When you invest in Japanese property, listing sheets for the property will usually show both a “surface yield” (表面利回り) and an “actual yield” (実質利回り). Both figures represent the property’s return on investment, but we recommend relying on the actual yield, since it gives a more representative basis for comparing different properties. This article shares how each yield figure is calculated, breaking down the “actual return” after Japan’s holding taxes, management costs and other miscellaneous expenses.
Please note that while we try to list complete and accurate information wherever possible, figures can vary by property type, land characteristics, floor area and other factors, so we also recommend consulting a professional for details.
Surface Yield (表面利回り)
Surface yield is calculated by dividing the property’s annual rental income by its purchase price, then multiplying by 100% — the resulting percentage is the unit’s investment return. The formula is:
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Surface yield = Annual rental income ÷ Purchase price x 100%
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Actual Yield (実質利回り)
Calculating the actual yield also requires factoring in the cost of holding the property and the transaction costs incurred when buying it. The formula is:
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Actual yield = ( Annual rental income – Holding costs ) ÷ ( Purchase price + Transaction costs ) x 100%
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As you can see, holding costs and transaction costs are the key variables — the larger either one is, the lower the yield.
Holding Costs for Japanese Property
Building Management Fee, Reserve Fund and Miscellaneous Charges
These two costs generally only apply to apartments; for a detached house (ikkodate), these expenses are borne directly by the owner. The building management fee mainly covers management functions — building patrols, cleaning of common areas, equipment inspection staffing, and so on — and is a fixed monthly charge. The reserve fund (修繕積立金) is less familiar to many people: it is also a fixed monthly charge, set aside for future building repairs. Early in a building’s life, the management company will typically use actuarial methods to estimate future repair costs, so the reserve fund tends to be relatively stable, and it also spares owners from having to pay a large lump sum for repairs all at once. The level of both fees depends on many factors — whether a manager is on-site full time, the shared facilities, the number of units, and so on — but together they typically run to roughly a quarter of the rent. Some properties also carry other miscellaneous charges, such as electricity or sewage fees, many of which are billed to the tenant; but some, such as water charges, are billed by the management company as a flat fee regardless of usage. Buyers can review the property’s “Important Matters Survey Report” for details of these charges before purchase.
Property Tax (Fixed Asset Tax and City Planning Tax)
Holding a Japanese property means paying “kotozei” (固都税), the combined name for the fixed asset tax and the city planning tax — used mainly to fund local government’s ongoing area spending and development. Because the two taxes are paid on the same form, they are commonly referred to together as “kotozei.” Owners receive a tax notice from the tax office each year, typically between April and May. The calculation is split between “land” and “building”: fixed asset tax is 1.4% of the “fixed asset tax assessed value,” and city planning tax is 0.3% of that same assessed value; adding the two together gives the property’s fixed asset tax for that year. If the “land” is residential land under 200㎡, a reduction applies. Note that the tax rate is not applied to the sale price — instead, the government assesses the property using its own “fixed asset tax assessed value,” which for most properties runs roughly 30–40% below the market sale price. When buying, you can ask the relevant agency about last year’s kotozei amount for the property.
Income Tax on Rental Income
Rental income from Japanese property is subject to income tax, calculated on a progressive scale with seven brackets ranging from 5% to 45%. Some of the owner’s expenses during the period can be deducted, such as property management costs and the reserve fund, when calculating taxable income. In addition, rent paid to a non-resident owner is generally subject to 20.42% withholding tax at source, deducted and remitted by the tenant each month; the main exemption is where the tenant is an individual renting the property for their own or a family member’s residence, so most business or corporate tenancies do still require withholding. The owner then files a final tax return each February to reclaim any tax overpaid.
A Real Example of Investing in Japanese Property
Property in Noda Ward, Osaka
Purchase price: JPY 7,000,000
Rental income: (monthly) JPY 43,300 / (annual) JPY 519,600
Management fee: (monthly) JPY 5,300
Reserve fund: (monthly) JPY 3,150
Kotozei (property tax): (annual) JPY 31,000
Surface yield = ( 43,300 x 12 ) ÷ 7,000,000 x 100% = 7.4%
Actual yield = [ ( 43,300 – 5,300 – 3,150 ) x 12 – 31,000 ] ÷ 7,000,000 x 100% = 5.5%
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Sources
- Japan Rosenka (property valuation reference)
- National Tax Agency (income tax filing)
- Japan income tax rates
