Japan Real Estate Due Diligence: What to Check Before You Buy

The listing looks good. The yield is right for you and the asking price falls in line with the neighborhood. For plenty of overseas buyers, that is where the checking stops. But it’s also where problems with Japan real estate tend to begin.

In Japan, real estate due diligence is the research done before you close: a detailed look at the building and the local rents, so the price you pay matches what you’re actually buying. Tsuyoshi Hikichi, managing director of Axios Management, has watched buyers skip that step more often than he would like. His advice to every one of them is simple: call before you decide anything.

Due diligence in a nutshell

The Risk: Buyers who rely on listing figures can face surprise repair bills and a rental market that is shrinking.

The Fix: A pre-purchase review of the building’s condition and cost history, set against local rents, so you buy with a five- to 10-year plan already set.

What does due diligence mean in Japanese real estate?

Hikichi starts by thinking about the physical building: its exterior and rooftop, and only then does he move onto the facilities inside. 

“Buildings and facilities need to be renewed periodically, usually every 10 to 20 years,” he says. A property bought in year nine and one bought in year nineteen can expect very different bills, even at the same asking price. 

Knowing where a building sits in that cycle lets Axios draw up a CAPEX schedule, the forecast of major repair and renewal spending, for the next five to 10 years. A buyer who sees that schedule before purchase can build it into the offer. Skip your due diligence and that’s a cost you won’t have a choice about paying.

Rent is the next big consideration. Rents usually fall as a building ages, Hikichi explains. Recent inflation has changed that a little: when your current rents are set at below what the market could bear, there may be room to raise them. Axios researches the local market to judge how much room there is, since that feeds directly into future ROI.

And finally, there are expenses. Axios reviews past repair and restoration work and what each job cost. “Most property managers in Japan add a margin to quotations and make no effort to bring expenses down,” Hikichi says. Axios negotiates with contractors to cut costs as far as it can, which is a hallmark of good management companies in Japan.

Why is due diligence harder for overseas buyers in Japan?

“If they don’t know Japanese regulations or customs, it will be more difficult to deliver the results they foresee,” Hikichi says. He gives a simple example. Which regulatory inspections of a building’s facilities happen every year? What other inspections are required and what do they cost? Someone who’s never asked those questions can’t budget for them.

Tenant law catches many buyers out. Under Japan’s Act on Land and Building Leases, tenants are well protected and a landlord can’t raise rent on an existing tenant without agreement. If the tenant says no, the dispute goes to mediation and, if that doesn’t settle the matter, to court. 

“If they only look at numbers, the investment outcome will be disappointing,” Hikichi says. A plan that assumes rent will rise with inflation is a guess until someone reads the lease. The type of lease matters too, because fixed-term contracts can set their own terms for rent revisions. Our look at mistakes foreign real estate investors make in Japan covers more of these mistakes, but the bottom line is the same — you can’t prepare for what you don’t know is coming.

What happens when buyers skip due diligence?

Hikichi says he has many examples which tend to go the same way. A building needs a sudden, very large repair. Or a buyer can’t find new tenants because the local market is shrinking. 

“Most critical situations involve unexpected building conditions and facility repair or renewal,” he says. A building can be in decent shape and still sit half empty if the neighborhood is losing renters. These problems are like cavities: prevention is a far better solution than cure. After the purchase is complete, it’s the owner’s responsibility, whether they were expecting it or not. 

What does good due diligence do for a buyer?

Hikichi’s earliest clients are some of the best examples. Because they work with Axios long term, they now understand why the pre-purchase review matters, and they ask Hikichi for his opinion and a full due diligence whenever they look at a new property. 

Done thoroughly and well, the review gives the buyer two things: grounds to ask the seller for a discount, and a clear mid- to long-term investment plan from day one. The discount is possible because the review turns up issues or liabilities neither party was aware of. The moment they come to light, the pre-diligence figure heads for the negotiating table.

Despite that benefit, not every investor sees it that way yet. “Unfortunately, there are still many property investors who don’t see or understand the importance of this pre-acquisition analysis,” Hikichi says. “I wish they would reach out to us before making any decision or starting the purchasing process.”

How does Axios Management do property due diligence in Japan?

For once, someone looks forward to paperwork. When a client finds a property they like, Hikichi asks them to send over as many documents as possible. The team then evaluates the property using their proprietary AI alongside their overlapping skills and experience. 

If the numbers and the location make sense, the next step is an on-site visit, with plenty of photos and an in-depth check of the facilities. The local area gets researched too, to ensure every angle of the purchase is airtight. A weak property is ruled out on paper, before anyone makes the trip, so the experience is less time-consuming from day one.

Planning to buy property in Japan and want to do your due diligence first? Contact Axios Management before you make an offer.