Difficult one, but my thoughts:
Debt-free, and with a growing investment portfolio, you are well on the road to financial independence.
The other option you describe is to load yourself up with debt for 30 to 35 years, as you said, into your retirement.
At 40, I wouldn't want to be taking on that amount of debt personally, especially in order to build or buy 'too much' house and then later try and downsize.
As others have mentioned, buying a used place seems more sensible financially, so keep looking for houses or apartments that suit your needs.
Alternatively, keep renting. If your current place is not suitable, see what else is available. I have friends in Europe who rent their whole lives, which is seen as perfectly normal in many countries. I wouldn't be in any rush to purchase, especially if it would have a major impact on your other plans, retirement etc.
(But as you said it is an emotional decision, not just a financial one. You have to do what is right for you and your family, ultimately...)
Selling stocks to build a house, is it a bad move?
Re: Selling stocks to build a house, is it a bad move?
Aiming to retire at 60 and live for a while longer. 95% index funds (eMaxis Slim etc), 5% Japanese dividend stocks.
Re: Selling stocks to build a house, is it a bad move?
Although we ended up buying a used house, I wouldn't say that it is necessarily more sensible than building or buying new in Japanese context. Quality of Japanese houses overall is shitty, and considering that most people do not take good care of their houses, anything older than 10 years, I'd say, could have rotten walls, very poor insulation and leaky roof, and even eaten up by termites. Fixing all that costs money, and 10-15 years is also time to repaint walls and a roof, which also cost a lot. Add to that indoor reform etc., and you might find out that buying new might not be that much more expensive (if any, esp. in the long run) and be better quality, not to mention that everything will be new there. So it depends.
If there was a new house or land satisfying our requirements in the area we liked, I would probably went with that rather than buying used, although in the beginning or our "my home" quest I was set on buying a second-hand house.
Re: Selling stocks to build a house, is it a bad move?
Thanks everyone for the comments so far. I am really on the fence between getting that house built in a convenient location, with a good environment for the kids, and slowing down my walk towards FI, or going the other extreme and getting something much cheaper with a 1 hour commute to Tokyo, knowing that I don't need to go there everyday anyway, and having much more leeway to invest and spend money on education, travel, and so on.
What I have seen so far seems to echo Ori's comment, depending on the place (especially Tokyo where the demand is very high) used houses up to 10 years can fetch basically the same price as new ones, especially if built by a reputable maker. That's why I thought that building may make sense after all. I have thought about mansions as well, but with a 5LDK requirement that's not really a viable option, especially since the prices are even more through the roof.
I see no reason why my income should fall in the future, but well, you never know what can happen. If everything goes well this should go smoothly, however we are not safe from another crisis that could result in me having to take a job that pays much less, while the price of real estate falls at the same time. In that case there would be no choice but to sell at a big loss, and still struggle to pay the remainder of the mortgage.
One more question I have for house owners, used or new, is what are the running costs of owning your house besides utilities? I understand that I will probably have to pay considerably more than just the loan+electricity/water/gas/internet bills, but am wondering how much I should estimate.
What I have seen so far seems to echo Ori's comment, depending on the place (especially Tokyo where the demand is very high) used houses up to 10 years can fetch basically the same price as new ones, especially if built by a reputable maker. That's why I thought that building may make sense after all. I have thought about mansions as well, but with a 5LDK requirement that's not really a viable option, especially since the prices are even more through the roof.
I see no reason why my income should fall in the future, but well, you never know what can happen. If everything goes well this should go smoothly, however we are not safe from another crisis that could result in me having to take a job that pays much less, while the price of real estate falls at the same time. In that case there would be no choice but to sell at a big loss, and still struggle to pay the remainder of the mortgage.
One more question I have for house owners, used or new, is what are the running costs of owning your house besides utilities? I understand that I will probably have to pay considerably more than just the loan+electricity/water/gas/internet bills, but am wondering how much I should estimate.
