Rental Income v/s Monthly Loan Payment conundrum ?

[Manish]

I am in Japan for 7 years with wife and a kid. We enjoy living here and looks like will be here for long if not forever.
We moved to Tokyo from Inaka 2 years back and Me and My wife noticed that a big portion (150,000 JPY ) goes for rent so how to make use of that amount for our financial advantage is a question we are debating for some time.

- One of the real estate guy i talked to suggested me to go for an old mansion in minato ku ( azabu, roppongi ..) which has stable income stream.
According to him, although expensive, however with current low loan rates the income from rent will payoff the monthly loan installment and have some extra if you choose the property correctly.

- Buying a house in Japan is tempting with low interest rates. I can get PR easily so it looks even better with loan rates in case of PR.

- I am not sure about the loan as of now since I have never taken a loan. Having my financial decision tied to monthly installment bothers me a bit. However not utilizing the opportunity while staying in Japan also is not prudent.

- Additionally, I am not sure if the loan rates will start going north or not. How much north it may go in a 10-15 year period is also something it bothers me.

So, I would like to hear from readers if someone has gone through this conundrum.

*Just to add, I am hitting 40, with no other major financial liability as of now. Although stable and good earning, due to financial commitments i cannot save too much right now.

[RetireJapan]

Hi Manish

A few thoughts to kick us off:

1. Be aware that you are not allowed to rent out a property if it has a residential mortgage on it. If your bank found out, they could demand you replay the loan in full immediately, or force you to remortgage with a commercial (more expensive) mortgage.
2. With older manshons it is necessary to be aware of the maintenance costs and manshon fees. These can become very expensive over time. For example, in our manshon, the monthly fees are about the same as the mortgage!
3. For residential mortgages I think it makes sense to fix the interest rate so that you are able to pay it comfortably. I can't see interest rates falling very far, but they could certainly go up in the future.

Anyone else?

[jcc]

It's worth considering the incentives for the real estate agent along with the risks.

Real estate agents are payed by commission. And if that commission is a %(generally the chuukaitesuuryou on used mansions can be 3%!), they will want to upsell you as hard as possible. They're all trying to push into buying a place and then "oh you can just rent it if you need to move", but you should seriously consider if a) you will live there for a long time and b) it will be rentable in the foreseeable future also c) do you really want to live with your family in roppongi in an old cramped manshon?

There's probably truth to the fact that resale values of manshon will remain higher in major business centrals.

If you're investing for your retirement though and picking between a mansion with mortgage that's 25man a month in such a place or one at half that price elsewhere, you may also want to consider the missed investment opportunity from the 12.5man you'd be dumping into the expensive mansion every month. Going with a conservative long-term annual appreciation of 4%, after 25 years that would grow to 2746man(of which 42% would just be the growth). Having your whole investment in your house is not diversified at all. It might turn out well. Or Japan might catch up to the 21st century, remote work increases and the overpriced parts of the city see a value collapse. If the home is an investment, is it one you can afford to lose money on?

Ultimately it's going to come down to your own priorities and where you want to live. If you like the idea of living in azabu or roppongi and you can afford it without depending on it to retain its value(which cannot be guaranteed), then you can do that. If you'd only be moving there considering it a long term investment, my personal opinion is you'd be taking much less risk by moving somewhere nice a bit further out and investing the extra cash into a diversified portfolio.

[Manish]

Ben :
Thank you.
You have flagged a very important point about residential property not allowed to be rented out. This will be "Jutaku loan" right.
Is there a law which stipulates minimum time for residence ? What happens if you relocate due to work, kid's school etc. Are the waivers on Bank's discretion ?
I have a colleague who got 110% Jutaku loan just by applying for PR (not actual PR). He is living at the property right now however plans to sell or give it on rent after 2-3 years. He has a wild streak so he is not thinking about how he will handle the bank if and when it finds out.


jcc :
If was skeptical about this then after reading your comments i almost felt a noose around my neck and gasping for air
But you are right about each of the points that you made and those numbers makes lot of sense.

To keep my hopes afloat, I thought out a scenario. Do you think this is too much of wishful thinking or possible in someway.
My idea is that if i get 100% financed for a property with say 1% ~2% interest, stay in it for say 5 years and then give it out for rent. If the rental income can offset my monthly loan repayment then it can be helpful in building an asset.
Basically i let someone else repay my mortgage instead of Me paying someone else's mortgage.

Further, I can use the lump sum amount that i saved due to cheaper loan in investment back home in India where I am sure to receive an annual growth of 7% per year risk free.

What do you think ?

[jcc]

So long as a) you can keep it rented out, and b) the rent payments cover both the mortgage and maintenance costs, it can work.

a) is pretty complicated and not something I feel even remotely qualified to answer. But there are a lot of issues in japan of realtors selling "investment" mansions where it turns out the units can't be consistently rented out at the price that they were sold on. The realtors are not your friends and are not incentivized to serve your best interests. They're running their own business and they make money when they sell you something.

Like I said, my personal feeling on this is that as an investment it's not diversified. All your eggs are in one basket. If it's not somewhere you actually want to live, my personal feeling is you'd be taking a big risk.

If you do decide to go for it anyway, do some real research on historic rent rates in the area as well as occupancy, especially in the building you're looking to get a unit in.

[Ditto]

I really am not qualified to answer the question but here is a bit of my experience, hope it helps:

We have rented a 3LDK 100m2 Duplex the past 3 years.

