[Summary]
Vacant house investment is an investment method in which used detached houses and old houses acquired at low prices are regenerated and monetized through rental, private lodging, shared housing, resale, etc. While it is easy to aim for high yields because the acquisition price can be kept low, there is also a high risk of becoming ``negative personal property'' if the repair, vacancy, management, or exit strategy is incorrect.
According to the Ministry of Internal Affairs and Communications' 2023 Housing and Land Statistics Survey, there were 9,002,000 vacant houses nationwide, and the vacant house rate was 13.8%, the highest ever. Although supply is increasing, there are only a limited number of properties available for investment. The important thing is not how cheap it is, but whether there will be a renter, buyer, or use for it after it is rehabilitated.
In this article, we will explain from an investor's perspective the benefits of investing in vacant properties, points where they are likely to fail, financing, management, and even exit strategies.
First, the conclusion
Investing in vacant properties is an investment that can yield high returns if designed well.
However, this is not an investment in buying a cheap house. In reality, it is similar to a small-scale revitalization project in which old houses are repaired and recycled to meet local housing needs.
The conditions for success can be summarized into three things:
- Being able to manage the total investment amount including acquisition price and repair costs
- Choose an area where there are tenants or buyers
- Avoid properties that cannot be sold, rented, or fixed.
It is dangerous to judge based only on the surface yield. In fact, when investing in vacant properties, you need to think about ``how to get this property to the exit'' before considering the yield.
What is vacant house investment?
Vacant house investment is an investment in which an unused used detached house or old private house is acquired and made into a profit after the necessary repairs and renovations are carried out.
The main monetization methods are as follows.
- Rent as a detached house
- Use for vacation rentals and short-term stays
- Convert to shared house or business space
- Resell after renovation
In rural areas and suburbs, there are properties whose acquisition prices range from several hundred thousand yen to several million yen. Therefore, it is easier to start investing with a small amount compared to investing in a condominium in the city.
However, there is always a reason behind the low price. It is necessary to see through the problems behind the low prices, such as weak locations, damaged buildings, difficulty in rebuilding, neglected management, and limited sales targets.
Why is it attracting attention now?
The reason why investment in vacant homes is attracting attention is the increase in housing stock.
According to the Ministry of Internal Affairs and Communications' 2023 Housing and Land Statistics Survey, the number of vacant houses nationwide was 9,002,000, an increase of 513,000 from 2018. The vacancy rate is also the highest ever at 13.8%. In addition, the number of vacant houses, excluding those for rent or sale and vacation homes, has reached 3,856,000.
For investors, this means an increasing supply of properties.
On the other hand, not all vacant houses are suitable for investment. In areas where the population is decreasing, there is a shortage of borrowers. If the building is in poor condition, the repair cost will be greater than the acquisition price. The increase in the number of vacant houses is an opportunity, but also an increase in the difficulty of selection.
In addition, due to the rising price of new construction and construction costs, interest in ``cheap single-family houses'' tends to remain. Properties that can accommodate needs that are difficult to meet in condominiums, such as being pet-friendly, with parking, DIY-friendly, and spacious housing, are attractive investments.
Benefits
The biggest appeal of investing in vacant properties is that it is easy to keep the initial investment down.
If the acquisition price is low, the surface yield appears high even if the rent level is not high. For example, if you can earn a monthly rent of 50,000 yen with a total investment of 3 million yen, the annual rent will be 600,000 yen and the surface yield will be 20%.
However, what we should be looking at here is not the surface yield, but the real yield after repairs.
When investing in a vacant home, the following costs are more important than the purchase price.
- Removal of leftover objects
- Water repair
- Roof/exterior wall repair
- Electricity/water supply and drainage equipment
- Termite control
- Fire insurance
- Property tax
- Tenant recruitment fee
Even so, if you can rent out the property while keeping the total investment amount low, you may be able to aim for a higher cash yield than a centrally located condominium.
Additionally, depending on the local government, there may be subsidy systems in place for vacant house renovations, migration promotion, seismic retrofitting, etc. Subsidy conditions vary by region, so please check the local government page before purchasing.
The biggest risk is repair costs
The scariest thing about investing in a vacant home is the additional repairs that are discovered after the purchase.
Old houses often have problems that are not obvious just by looking at them from the outside.
- Rain leak
- Termite damage
- Corrosion of water supply and drainage pipes
- Moisture under the floor
- Lack of electrical capacity
- Tilt
- Boundary undetermined
These will destroy the surface yield all at once.
In particular, plumbing, roofs, foundations, and structural parts tend to be expensive. Before purchasing, you cannot skip tasks such as conducting a home inspection, checking the repair history, looking under the floorboards and attic, and interviewing neighbors and local contractors.
When making investment decisions, it is necessary to look not only at the purchase price, but also at ``purchase price + required repair costs + contingency costs.''
There are large regional differences in vacancy risk.
When investing in vacant properties, the area may be more important than the building.
In some cases, regions where goods can be purchased cheaply are experiencing a decline in population and employment. Even if the rent is low, if there are no tenants, the investment will not take place.