Re: Selling stocks to build a house, is it a bad move?
Actually not much for me, at least thus far. I bought used (20 yr old) and had a lot of work done prior to moving in, extensive interior reform (including new kitchen, bathroom, flooring) and exterior maintenance work (including roof replacement, paint, complete re-caulking, etc). Since I did all that up front, additional costs have been virtually nil since moving in, which was about 2.5 years ago. My house came equipped with an Enefarm too, so even the utilities costs have gone down, despite going from a 3LDK manshon to a 5LDK house.
Re: Selling stocks to build a house, is it a bad move?
A good question. Along with the housing options, some of the other variables to consider are:
a) How much do you want to keep in savings?
b) How much do you want to keep invested in the market?
c) How do you want to manage your running costs? (i.e. higher mortgage payment without releasing stocks VS lower payment after spending more at the beginning)
d) Considering your annual investment returns, how does it compare to the loan interest? i.e. if you are paying 1.5% in interest per year for the loan while making 4% interest from you investments, you are on the plus side using the same cash.
If you go in now with the minimal deposit, you have the option later to sell stocks and pay off a bigger chunk of the loan. You could do this in case of job loss, illness, or just wanting to reduce the debt sooner.
Lastly, how long do you need this bigger house? Maybe when the kids start moving out, you sell, recoup your investment, then get something smaller.
a) How much do you want to keep in savings?
b) How much do you want to keep invested in the market?
c) How do you want to manage your running costs? (i.e. higher mortgage payment without releasing stocks VS lower payment after spending more at the beginning)
d) Considering your annual investment returns, how does it compare to the loan interest? i.e. if you are paying 1.5% in interest per year for the loan while making 4% interest from you investments, you are on the plus side using the same cash.
If you go in now with the minimal deposit, you have the option later to sell stocks and pay off a bigger chunk of the loan. You could do this in case of job loss, illness, or just wanting to reduce the debt sooner.
Lastly, how long do you need this bigger house? Maybe when the kids start moving out, you sell, recoup your investment, then get something smaller.
-
Beaglehound
- Veteran
- Posts: 681
- Joined: Wed Apr 10, 2019 12:21 pm
Re: Selling stocks to build a house, is it a bad move?
Regarding ongoing costs, property taxes will be the main thing along with the things you mention. That depends on the assessed value of the house/land (which is considerably less than the market value). A new house will cost more in property taxes, but will go down over time as the house depreciates. Not sure if system still applies but our taxes for a new house were halved for the first three years.
-
Moneymatters
- Veteran
- Posts: 425
- Joined: Wed Mar 04, 2020 7:20 am
- Location: Tokyo
Re: Selling stocks to build a house, is it a bad move?
You have not mentioned what the expectations there are for your kids education and even getting them started in life. Like the magician says, "think of a number. Now double it..."
Anyhow, if you know for sure you'll be paying 250K per month on rent anyway, assuming land holds value, there is the argument that buying and building will be either a zero net gain or even less out of pocket expense over a 20 year span. I say 20 so you can depreciate the house to zero rather than relying on finding a buyer.
Maintenance costs will vary based on the construction method and aminities. I'm in a 4LDK but the floor space is close to a 5LDK. Central air is an expensive option requiring regular maintenance and requires a well constructed house to start with. Traditional aircons last 15+ years and they cost about what they did 20 years ago. So if you install 5-6 aircons assume you'll need to replace them all around 15 years as they fail(some sooner, some later).
The neighbors switched from a water heater to eco-cute the first time they had a problem. that was close to 1mil outlay within 10 years. I replaced the water heater with same after 15 years for around 200K (I had it repaired once). If you have a motar clad construction/colonial style roof materials, and do basic painting and coating around the 11-12 year mark (1.5-2mil?) you'll extend the life to around 20. Then you'll need to replace the roof when you re-paint again. You can mitigate this with more expensive construction materials for the roof and walls. My wife thinks Galvalume looks good. I think it looks like a storage locker. You could start with a roof that will last for 20+ years without any maintenance. But it will cost more up front.
