The most important part of your investment property is the tenant. They are the only source of revenue from the venture; rent revenue that, if the property was chosen well, will keep your ownership in the black.
In Japan, disputes favor the tenant over the landlord. This is why it is imperative that the screening process be carried out with the most due diligence possible.
The worst case scenario you can have is a deadbeat tenant. The eviction process is costly, time consuming and will take at least 6 months to 1 year to carry out legally; all the while the deadbeat tenant is living in your unit for free.
Hence the lease application process has evolved to look more like a bank loan application with applicants needing to provide the following documents with their application:
- Letter of employment detailing salary information and from when the applicant has been employed from
- Government issued photo identification for all persons planning to live in the unit
Proof of registered seal
- In some cases past income tax statements for 3 years
- Company profile, registration
- Financial statements
- Proof of registered seal
How exactly is the screening process done? As with other countries, we look to make sure that the rent of the applied for apartment does not exceed 1/3rd of the applicants gross monthly income.
So, to use a simple example, if the apartment is ¥100,000 / month, the applicant must show they make at least ¥300,000 / month in gross income.
The next item that is needed is a co-signer (locally called a guarantor). Guarantors are screened at the same degree as the tenant themselves. This means the guarantor must submit the same documents the tenant does when applying for the apartment.
The guarantor also is legally responsible for the rent should the tenant fail to pay. The trouble in Japan is that while everyone must have a guarantor, no one wants to be one.
For Japanese tenants, traditionally the guarantor was family member. However more and more Japanese tenants are having trouble getting someone to agree to take financial responsibility for their lease. If the applicant is foreign then the problem is compounded.
Enter in what is called a guarantor company. A guarantor company is a third party insurance that acts in lieu of a personal guarantor. The guarantor company is a tenant borne expense with costs of coverage added to the fees needed to secure the contract.
Guarantor companies usually cover lost rent and restoration of the property to the original condition. In next week’s article I will go into more detail about the different guarantor companies’ coverage but for now it is important to know that the guarantor company is what makes the tenancy as risk free as possible.
We do our own screening, but we also rely heavily on the guarantor company’s screening too. Their screening as an insurance company is more comprehensive than what we have access to as property managers.
We screen the tenant for stable employment and whether they can afford the apartment or not but guarantor company screenings look further into whether the tenant has existing unpaid debt as well as criminal history of the applicant.
Despite the tenancy laws being heavily in favor of the tenant, due to the guarantor system Japan is actually one of the safest and most reliable rental markets in the world. That isn’t to say you won’t have problems with renters but no matter what happens, requiring tenants to apply for use of a guarantor company coupled with the Japanese tendency to save face in all financial transactions means you’ll have a safe and sound investment for years to come.
Editor’s Note: Oji is Vice President of Housing Japan’s Leasing & Property Management Division and has worked for many years managing property. Oji is a certified property manager and during his long career managing Tokyo residential property he has seen it all. Oji writes a weekly column outlining different aspects of property management and the rental market as he sees it from his unique perch.