Initial Costs in Tokyo Real Estate Investment and How to Reduce Them❘Japan Real Estate

For beginners looking to start real estate investment in Tokyo, it is essential to understand the initial costs (so-called miscellaneous expenses) required in addition to the property price. When purchasing a property, various costs such as brokerage fees and taxes arise, and the total amount is generally said to reach approximately 15% of the property price. For example, for a property priced at 30 million yen, approximately 4.5 million yen, and for a property priced at 100 million yen, approximately 15 million yen must be prepared as initial expenses. Properly understanding and incorporating these initial expenses into your plan is extremely important for financial planning and risk management.

This article provides a detailed explanation of the typical initial costs for real estate investment (assuming the Tokyo area) and their breakdown. Additionally, we introduce specific methods to reduce initial costs that beginners should be aware of, incorporating risk management perspectives. Please refer to this article to successfully pursue real estate investment.

The typical initial costs for real estate investment amount to approximately 15% of the property price

The initial costs of real estate investment refer to the total of various expenses paid in addition to the purchase price of the property itself, such as those incurred during the purchase process and contract signing. As a general guideline, the total initial costs are estimated to be approximately 10–15% of the property price. While some sources suggest a lower estimate of around 7% of the property price, it is safer to anticipate approximately 15% of the property price when purchasing investment properties in the Tokyo area or using a loan. While the proportion of miscellaneous expenses tends to decrease slightly as the property price increases, costs of around 10% still apply. Additionally, when taking out a loan, fees such as loan processing fees and insurance premiums are added, so the proportion of initial costs is higher compared to a cash purchase.

For example, in the case of purchasing a used condominium in Tokyo for 50 million yen using a loan, the real estate brokerage fee alone (approximately 3% plus consumption tax) amounts to approximately 1.7 million yen. When adding various taxes, registration fees, fire insurance premiums, and loan-related expenses, the total initial costs can easily reach several hundred million yen. If you do not have sufficient funds, you may not be able to proceed with the purchase process. Therefore, it is important for beginners to understand the typical initial costs in advance and secure funds accordingly.

Breakdown of Initial Costs and Detailed Expense Items

What specific items are included in the initial costs of real estate investment, and how much do they typically cost? The main breakdown is explained below.

• Real Estate Brokerage Fees: These are fees paid to the real estate company that handles the buying or selling of the property. By law, the upper limit is set at “3% of the property price + 60,000 yen (plus consumption tax),” and in most cases, the full upper limit (plus consumption tax) is charged. In Tokyo, where investment properties are expensive, brokerage fees can be high and account for a significant portion of the initial costs. For example, for a property priced at 50 million yen, the brokerage fee alone would amount to approximately 1.71 million yen (including tax).
• Registration Fees (Registration Tax, etc.): These are the costs associated with transferring property ownership or registering a mortgage when taking out a loan. A national tax called registration tax is imposed, with the tax rate being 2% of the assessed value of the land and buildings for property ownership transfer registration, and 0.4% of the loan amount for mortgage registration when taking out a residential loan. In addition to these registration-related taxes, other costs include fees for a judicial scrivener to handle the registration procedures (typically several tens of thousands to hundreds of thousands of yen) and stamp duty for affixing stamps to the purchase contract and loan agreement. Depending on the property price, the total registration-related costs can amount to several hundred thousand yen, constituting a significant portion of the total initial expenses.
• Loan fees and guarantee fees (loan-related expenses): When using a loan for the purchase funds, various fees payable to the financial institution will apply. The most common is the loan processing fee, which generally ranges from several thousand to several tens of thousands of yen, depending on the loan amount and the financial institution. Additionally, many private bank loans require a loan guarantee fee when using a guarantee company, which is typically paid upfront as a percentage of the loan amount (ranging from several hundred thousand to over a million yen, depending on the loan amount). Guarantee fees vary depending on the financial institution and loan conditions, and some banks may waive the guarantee fee and instead add it to the interest rate. In any case, when using a loan, these loan-related expenses will be added to the initial costs, so it is important to note that the initial burden will be greater compared to a cash purchase.
• Fire insurance premiums: These are insurance premiums to protect the property from fire and natural disasters. When using a loan, it is generally required by the financial institution to purchase fire insurance, and the premiums for several years are paid in a lump sum at the time of contract. Premiums vary depending on the structure of the building (wooden or reinforced concrete, etc.), floor area, age of the building, and coverage details. They also differ significantly depending on whether the property is a single unit in an apartment building or an entire building. For apartment unit investments in urban areas of Tokyo, premiums range from approximately 50,000 yen to several hundred thousand yen, while for entire building investments, they range from several hundred thousand yen to several million yen. Additionally, if you opt for optional earthquake insurance, separate premiums will be added.
• Real Estate Acquisition Tax: This is a tax levied once when acquiring real estate. After purchasing the property, a tax notice will be sent by the local government within a few months to half a year, and the tax is levied at a rate of 4% of the assessed value of the property, which serves as the tax base. However, there are tax relief measures for residential properties, such as deducting a certain amount from the assessed value or reducing the tax rate to 3% (subject to conditions such as floor area requirements). Real estate acquisition tax is not paid at the time of property handover, but a lump-sum payment may be requested later, so it is important to include this in your initial budget planning.