Land/Property tax.(Disclaimer. This could all be wrong.).
As a rule of thumb, if the land is under 200sqm and classed for small dwellings and if you keep living areas under 120sqm it will be reduced by half for the first 3 years.
https://vs-group.jp/real-estate/propert ... lculation/
Depreciation table also in that link.
You need an expert to give you a better projection of what will be the assessed value of the property(and land), as it isn't going to be what you paid for it. As a rule of thumb estimate about 70% of fair market value as the assessed value. So let's say, the land is assessed by your municipality at 42mil and the property assessed at 20mil. Understanding market value is easier for land. But less so for a house where the value is more opaque. (The fact you paid 1 mil for imported gold plated taps for the tub doesn't mean they'll be assessed with a value of 700k.)
Anyhow, with the above assessed values the first year might be 161K
42mil / 6 * 1.4% /2 = 49,000
20mil * 0.8 * 1.4% /2 = 112,000 (assumes house made of wood. Stand back and marvel at the 20% initial depreciation as they handed you the keys..).
The house portion will further depreciate in years 2 and 3 so at year 4 the value will be 0.67 of that 20 mil.
But the 50% discount will go away so it jumps up.
Land 42 / 6 * 1.4% = 98k
House 20 * 0.67 * 1.4% = 187k
Total 285K
Municipalities are supposed to reassess all values every three years so it's possible the land valuation will even increase. I know. In Japan! It even happened to me.
Internal reform is down to wear and tear but small kids are like animals and teenagers feral. If I was doing it again I'd get ideas from zoo enclosures or those prison cells when everything is metal. When my son was young I found him in the bathroom reenacting the dirty protest scene from McVicar! But I digress.
You are right not to assume earning power. I know many highly earning foreigners that have had to return home/another country for job opportunities once they reached the dreaded 50. Thinking laterally, (I'm lying down right now), if this is an area you want to plant roots in, maybe you could build something that could easily be adapted into a two family dwelling. Then move into half on retirement and give half to your favorite child alternatively rent it to your least fave.
Anyhow, if you know for sure you'll be paying 250K per month on rent anyway, assuming land holds value, there is the argument that buying and building will be either a zero net gain or even less out of pocket expense over a 20 year span. I say 20 so you can depreciate the house to zero rather than relying on finding a buyer.
Maintenance costs will vary based on the construction method and aminities. I'm in a 4LDK but the floor space is close to a 5LDK. Central air is an expensive option requiring regular maintenance and requires a well constructed house to start with. Traditional aircons last 15+ years and they cost about what they did 20 years ago. So if you install 5-6 aircons assume you'll need to replace them all around 15 years as they fail(some sooner, some later).
The neighbors switched from a water heater to eco-cute the first time they had a problem. that was close to 1mil outlay within 10 years. I replaced the water heater with same after 15 years for around 200K (I had it repaired once). If you have a motar clad construction/colonial style roof materials, and do basic painting and coating around the 11-12 year mark (1.5-2mil?) you'll extend the life to around 20. Then you'll need to replace the roof when you re-paint again. You can mitigate this with more expensive construction materials for the roof and walls. My wife thinks Galvalume looks good. I think it looks like a storage locker. You could start with a roof that will last for 20+ years without any maintenance. But it will cost more up front.
Land/Property tax.(Disclaimer. This could all be wrong.).
As a rule of thumb, if the land is under 200sqm and classed for small dwellings and if you keep living areas under 120sqm it will be reduced by half for the first 3 years.
https://vs-group.jp/real-estate/propert ... lculation/
Depreciation table also in that link.
