Cash or loan for house renovation

[RetireJapan]

Quick question for you today: my wife wants to help her parents renovate their house. We're going to chuck in 10m yen, they will do the same. The house will eventually become ours. Should be pleasant enough once its renovated.

So, do we pay our 10m in cash by selling some of my wife's investments (probably THEO and NISA holdings) or do we get a loan for the 10m and pay it down from cashflow each month?

I got a leaflet the other day from Shonai Bank (they do my mortgage) offering a special loan for public servants for up to 10m @1.7%. I'll have to go and ask them about fees, etc. but this seems reasonable. We can borrow for up to 10 years, which would result in a monthly payment of about 100,000 yen.

So which is the better option? I don't think there is a lot in it. Personally I am inclined to borrow the money, as we would then have the option to pay it off if we wanted to.

[Jamo]

Loans here are so cheap, so pretty easy to outpace the fees with investment.

So I wouldn't sell your investments, they should make you more money over then next 10 years (5% p/a?) than you would save by paying upfront (1.7%p/a). Assuming the market doesn't crash... Pretty rough logic but I think it's sound

[DragonAsh]

Obviously take my words with a grain of salt, as you know, in general I hate taking out debt if I don't need to.

But my first thought was, in terms of your specific question, given where the market is right now, I personally wouldn't mind taking some money off the table, locking in some gains and just putting in cash. I think we would be very very fortunate if we average 5% returns over the next 10 years.

And just playing devil's advocate here - that would go doubly so if I wasn't even living in the house yet. I'm sure you're well aware of the pitfalls of residential real estate in Japan. What's the time frame for you 'eventually' owning the house? Especially when with a loan, that Y10mn is really going to cost you closer to Y11mn.

Would there be any tax considerations if the Y10mn is viewed as a gift?

[RetireJapan]

And just playing devil's advocate here - that would go doubly so if I wasn't even living in the house yet. I'm sure you're well aware of the pitfalls of residential real estate in Japan. What's the time frame for you 'eventually' owning the house? Especially when with a loan, that Y10mn is really going to cost you closer to Y11mn.

Would there be any tax considerations if the Y10mn is viewed as a gift?

I have no idea when we'll 'get' the house, but it doesn't really matter. I see this as a complete waste of money, but it is something that is very important to my wife and will make her happy, so we'll do it. Just need to figure out the best way to do so.

Haven't really looked at tax implications. I think the house is in my wife's name, but my in-laws are living there, so I'm hoping it's going to be one of these cohabiting things that no-one really cares about

[DragonAsh]

Well, in that case I really really wouldn't take out a loan for something that you consider to be a waste of money (personally, I tend to agree with you).
I think it's great that you're making such a gesture, and certainly having a good relationship with the in-laws is a consideration - I'm really really grateful that we have a fantastic relationship with my wife's parents; so much so that we bought the house next door - but you're still a better man than I; I might contribute Y1m to such an endeavor but no way would I sink Y10mn into it regardless of whether I could 'afford' it or not. TBH I'm a bit surprised the in-laws would go along with it; I know my in-laws wouldn't let us even if we wanted to; they'd insist we put the Y10mn towards our own house / retirement / grandkids etc.

[captainspoke]

... We're going to chuck in 10m yen, they will do the same. The house will eventually become ours. Should be pleasant enough once its renovated.
...

I've thought on this some, and don't know whether to mention it.

This all looks fine. ¥20M will produce an almost new house that should be very pleasant. And I think it's a good, human thing to do for family, for an older generation, and so on.

But the italicized part...

Worst case might be that one of the in-laws passes on, and the other suffers from Alzheimer's. Such patients can become belligerent towards their kids--this is not common, but it is also not rare. (I don't know the details, but declaring someone incompetent here is probably hard.) The surviving parent may 'forget', or ignore, or in their own mind re-construe what happened when you gave them money to help remodel the house.

