Still Money in Minpaku

The future of vacation rentals

Vacation rental, or minpaku in Japanese, is now synonymous with Airbnb, which has turned into a money-spinner for property owners nationwide.

However, any letting lasting less than 30 days requires that the property owner have a hotel licence. As the majority of minpaku stays last less than a week, almost everything you see on Airbnb is illegally operated.

Given the drastic rise in tourist numbers over the past four years, the financial gain has proven too tempting to pass up. Thus, according to AirDNA, a site offering analytics services to Airbnb hosts, there are over 16,000 listings in Tokyo alone.

Under Prime Minister Shinzo Abe’s program of economic policies known as Abenomics, the government has taken the first step towards lessening the illegality of minpaku. Although not yet passed by the Diet, it is all but certain that minpaku operators will be allowed to let their property daily for up to 180 days per year.

However, the crafting of the law will allow prefectural and local jurisdictions to add further restrictions, as they see fit.

Another limiting factor will continue to be Homeowners’ Associations (HOA).

Most minpaku listings are condominiums, and every condominium complex has an HOA that follows a charter mutually agreed to by all owners in the complex.

Until recently, the wording in HOA charters referred to renters as third parties, stating that they would need to follow rules in the charter concerning such matters as proper garbage separation and disposal, as well as rules — such as those governing excessive noise — that have not always been followed by hosts.

Osaka is an example of where the friction is most evident. Despite the city being one of the special areas where individuals can offer minpaku services, in January this year an Osaka court ruled in favour of an HOA that sued one of its member owners for their ongoing offer of minpaku services. The illegal operator was fined.

This first ruling has set a precedent for other HOA wishing to take action against minpaku operators in their midst.

What now?

While the number of hotels will continue to increase, their number will not grow fast enough to cover existing and future demand. The real estate industry, which has sat largely on the sidelines until very recently, will enter the market offering property management services tailored to comply with federal, prefectural and local regulations.

Until recently, minpaku operators traditionally had to manage their own listings, making the endeavour hands on. However, a quick search for furnished property management in Tokyo brings up several innovative companies taking the lead. They offer products ranging from daily stay management services to others offering one month minimum stay management, thus avoiding the need for a hotel licence and making the service HOA friendly.

There is still money to be made, but it isn’t as simple as it once was. People interested in purchasing residences to take advantage of minpaku property management services are better off getting financing than paying in cash.

People living in Japan have access to the lowest interest rates in the developed world. There are no interest-only loan repayments; borrowers pay down the principle from day one, thereby also earning more equity from day one.

The thinking is simple; you pay 30 percent down to receive 100 percent ownership with the remaining 70 percent being borrowed. The rent generated pays down the mortgage and all other costs of ownership.

Hold the property for 10 years or longer while keeping it reliably rented and your tenants will have paid down a third of the outstanding loan for you.

Assuming you had professional help when buying, you sell your property after 10 years for roughly the purchase price. You will have eliminated the outstanding loan amount, and received both the paid equity back out of the property in addition to the remaining cash flow during your ownership.

One thing is certain: minpaku are not going to go away anytime soon. There will be a strike zone found among the economic benefits, as well as legal and social practicalities, with more property management services on offer to further mature the minpaku market. This, together with proper planning and management, results in solid investment strategy.

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