You need an expert to give you a better projection of what will be the assessed value of the property(and land), as it isn't going to be what you paid for it. As a rule of thumb estimate about 70% of fair market value as the assessed value. So let's say, the land is assessed by your municipality at 42mil and the property assessed at 20mil. Understanding market value is easier for land. But less so for a house where the value is more opaque. (The fact you paid 1 mil for imported gold plated taps for the tub doesn't mean they'll be assessed with a value of 700k.)
Anyhow, with the above assessed values the first year might be 161K
42mil / 6 * 1.4% /2 = 49,000
20mil * 0.8 * 1.4% /2 = 112,000 (assumes house made of wood. Stand back and marvel at the 20% initial depreciation as they handed you the keys..).
The house portion will further depreciate in years 2 and 3 so at year 4 the value will be 0.67 of that 20 mil.
But the 50% discount will go away so it jumps up.
Land 42 / 6 * 1.4% = 98k
House 20 * 0.67 * 1.4% = 187k
Total 285K
Municipalities are supposed to reassess all values every three years so it's possible the land valuation will even increase. I know. In Japan! It even happened to me.
Internal reform is down to wear and tear but small kids are like animals and teenagers feral. If I was doing it again I'd get ideas from zoo enclosures or those prison cells when everything is metal. When my son was young I found him in the bathroom reenacting the dirty protest scene from McVicar! But I digress.
You are right not to assume earning power. I know many highly earning foreigners that have had to return home/another country for job opportunities once they reached the dreaded 50. Thinking laterally, (I'm lying down right now), if this is an area you want to plant roots in, maybe you could build something that could easily be adapted into a two family dwelling. Then move into half on retirement and give half to your favorite child alternatively rent it to your least fave.
"That guy"
Re: Selling stocks to build a house, is it a bad move?
Nice that you have mentioned this, because I've been meaning to ask about it. Being a person who tries to always have plan B, I was thinking that in event of our income significantly decreasing, in my home country (and many others, AFAIK) it would be possible to rent out rooms in a house to students etc. However, it seems that renting a room is not a thing in Japan? I've checked Suumo and other similar sites, and there are no search option for rooms.Moneymatters wrote: ↑Thu Nov 04, 2021 2:18 am Thinking laterally, (I'm lying down right now), if this is an area you want to plant roots in, maybe you could build something that could easily be adapted into a two family dwelling. Then move into half on retirement and give half to your favorite child alternatively rent it to your least fave.
Also, I've read in Japanese real estate magazine that some people build their house in such way, so that the first floor could be used as a co-working space and pay their loan with that income, however it is difficult to say whether co-working will be a thing in 30 years, when TS plans to sell.
Re: Selling stocks to build a house, is it a bad move?
Not sure how common that is, but after his mother died, my former landlord did convert the ground floor of his 3-storey family house to a separate 2DK home that I was renting out while he was still occupying the upper floors. It was not just a room, though, but a proper manshon (advertised as such on real estate websites) with a separate main door (on the opposite side of the building), independent utilities, etc., so the initial capital outlay for "reform" must have been significant.Ori wrote: ↑Thu Nov 04, 2021 5:40 am Nice that you have mentioned this, because I've been meaning to ask about it. Being a person who tries to always have plan B, I was thinking that in event of our income significantly decreasing, in my home country (and many others, AFAIK) it would be possible to rent out rooms in a house to students etc. However, it seems that renting a room is not a thing in Japan? I've checked Suumo and other similar sites, and there are no search option for rooms.
Re: Selling stocks to build a house, is it a bad move?
There used to be a couple of Japanese forums for such rentals a couple of decades back, I even rented one during my early years as a student. It seems like they've all but died out since sharehouses and airbnb became more accessible.Ori wrote: ↑Thu Nov 04, 2021 5:40 am Nice that you have mentioned this, because I've been meaning to ask about it. Being a person who tries to always have plan B, I was thinking that in event of our income significantly decreasing, in my home country (and many others, AFAIK) it would be possible to rent out rooms in a house to students etc. However, it seems that renting a room is not a thing in Japan? I've checked Suumo and other similar sites, and there are no search option for rooms.