Real estate investors: Beware of sales talk

First-time property investors across Japan are starting to find themselves with poor performing investments that don’t meet what they were promised by salespersons. Despite cashflow-positive claims made at investor seminars, some buyers are finding out that their rental property is running in the red, which means they pay cash out of their own pocket each month just to keep up with loan repayments. Some are then convinced by salespersons to buy additional properties to help offset their current losses. The newly suggested properties may appear to be cashflow positive on paper, but in reality they also turn out to run at a loss, only worsening the investor’s situation.

A common tactic is for a salesperson to provide a scenario of the potential return assuming the longest mortgage possible (resulting in lower monthly payments), and not warning the buyer about the possibility of interest rate hikes, monthly building fees increasing in the future, or large-scale building repairs and maintenance that need to be carried out at the owners’ expense. The simulations may also incorrectly assume that rents will remain unchanged and not factor into account future vacancy or a decrease in rents.

Some sales pitches include promises to buy back the the property for the same amount after a fixed period of time, or promising a guaranteed rent, only for the promises to be broken after the sale. Salespersons might also fail to inform the buyer that by taking out investment loans now, they may find it more difficult to get a home loan for their personal residence in the future, especially when they have borrowed at their maximum capacity.