A professional’s take on whole building financing

 

We get asked all the time about financing options for whole buildings. To address the topic properly, I’m going to divide buyers into two categories; buyers that live in Japan and buyers that live outside of Japan.

 

Before that though, I want to mention that in both cases, whole building real estate purchase are the only asset class where the bank will include the rent revenue generated from the property in addition to the financial health and stability of the borrower when determining maximum borrowable amounts.

First, to those living in Japan, you’ve most likely heard of a certain finance product that requires no money down. Not too long ago, there were very limited investment property loans that existed for foreign people with no permanent residency visa. This product came out and while initially sort of interesting, the loan came with large penalties for early repayment, very high interest rates and the properties that were being sold to people were in areas with declining populations.

Also, this finance product usually lends borrowers more than they can afford.

Fast forward to today. Specifically, within the last 5 years, more financing options have opened up for foreign residents in Japan. More detailed information on these can be seen on our Yen Loan Calculator page.

Many of the same buyers who have purchased whole buildings using no money down financing are now finding that other banks will not lend to them due to the amount of debt the client has on their income statements.

Even for a place to live and a good job, clients with this type of whole building financing on their personal balance sheet will be declined for tier 1 and tier 2 bank financing.

Unfortunately, this is a story we see play out often, leaving the debt holder of no money down financing left to sit on the sidelines while one of Japan’s great real estate renaissances takes place right before their eyes.

There is alternative financing now for whole buildings but it does require the investor to take more responsibility for their purchase. You need to put equity into the purchase however interest rates are lower and you wouldn’t disqualify yourself from other real estate financing options should you choose this route.

Another problem with this no money down financing product is the interest rate. Since it is so high, the gross yield the property needs to produce is upwards of 10-12% (minimum 7-8% in the Tokyo area taken on a case by case basis).

Automatically this gross yield requirement means that you will only see run down, not well maintained property selling for cheap in the urban areas. Alternatively, you will see reasonably well maintained buildings in areas where the rental market is being decimated due to demographics. Either case doesn’t make for a great investment.

For people living outside of Japan, there are options as well. Residents of Hong Kong can get financing from Orix, Singapore residents can get financing from United Overseas Bank (UOB) and those who understand either Japan or Chinese can borrow with the Bank of China.

Utilizing debt in a smart way to fund the purchase of a property is a great way to invest while keeping cash in your pocket. However, this takes a lot of local, in depth knowledge to do wisely in a way that you won’t regret later on down the line.

It is imperative that you trust who you are working with in order to get the best outcome. If you feel something isn’t right or that your questions aren’t being answered in a way that satisfies you, then you shouldn’t rush into a purchase.

 
 

Editor’s Note: Hashimoto San is a co-founder & president of Housing Japan. He writes a weekly column specifically for investors looking to take advantage of Japan’s more complicated real estate investment structures.