¥75,000 a month rent , we don’t own a car so no parking space.
¥7,000 extra a month if we had made the contract with parking included on day one, ¥10,000 extra if I want to add the parking now.
Out gas, water and electric bill is about ¥25,000 a month total.

So ¥100,000 monthly expenses.(¥110,000 if we had a car.)

I was looking for a new/second hand house in the same area we rent but prices were a bit over our budget. ¥40-50 million mortgage for 35 years (¥125,000-150,000) so definitely NOT worth buying.

2 weeks ago we found a house 4LDK, 9 km away from our current location, 102m2 building on a 170m2, build in late 2015, all electric, 7.5KW solar panel installed, great insulation, aircons installed in all the rooms. For only ¥23 million.

So 35 year mortgage on 1.25% fixed rate, ¥66,000 a month mortage payment, ¥0 city gas bill, hopefully ¥0 electricity bill, a considerable tax deduction from the mortgage. And hopefully the electricity company will pay us an extra ¥10,000 a month, 2 parking spaces.


Here is our pro and cons:

PRO:
Rent VS. Buy
¥75,000. ¥66,000.
¥25,000 utilities. ¥10,000 utilities
¥10,000 parking. ¥0 parking
¥20,000 Fire Insurance. ¥20,000 Fire Insurance
¥10,000 monthly income from solar panels.
accomplish of owning a place.

PRO: Even if houses depreciate tremendously in Value in Japan in 35 years you will still have something left from selling the land instead or ¥0 from renting for 35 years.

PRO: significant tax deduction. No ridiculous ¥50,000 every 2 years to renew the contract.
PRO: letting the property on rent will pay itself even changed to commercial interest rates.

CON: my commute to work will be 15 min longer, we have to move kids from the schools and kindergarten and get adapted to the new city

CON: My commute to work will be slightly more expensive.
CON: Property Tax
CON: Maintenance
CON: Gave up on the desire to have a relatively big backyard and an extra room to myself, not worth the extra ¥10-15million


My final thoughts: if you carefully select the property, location, and the price of the property so you don’t get a huge loan than it’s always better Buying than renting.

[DragonAsh]

> ¥20,000 Fire insurance

You pay Y20,000 a month for fire insurance?!

Dear god that's criminally high. That's more than I pay a year.
Please tell me that's your annual payment...


> PRO: significant tax deduction.

Er, no. The theoretical max benefit is deducting 1% of the outstanding loan balance from your income tax. If you paid Y3 million down and took out a Y20 million loan for 35 years - and having debt hanging over your head for 35 freaking years should horrify you - the max deduction would be in the first year, and it'd only be Y200,000 a year, assuming you pay enough income and resident tax to actually be able to deduct the full amount.

And of course you need to file tax returns by yourself (確定申告), vs having the company do it for you. If you already do this, then not a problem; otherwise you could easily argue that your time is worth more than a measly 200,000 for the paperwork and hassle involved.

I mean, 200,000 ain't nothing...but it's not 'significant'. By all means, take advantage of it if you do purchase, but it shouldn't be viewed as a 'significant' benefit. You shouldn't even factor it in to your purchase calculations. Put another way - if you're banking on that tax deduction to make the budget work, you can't afford to buy a house.


To the OP

am not sure about the loan as of now since I have never taken a loan. Having my financial decision tied to monthly installment bothers me a bit. However not utilizing the opportunity while staying in Japan also is not prudent.

- Additionally, I am not sure if the loan rates will start going north or not. How much north it may go in a 10-15 year period is also something it bothers me.

So, I would like to hear from readers if someone has gone through this conundrum.

*Just to add, I am hitting 40, with no other major financial liability as of now. Although stable and good earning, due to financial commitments i cannot save too much right now.

In my humble opinion, you should not be even thinking about taking out debt to buy a house if you're not in position to save. Your statement about not wanting to be tied to a monthly payment suggests you realize this, but I also suspect you're being seduced by FOMA (fear of missing out) - 'oh interest rates are so low, i should hurry up and take out a bunch of debt and then invest, or something'.

If you have other commitments that hinder your ability to save, buying a home and going into debt to do it is a horrible idea. It's a recipe for disaster. Because Murphy is going to move in with you and decide to give you a leaky roof right when you can least afford to cash flow the repairs.

It sounds like you're in a good position with stable earnings and a good family situation; Y150,000 for rent is reasonably chunky, so I assume you're on a decent salary. But that's even a bit more cause for concern, because you say you still can't save much due to other financial commitments.

For now, I think you should concentrate on playing defense; focus on your monthly budget with your wife and figuring out how you can consistently save each month. Not sure where you live and work, but you could probably cut your rent in half by moving just a bit farther out. Be warned, I'm slightly biased mainly because I HATE the idea of paying rent almost as much as I DETEST the thought of being in debt, so....

[RetireJapan]

My final thoughts: if you carefully select the property, location, and the price of the property so you don’t get a huge loan than it’s always better Buying than renting.

I would add one thing to this: as long as you never move.

[Manish]

Thanks a lot everybody for the wise comments.
I have a far clear head about this after reading everyone's thoughts and experiences.

[DragonAsh]

I hope everyone was listening to me when I told people - repeatedly - that avoiding (paying down) debt was more important than investing. Markets can go up....or down, debt is always debt until it's gone.