Renting out Your Property as an Offshore Landlord
Table of Contents
Renting out your property as an offshore landlord
Two types of leases you can conclude with your tenant
Withholding tax
Rental flowchart
Income and Expenditure
The scope of services you receive from a real estate company when renting out your property as an offshore landlord could be as minimal or as comprehensive as you like. But one thing you cannot do on your own when you do not have a Japanese bank account is to receive the monthly rent from the tenant directly, since the tenant will not make rent payments to an overseas account each month. You will need to entrust a real estate company to receive it for you.
All domestic banks do not allow foreigners without a Japanese address to open a bank account in Japan. They also prohibit non-residents (非居住者 He-kyo-jusha) from keeping their Japanese bank accounts open once they leave Japan with no intention of returning, unless they have a remaining mortgage loan which is repaid monthly through the loan lender’s bank account.
The most hassle-free way to operate your rental business is to entrust powers to a real estate company who you trust, but you can limit the powers of what the real estate company can do if you wish to be more involved in the process, or if you wish to entrust the rest of the powers only after you have built a trusting relationship with the company.
Here is a list of tasks for the landlord and the entrusted real estate company to do respectively when operating and managing a rental contract.
List of tasks to do as landlord
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examine offers and decide to accept the applicant or not, sign the rental contract
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receive the monthly rent ※landlords without Japanese bank accounts cannot receive this internationally
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arrange cleaning service, restoration and repair work directly with vendor, or just make decisions on what your real estate company suggests to do by vendors used by them
List of tasks done by real estate company
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source tenants
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preparing lease contracts and other paperwork
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being point of contact for any requests from tenant during a rental term, and sending out notices when needed
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spot inspection with tenant upon contract termination
Two Types of Lease you can conclude with your tenant
When you rent out your property there are 2 types of contract you can conclude with your tenant and the simple difference is whether to limit the leasing period or not. A contract that has a limited leasing term is called a fixed-term lease (teiki-shakuya-keiyaku 定期借家契約) and a contract that does not is called a renewable lease (futsu-chintaishaku-keiyaku 普通賃貸借契約).
Here are some advantages and disadvantages of each type of lease contract.
Advantages
Fixed-term lease
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If you have plans to use the property for yourself or for someone else in the future, you can end the contract at the end of the term.
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If you have plans to sell your property, it is better to keep the option to sell it without a tenant in order to broaden the buyer base, and you can end the contract at the end of the term.
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When your property is old and it is unpredictable when it may be torn down, it is best to keep the contract as a fixed-term lease. You can wait until the term comes to an end to avoid paying hefty eviction fees to the tenant.
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If you are unable to reach an agreement with the tenant to increase the rent due to unavoidable economical factors, you may end the contract at the end of the term.
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If the tenant is unreliable in paying rent on time or has a history of delinquent payments, you can end the contract with the tenant at the end of the term.
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If the lease term is 4 years or longer, you can save the tenant the renewal fees that are usually required under a renewable lease. This may encourage the tenant to rent for a longer period.
Renewable lease
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You can encourage the renter to keep renting by keeping the lease conditions the same or in terms comparable with the ongoing market.
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You can earn renewal fees every 2 years at a maximum of 1 month’s rent.
Disadvantages
Fixed-term lease
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You may have a hard time finding a tenant if the lease term is too short.
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You may need to bring your rent down to 70 – 90% of the market rates and/or lower the renter’s initial fees by not charging key money, if the lease term is shorter than 2 years. Although this all depends on how much demand there is for your property.
Renewable lease
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Even if you have an undesirable tenant, it may not be easy to evict them from your property.
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You will not be able to easily take back possession of your property to use it for yourself or for some other people, unless you have a justifiable cause. But even then, you may have to pay eviction fees to a certain extent.
Withholding Tax
When the landlord is a non-resident or a foreign corporation renting out a property in Japan, a corporate renter is required to withhold 20.42% of the monthly rent and pay it to the tax authority each month before the 10th day of the following month (this does not apply to individual renters). This withholding tax (源泉徴収税 Gensen-choshu-zei) serves as an advance payment towards the landlord's potential income tax liability. If the paid tax total is different than the actual income tax amount, the landlord or landlord’s appointed tax representative (納税管理人No-zei-kanri-nin) will have to appropriate the sufficiency or insufficiency by filing income tax returns (確定申告 Kakutei-shin-koku) during Feb. 16 – March 15th of the following calendar year. The renter may be exempted from paying withholding tax if the landlord possesses an exemption certificate, or if there are tax treaties between Japan and the landlord’s country, and if the necessary paperwork is filed by both the landlord and the renter.
Avenue Far East is neither qualified nor authorized to give legal or tax advice, and any such advice shall be obtained from an appropriate, qualified professional advisor of your own choosing. Moreover, the stated requirements may be revised at any time and the information contained here may not be up to date. Therefore, it should be used for reference only.
Rental Flowchart
Receive a rent assessment and decide on the asking rent and the type of rental contract (fixed-term or renewable) that you want to conclude with the tenant
Decide on the scope of services you require from your real estate company and how much you will take on yourself
Contact a real estate company and start sourcing for a tenant. If you have bought a tenanted property, have your real estate company take over the management from the seller's appointed management company, if any exists.
When an application comes in, examine it with the guidance of your agent and decide if you accept the offer or not
Sign the lease agreement and receive payment of the contract fee
Rely on your management company to respond to repair requests from the tenant during the lease term. Your management company will check if the claim is appropriate and relay details to you. If repair is necessary, you or your management company will arrange for it.
Rely on your management company to handle all necessary paperwork during the lease term. If any document needs signing, such as renewal (re-contract) contracts and termination notices, they will be sent to you.
Income and Expenditure
Income
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Monthly rent
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Key money (2 months at most, but easier to find tenant if waived)
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Renewal fee (1 month at most upon contract renewal every 2 years)
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Re-contract fee (1 month at most upon concluding a new fixed-term contract)
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Deposit (2 months at most, but technically this money does not belong to you and will be used to clean and restore the room to its original condition after the tenant moves out. Any remaining balance after deducting cleaning and restoration fees shall be returned to the tenant)
Expenditure
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Agency fee (1 month’s rent + tax)
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Income tax (paid between Feb.16 - March 15 of the following year against income earned between Jan.1 - Dec.31)
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Agent service fee for receiving monthly rent on behalf of landlord (few percents of the monthly rent)
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Agent’s renewal (re-contract) processing fee (25~50% of the renewal fee) for handling renewal (re-contract) contract for another term