Pitfall of sub-leasing(sub-letting) real estate investment
High yielding, guaranteed rent（sub-leasing) should be too good to be true ?
Recently one of the scandals which rattled the industry is KABOCHA-NO-BASHA
(Pumpkin Carriage) problem.
The background of the scandal is as follows.
Investors were guaranteed a fixed monthly amount over an extended period if they invested money by contracting with a real estate company called Smart Days(Tokyo)
that used the funds to set up and manage share house facilities under sub-leasing agreement.
Since 2015, Smart Days, operator of women-only share houses called Kabocha no Basha (Pumpkin Carriage), has promoted high yield investments through the media and has mainly acquired customers of office workers. In the sub-leasing contract, rent payment collected through the sub-leasing is sought to pay back the debt for a long period plus small profit.
For example, suppose you borrow 100 million yen from a bank and the monthly repayment amount is 500,000 yen, if you earn rental income of 550,000 yen a month, it will generate 50,000 yen a month profit. This system is typical leveraging in the real estate investing and there is no red flag about it.
In an ideal setting, Smart days as the sub-leasing company would rent out rooms to tenants and bring in a steady and continuous supply of rent, a portion of which would go to the investors.The shared house with shared toilets and bathrooms is not as wide as 7 m² in living space, but the initial cost of moving in is kept low (so they say), and it was expected that more women moving into Tokyo from rural cities will choose to stay in these share houses.Smart days also promoted the business to support tenants finding a job (This is an alarming part)
However, the occupancy rate has been sluggish, and the recruitment business seems to have failed to meet expectations. Smart Days, operator of women-only share houses called Kabocha no Basha (Pumpkin Carriage), told its several hundred investors in the Tokyo area on Jan. 20 that it could not pay them from this month.
The company said it has been financially distressed because the occupancy rate has dropped below 50 %.
From the autumn of 2017, Smart days slashed some rent payable unilaterally to the owners, and in January 2018 payment to investors completely stopped. The majority of investors (some 700) financed their investment by a large amount of loans from Suruga banks with very little down payment. With their debts. Without rent income by sub-leasing from Smart Days, repayment of debt will surely become difficult, and it may cause some bankruptcy cases.
Details are unknown so I am not sure if it is fraudulent.
I venture to say there are at least 3 caveats in this investment.
1) Share-house investment is very young in Japan.
Investors should have expected some bumpy roads and
should have taken all the pre-cautions.
The marketing for the share-house rooms is more difficult than the conventional
rooms. It is a kind of advanced class type of investment not suitable for beginners.
Sub-leasing could look good but counter-part risk must be taken by the investors.
In addition, supporting tenants to find a job in the real estate investment does not sound right.
2) Apparently many of the investors were lured
by the advertisement laying out the ‘high yield’.
In the world of investment, some stories are too good to
be true. Those share-houses are not necessarily located in the
area where strong rental demand is expected. The vacancy risk could have been detected.
The location is always important for any type of rental properties.
3) The notion of making a investment with little down payment is understandably attractive.
But what looks sexy in a company’s advertisement does not always translate into what is best for investors financial well-being.
Leveraging is not a monster rather it is the essential part for a success in the property investment.
But it is a debt. Investors always need to build a plan for contingent loss.
Babocha-no-basha TV programme YouTube
Toshihiko Yamamoto
Real estate investing consultant and author.
Toshihiko is currently writing a book about the real estate investing in Japan
for foreign investors.
Founder of Yamamoto Property Advisory in Tokyo.
International property Investment consultant and licensed
real estate broker (Japan).
He serves the foreign companies and individuals to buy and sell
the real estates in Japan as well as own homes.
He holds a Bachelor’s degree in Economics from
Osaka Prefecture University in Japan
and a MBA from Bond University in Australia