When on the borderline of dementia, or just age and memory problems, there is something in the US called "undue influence over an elder." A caretaker, even one kid out of several, can stay close and effectively manipulate the older person. In my family's case, it was a woman in my father's church who took over his life and micromanaged everything, becoming the only thing he knew. She talked him into marriage, and while she did take care of him, as a widow she's now collecting his pension and social security for life. Luckily, there wasn't much other money involved. Oh, and she was a year younger than me (I'm the third of four kids), and my dad was over 30 years older than I was, so call her 32-33 years younger than him--they got married when he was 95...! Talk about weird.

Another unusual one I heard of: The wife of a couple for some reason adopted someone who ran a temple, who became her legal child (again, probably a kind of undue influence). Then she died early, and this temple guy had become one of her legal heirs...! Hubby thus shared inheritance.

I think that's enough to convey some possible dangers. Please consider their likelihood and how you might avoid them.

[fools_gold]

I usually prefer taking a low interest loan to dipping into savings. However, in this case I'd be a bit wary of taking a loan out in my name for the in-laws. What if you were to get divorced, or your wife passed away? You could end up being on the hook for the loan repayments without any legal claim to the property. Also, I don't want to sound harsh, but it doesn't sound like they really need your financial assistance. They've got 10 million of their own plus the equity in the property. They could sell up and buy a nice manshon, or just be a little less extravagant with the renovations.

[goodandbadjapan]

I think it is great that you are helping out. I've done something similar for my parents and was so pleased my wife had no objections. The only thing I would wonder about is why not just have the house transferred into your or your wife's name now? I'm not sure if transferring creates tax issues now or if their is a sliding scale of inheritance for say 7 years as there is in the UK. That may help with inheritance tax etc further down the line and any of the other worries about the future disappear. Or, I suppose you could buy it from them at an agreed price so it is yours but they do the renovations and live there while title is in your name. See it as your house that they are taking care of during their lifetime. Probably problems with those ideas that I'm not seeing but just a thought.

[RetireJapan]

Well, in that case I really really wouldn't take out a loan for something that you consider to be a waste of money (personally, I tend to agree with you).

Don't think the purpose makes much difference to the numbers, but agree with the feeling

TBH I'm a bit surprised the in-laws would go along with it; I know my in-laws wouldn't let us even if we wanted to; they'd insist we put the Y10mn towards our own house / retirement / grandkids etc.

Well, the narrative is that it's basically our house now (although I'm pretty sure my MIL is going to outlive me). Also the main driver is my wife, as it's fairly likely she'll have to stay with them for extended periods in the future. She spent two weeks there in November, and hated being cold, etc.

And it is her money

My wife is the reason we have the kind of cash flow we do, so if she wants to take care of her parents I don't have a problem with it. Revenue and profits at her school are on an upward trend, so this should just be a temporary blip.

Worst case might be that one of the in-laws passes on, and the other suffers from Alzheimer's. Such patients can become belligerent towards their kids--this is not common, but it is also not rare. (I don't know the details, but declaring someone incompetent here is probably hard.) The surviving parent may 'forget', or ignore, or in their own mind re-construe what happened when you gave them money to help remodel the house.

Sure. Worst case scenario is that we don't get the house, I guess. Don't really care. It is a nice house in a stunning location, and I can imagine us living there in the future, but I like our flat quite a lot too

I'm not really into things: https://youtu.be/zQxZHAvKBHo?t=2m12s

I think it is great that you are helping out. I've done something similar for my parents and was so pleased my wife had no objections. The only thing I would wonder about is why not just have the house transferred into your or your wife's name now? I'm not sure if transferring creates tax issues now or if their is a sliding scale of inheritance for say 7 years as there is in the UK. That may help with inheritance tax etc further down the line and any of the other worries about the future disappear. Or, I suppose you could buy it from them at an agreed price so it is yours but they do the renovations and live there while title is in your name. See it as your house that they are taking care of during their lifetime. Probably problems with those ideas that I'm not seeing but just a thought.

I think the house is already in my wife's name. They did the paperwork a couple of years ago when my FIL was diagnosed with Alzheimer's.

[RetireJapan]

Actually the most compelling reason might be avoiding the paperwork involved in getting a loan