Vacancy and Tenant Risk in Tokyo Rental: Underwriting the Downside

TL;DR: The gross-yield number on a Tokyo listing assumes 100 percent occupancy, zero defaults, and no turnover cost. None of those hold. I underwrite every deal with a realistic vacancy haircut by ward and unit type, a guarantor-company backstop for tenant default, and a budget for genjo kaifuku (restoration on move-out). If the deal only works at the headline yield, it does not work.

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Why the Gross Yield on the Listing Is Almost Always a Lie of Omission

When a brochure says gross yield of, say, 5 percent (directional, as of writing), what that number really means is: annual rent at full asking, divided by price, before anything goes wrong. It ignores vacancy, it ignores the months a unit sits empty between tenants, it ignores the management fee, the building’s shuzenhi (the repair-reserve fund), the kanrihi (the monthly building-management fee), property tax, and the cost of putting a unit back into rentable shape.

The honest number is net yield after all of that, run against realistic occupancy rather than 100 percent. In my own underwriting the gap between the two is rarely small. Headline gross can shrink by a meaningful margin once you load in real costs and a vacancy assumption (directional, as of writing). The whole point of this article is to make that shrinkage visible before you wire a deposit, not after.

A simple discipline: never let a seller’s pro forma be your pro forma. Rebuild it yourself, line by line, with conservative inputs. The exercise takes an afternoon and routinely changes the decision.

Realistic Vacancy by Ward and Unit Type

Vacancy risk is not uniform across Tokyo. It varies by location, by unit size, and by who the likely tenant is. The Tokyo apartment vacancy rate you should plug in depends heavily on what you bought and where.

Central wards with deep rental demand — think Minato, Chiyoda, Shibuya, Shinjuku — tend to re-let faster, especially compact units aimed at single professionals. Move outward or into oversupplied pockets and the empty-period between tenants stretches. As a rough working frame I use when stress-testing (all directional, as of writing):

• Compact units (1R / 1K) in central, station-near locations: short vacancy, fast turnover, but tenants churn often — they move for jobs and life events.
• Family-size units (2LDK / 3LDK) in residential wards: longer vacancy when empty, because the tenant pool is thinner, but tenants stay much longer once placed, so you turn over less.
• Anything more than roughly a 10-minute walk from a station, or in a thin submarket: assume a longer empty period and underwrite for it.

The trade-off is real: small units give you frequent-but-short gaps, larger units give you rare-but-long gaps. Neither is free. I model vacancy as a percentage haircut on annual rent and separately budget the dead months at each turnover, because a unit that re-lets in two weeks is a very different asset from one that sits for two months. To compare submarkets side by side, compare wards before you fix your assumption.

Tenant Default and the Strength of Guarantor Companies

Tenant default risk in Japan is structurally lower than many foreign buyers expect, and the main reason is the hoshogaisha (the rent-guarantee company). In most modern Tokyo leases the tenant is required to enroll with one. The tenant pays the guarantor a fee; if the tenant stops paying rent, the guarantor pays the landlord and then pursues the tenant. For the landlord, this converts erratic tenant credit risk into the credit risk of the guarantor company — a much better position to be in.

But not all guarantor coverage is equal, and this is where I push clients to read the fine print:

• Coverage scope: does the guarantee cover only unpaid rent, or also restoration costs and the cost of legal eviction if it comes to that?
• Coverage period and caps: some guarantees cap the number of months covered. Know the ceiling.
• The guarantor’s own solvency: you are now relying on that company. A weak guarantor is a weak backstop.

Separately, Japanese tenant-protection law makes eviction slow and landlord-unfriendly by design, so a non-paying tenant who refuses to leave is a genuine drag even when a guarantor is paying the rent. The guarantor covers the cash; it does not instantly hand you back the unit. Confirm the exact terms of any guarantee, and any eviction question, with a licensed professional — this is not legal advice.

Turnover Cost and Genjo Kaifuku (Restoration)

Every tenant who leaves triggers cost, and this is the line foreign buyers most often forget. Genjo kaifuku is the restoration of the unit toward its original rentable condition on move-out. Cleaning, repainting, replacing worn flooring or fittings, re-papering walls — these recur on a cycle you do not control.

Two things matter here. First, national guidelines draw a line between normal wear-and-tear from ordinary living (broadly the landlord’s burden) and damage or neglect caused by the tenant (broadly the tenant’s burden). That allocation governs how much of the bill the deposit can absorb versus what you eat. Second, even the landlord’s share is a real, recurring operating cost — not a one-off. Budget a restoration and re-listing reserve for every turnover, sized to the unit, and assume you will spend it.

Add to that the re-letting friction: agent fees to find the next tenant, advertising, and any free-rent incentive you offer to fill the unit quickly. The frequent-turnover compact unit that looked attractive on gross yield is exactly the unit where these costs stack up fastest. Run your specific numbers through the tools before you commit to an assumption.

How to Stress-Test a Tokyo Rental So the Headline Does Not Fool You

Here is the actual sequence I use to underwrite the downside. Knowing how to underwrite Tokyo rental downside is mostly about being honest with your own spreadsheet.

1. Start from net, not gross. Subtract kanrihi, shuzenhi, property tax (fixed-asset and city-planning tax), management fee, and insurance from annual rent first.
2. Apply a vacancy haircut appropriate to the ward and unit type — not zero, ever.
3. Add dead months at turnover. Estimate how often the tenant changes and how many empty months each change costs you.
4. Reserve for genjo kaifuku and re-letting on the same turnover cycle.
5. Then run two bad scenarios: a longer-than-expected vacancy, and one tenant default where the guarantor covers rent but you still lose time and pay restoration.

If the deal still clears your required return after steps one through five, it is a real deal. If it only works at the brochure’s gross yield, you are buying a number, not a building. I would rather underwrite a property to look ugly on paper and be pleasantly surprised than the reverse — because in this market, the surprises that actually happen are the expensive ones.

What This Means For Your Next Move

The discipline is simple to state and easy to skip: rebuild the seller’s pro forma yourself, with a real vacancy assumption, a real default scenario, and a real restoration reserve. If you do only one thing differently after reading this, make it that. Talk to us and we will walk a specific listing through this exact stress test with you, line by line. Run your own inputs first with our tools, and when you are weighing locations against each other, compare wards so your vacancy assumption matches the submarket you are actually buying in. The headline yield is the start of the conversation, never the end of it.

Sources: Tokyo Metropolitan Government Bureau of Urban Development, Ministry of Land, Infrastructure, Transport and Tourism (MLIT), Statistics Bureau of Japan — Housing and Land Survey, Japan Property Management Association