expenditure that you should look at first when investing in renovating a used property?
The first thing you need to create is not just a table of "property price + acquisition costs + construction costs." This is a financial plan that includes fixed costs during the vacant period, financing costs, recruitment costs, contingency funds left after construction, and future equipment updates. The lower the construction cost, the higher the yield will appear. Yields before estimates are solidified should be treated as hypothetical.
Before purchasing, we compare the rent after construction with the contract/recruitment conditions in the neighborhood, and consider two scenarios: one in which the rent is lowered, and the other in which the vacancy is extended. Please check the recruitment competitiveness of each property separately from How to set rent.
What should I check for during inspection?
An inspection is a survey to understand the condition and quality of an existing home at the time of transaction. The Ministry of Land, Infrastructure, Transport and Tourism has established a training system for engineers to investigate the condition of existing housing, and is working to develop those who will be able to carry out the investigation. A visual inspection alone will not determine the construction cost, but it will be a starting point for checking the condition of the structure, roof/outer walls, leaks, under floors, and equipment, and identifying areas that require additional investigation.
For single-family homes, check for rot, ant damage, and rainwater intrusion routes; for apartment buildings, check the boundaries between private and common areas, and update history of water supply and drainage pipes. Any defects found are not only determined whether they can be fixed, but are included in the income and expenditure as an excess of the construction period and costs required before recruiting tenants.
Why do I look at the management regulations and common areas first for classified condominiums?
You may not be able to freely change the room. Check the management regulations and usage regulations for the sound insulation grade of the flooring materials, days and hours when work can be done, notifications to the management association, and restrictions on work on piping and the structure. Approval may be required even for construction work on private areas that affects common areas or upper and lower floors.
At the same time, check the long-term repair plan, repair reserve fund, and minutes of the most recent general meeting. Even if you update the interior, your investment decision will change if the cost of repairing the entire building, including the exterior walls, roof, and water supply and drainage, is large.
How do you manage additional construction costs?
When it comes to additional work, we don't end it with a ``it can't be helped because it's not what we expected,'' but treat the estimates separately. Items to be confirmed after demolition, whether or not existing equipment can be reused, supplied supplies, management association application, waste material disposal, and handling in case of extension of construction period are clearly specified in the estimate. Rather than just comparing prices from multiple companies, it is important to align the included work and exclusion conditions.
The government's long-term quality housing reform promotion project also requires pre-construction inspections, maintenance plans, and the creation of construction history. Availability of subsidies varies depending on the year, property, and operator, so please check official information and the construction company before factoring it into your purchase decision.
How do you verify the rent and exit after renovation?
Just updating the interior doesn't necessarily mean the rent will go up. We prepare the floor plan, station distance, area, year of construction, equipment, and competitive recruitment conditions, and verify the expected rent after construction and the recruitment period. Rather than setting a high rent, it is better to decide on the specifications that will be chosen by the tenants.
At the time of exit, the next buyer evaluates more than just the appearance of the construction work. Check to see if there are any inspection reports, construction records, equipment warranties, rental contracts, and repair history. Keeping records from the time of purchase will support management during ownership and explanation when selling.
INA's opinion｜Don't buy a lack of research rather than buy cheap
The appeal of second-hand properties is that you can transform them into homes that will be chosen by tenants. However, if you make a decision based solely on the low acquisition price, you will end up breaking even later due to unseen repairs, long vacancies, and excessive rent settings.
Before purchasing, consider surveying, construction, recruitment, and repairs after ownership as a single income and expense, and check whether it can withstand even adverse conditions. Not rushing into decisions will reduce the chance of investment failure.
Summary
- Investment in second-hand renovations will be determined based on the total investment amount and vacancy period.
- Isolate areas that require additional investigation through inspection.
- For classified condominiums, check the management regulations, common areas, and long-term repair plans.
- For estimates, we compare not only the amount but also additional conditions and construction period.
- Verify rent and exit, including competition, records, and future repairs.
Frequently asked questions
Can additional construction be prevented by inspection?
Although it cannot be completely prevented, it is possible to organize the deterioration that can be ascertained at the moment and the areas for additional investigation, and to clarify the assumptions for construction costs and contingency costs.
What are the first documents to check when renovating a condominium?
Check the management regulations, usage regulations, long-term repair plan, repair reserve fund, and general meeting minutes. We look at not only the feasibility of construction, but also the future burden on the building as a whole.
How do you decide the rent after renovation?
We compare competing properties in the same area, area, distance from stations, year of construction, and facilities, and set prices that include not only the rent but also the recruitment period.
I also want to read
- How to make money by renovating a vacant house
- Restoration cost market price and optimization strategy
Citations/References
- Ministry of Land, Infrastructure, Transport and Tourism "About existing housing situation survey engineer training system"
- Ministry of Land, Infrastructure, Transport and Tourism "Long-term quality housing renovation promotion project"
- Ministry of Land, Infrastructure, Transport and Tourism "Condominium Renovation Guidelines (Draft)"