The above is a summary of the main initial expenses. Additionally, at the time of settlement, there may be other costs such as the settlement of the current year's fixed asset tax and urban planning tax (a settlement payment to the seller for the portion after the delivery date, calculated on a daily basis). In summary, it is prudent to estimate approximately 15% of the property price as initial expenses for real estate investment in Tokyo. Failing to adequately account for initial expenses can lead to situations where you find yourself short on cash due to unexpected costs. It is important to conduct a simulation that includes all expenses prior to purchase and establish a financial plan with sufficient flexibility.

Specific methods to reduce initial expenses (from a risk management perspective)

While initial costs are significant, there are ways to reduce the burden through careful planning. However, when seeking cost reductions, it is essential to consider the risks and drawbacks associated with each method and make balanced decisions. Below, we introduce specific strategies for reducing initial costs that beginners can implement, taking into account risk management considerations.

Reviewing fire insurance coverage and selecting an appropriate plan

While fire insurance premiums account for a relatively small portion of initial costs, they can be optimized through careful consideration of the contract terms. By reviewing the insurance plan and optimizing it to provide adequate coverage, it may be possible to reduce premiums. For example, setting the building appraisal value (insurance amount) at an appropriate level to avoid excessive coverage, setting a deductible (self-burden) amount to reduce premiums, or removing unnecessary riders. Depending on the structure and location of the property, narrowing the scope of coverage can help adjust premiums to align with the associated risks.

However, it is important to note that overly focusing on cost savings may result in cutting necessary coverage, exposing you to significant risks. This is particularly true in Japan, a country prone to earthquakes, where the decision to purchase earthquake insurance is a complex issue. While earthquake insurance entails higher premiums, it covers risks such as fire and structural damage caused by earthquakes. The Tokyo area, in particular, is at risk of a major earthquake directly beneath the capital. While not purchasing earthquake insurance may be an option for properties with high seismic resistance, prioritizing premium savings alone and opting out of earthquake insurance is generally risky. The key is to determine the necessary coverage based on the property's risk profile and balance it with the premium. By comparing quotes from multiple insurance companies and selecting an appropriate plan, you can minimize unnecessary premium expenses while preparing for unforeseen disasters.

Aim for real estate investment that minimizes initial costs and is resilient to risks

Initial costs are an important factor in real estate investment that beginners often overlook, but they can determine the success or failure of an investment. When purchasing a property in the Tokyo area, it is important to keep in mind that approximately 15% of the property price is required as initial costs and to plan your finances accordingly. By correctly understanding the breakdown of brokerage fees, various taxes, and other fees, and by knowing the payment timing and approximate amounts, you can avoid any last-minute surprises at the time of contract signing.

Additionally, implementing strategies to reduce initial costs can help overcome the hurdle of insufficient capital. However, each cost-cutting measure has its own advantages and disadvantages, so it is important to maintain a balance from a risk management perspective rather than simply reducing expenses. Seek advice from reliable professionals to achieve both a reduction in initial costs and risk mitigation.

Finally, unexpected expenses are inevitable in real estate investment. By maintaining a certain amount of contingency funds even after paying the initial costs, you can calmly address unforeseen repairs or revenue declines due to vacancies. Ensure you have thorough knowledge and preparation regarding initial costs, and start your Tokyo real estate investment on a solid foundation.