The points to check are as follows.
- Is there a place to work nearby?
- Are there schools, hospitals, supermarkets?
- Is it possible to secure a parking lot?
- Is there little competition for pet-friendly houses?
- Is it possible for a local rental agency to provide clients? -Do you have a track record of contracting rents in the neighborhood?
For single-family houses in rural areas, the rent posted on a portal site alone is not sufficient. It is important to ask the local brokerage firm, ``Are these conditions really acceptable?''
Exit strategy
The most likely failure when investing in a vacant home is if you don't think about your exit plan before buying.
The following properties should be especially noted.
- Cannot be rebuilt
- Weak access conditions
- Land boundaries are ambiguous
- The burden of managing wells, septic tanks, etc. is high.
- Extremely depopulated areas
- Demolition costs exceed land price
When investing in a vacant house, you want to make sure that it can be sold as land even if the value of the building drops to zero. For properties with no land value left, the exit options become narrower the moment rentals stop.
The Ministry of Land, Infrastructure, Transport and Tourism has indicated that guidance and recommendations may be given to poorly managed vacant buildings and specified vacant buildings. If you receive a recommendation, you may not be able to receive residential land special treatment for property taxes. In other words, vacant properties that cannot be managed are also at risk in terms of tax burden.
Time also costs money
When investing in a vacant home, it is not always possible to receive rent immediately after purchasing.
In reality, the following periods occur:
- Removal of leftover objects
- Renovation estimate
- Construction
- Photography
- Recruiting residents
- Tenancy screening
During this time, property taxes, fire insurance, basic water and electricity charges, vegetation management, and transportation costs will still be incurred.
When planning your investment, it is safer to consider a blank period of about 3 to 6 months. If you start with little cash, it's easy to run out of money during repairs.
Financing Strategy
Investing in vacant homes is compatible with cash purchases. If the property is low-priced, you can start buying without using a loan, which can reduce interest rate increases and repayment burdens.
On the other hand, if you want to expand your business, financing is also an option.
Older houses have lower collateral ratings, making it difficult to receive regular bank loans. Therefore, it is necessary to explain the project plan to the Japan Finance Corporation, Shinkin banks, local banks, etc., not as a single property but as a business plan.
The items to be explained are as follows.
- Acquisition price
- Repair estimate
- Estimated rent
- Examples of nearby deals
- Tenant target
- Management system
- Sale or long-term holding exit
What loan officers want to see is not ``a property bought cheaply,'' but ``a business that has the resources to repay.''
Management system
For local detached houses, the management system greatly influences profitability.
If you manage the property yourself, you can reduce management costs, but you will have to deal with dealing with tenants, equipment breakdowns, neighborhood troubles, and plant management yourself. This is a big burden for properties located far away.
Contracted management reduces the hassle, but there are some regions where the management company does not manage the houses. It is also important to note that management fees and emergency response costs will reduce the real yield.
When investing in vacant properties, a system that allows for continued operation is more important than purchasing power.
Suitable for people
The following people are suitable for investing in vacant homes.
- Regional research is not a pain
- Interested in DIY and renovation
- Possible for long-term holding
- Can be operated as a small business
- Able to build relationships with management companies and craftsmen
On the other hand, it is not suitable for people who want to leave it completely untouched, who want to avoid the risk of repairs, or who think of it as a one-room investment in the city center.
Risk scenario
The bear scenario for vacant home investment is clear.
Even though I bought it cheaply, the repair costs are going up. It will take time to complete the construction work. Even if you lower the rent, you won't be able to move in. Even if I try to sell it, there are no buyers. In the end, only the demolition costs remain.
In this case, the vacant house becomes a liability rather than an asset.
Conversely, in a bullish scenario, the property is acquired at a low price, restored to livable condition with minimal repairs, and early move-in is decided on conditions that meet local needs, such as allowing pets and providing parking. If fixed costs can be kept down, real yields tend to be high.
In other words, the success or failure of investing in vacant houses depends not on ``buying cheaply'' but on ``creating a condition in which the property can continue to be used after rehabilitation.''
Summary
Investing in vacant houses is an investment that can be started with a small amount and has the potential to achieve high yields.
However, the reality is that rather than real estate investment, it is a revitalization business that includes repairs, customer acquisition, management, and exit.
Successful investors don't buy because it's cheap. We are looking at whether there is a tenant, whether it can be fixed, whether it can be managed, and whether it can be sold in the end.
Do you view vacant buildings as old homes or as renewable assets? This difference makes a big difference in investment results.
Source
- Ministry of Internal Affairs and Communications Statistics Bureau “Reiwa 5 Housing and Land Statistical Survey Basic aggregation (final aggregation) results regarding houses and households” https://www.stat.go.jp/data/jyutaku/2023/pdf/kihon_gaiyou.pdf
- Ministry of Land, Infrastructure, Transport and Tourism “Special site for vacant house measures | What is the Vacant House Law?” https://www.mlit.go.jp/jutakukentiku/house/akiya-taisaku/articles/2024020105.html