As discussed in our Insights article about investing in Japanese real estate, real estate investment can be a good way to increase your passive income and also receive Japan-specific tax benefits as a result of being able to use mortgage expenses, depreciation cost, management fees, brokerage fees and wear and tear as deductible expenses from your income tax bill; resulting in a tax refund in March each year.
There are a number of fees and taxes involved in owning real estate assets in Japan and care and attention should be paid to quantifying them so as to get a representative picture of the real returns that could be secured from a real estate investment; not just the gross return which may be drastically reduced once these fees are deducted. Ordinarily brokerage fees in Japan are equal to 3% of the purchase price of the property.
Example Of Japanese Property Investment Brokerage Fees
Purchase Price: 100,000,000 JPY
Brokerage Fee: 3,000,000 JPY
For commercial properties and buildings the purchase price could be in the hundreds of millions of yen, at which point the brokerage costs may also be substantial. This 3% fee has remained the same in Japan for decades and is not likely to change. A large contributing factor to this is that, as aforementioned, the brokerage fee can be used as a taxable deduction, meaning that when our investor, above, files her tax return he will also include the 3,000,000 JPY as an expense incurred in purchasing his real estate investment and this will be subtracted from the tax payable on the income (the yield) produced by her investment. This does not mean that the brokerage fee disappears, but it does mean that you get the money back, usually over the first 24 months of owning the investment. Ordinarily, after the first 2 years you have already deducted all of your incurred acquisition costs and expenses, and from there on you will continue to deduct mortgage (interest) expenses, management company fees and any other maintenance cost incurred by the property.
At this time cases where people have purchased real estate with discounted fees are limited to acquisitions that run into the tens of millions of dollars, transactions between corporations, or (less commonly) situations whereby a customer is a frequent buyer of real estate and their broker transacts business for the client at a reduced rate. Again, owing to the arguably re-fundable nature of the brokerage fee it is rarely questioned among Japanese buyers and historically Japanese consumers are not accustomed to haggling or bargaining (we are aware that this is particularly the case in Tokyo, and less so in areas like Osaka). Even if the money does come back to the investor over a 2 year period, it does create a dent in the investors cash flow and liquidity and has to be accounted for as a sunk-cost, which will in turn affect the break-even point (pushing it further back) and tie up capital that could have otherwise been employed elsewhere in investment to make returns…
Fees For Execution Only Real Estate Property Brokers
The concept of “execution only” originally started in the securities and brokerage industry with regard to stocks whereby the term “execution only” constitutes a transaction whereby the client already knows what they want to buy, and does not require any advice from the broker or purchasing agent. In this situation, the client ordinarily pays a smaller fee to the purchaser (presumably, because the agent has not had to spend time consulting and advising the client) and agrees that if they later on regret their purchase, or decide that they would have been better off having not made the purchase, there are no legal grounds to complain to the purchaser and say that they received “bad advice”.
We work with a licensed Japanese Real Estate broker who is accustomed to dealing with foreign buyers and also shares the view that the Japanese brokerage environment is antiquated and in the situation that the client already knows what they want, because they have already conducted the searching and due diligence by themselves, then the broker will work on an execution only basis and the client will be able to buy what they want; paying lower fees than they would with a normal Japanese Real Estate Broker. The extent to which the fee is discounted ordinarily depends on the cost of the property and the degree to which the client requires assistance in conducting due diligence, arranging bank financing etc, but ordinarily clients are able to secure a discount with minimal effort.
