Future finance planning when buying a house in Tokyo

[kitty63]

I am considering buying a house in Tokyo. The area where I live has monthly rents of 175,000 yen for 70-75 sq. mt. apartments including parking, close to station.

The houses I am looking at are in the range of 50-70 million, depending on how far from station and how old the construction is. Assuming I pick something in the middle, 15 minutes away and construction of 10-15 years old, I can probably get something around 55-60 million.

I did some calculations based on my understanding of real estate finance and lot of assumptions. According to my calculations, I will breakeven somewhere around 15 years. I thought I should be able to breakeven earlier, and seems like I am missing something.
Here is the spreadsheet: https://docs.google.com/spreadsheet...C1N3tGYn6Yh6W31qEBPc2hDfclgswriMMNw56/pubhtml

List of assumptions:

1. Property tax, insurance, monthly maintenance, increase in utilities (I find them hard to estimate and it may also depend on luck, so I don't know how far off I am)
2. Tax deduction for pending mortgage for 13 years at 0.7%?
3. Building cost depreciates at 5% each year, but I have kept it as logarithmic value, since the most depreciation would be in the earlier years. (Or am I very wrong here and the depreciation would be linear? Changing it to linear does reduce the number of breakeven years to 10).
4. Hoping initial fee (bank, agent, etc.) are a total of 3% :fingers-crossed:
5. Land cost increases at 3.5% yearly, given the latest data from https://tochidai.info/tokyo/

I know it is a lot to ask, but can anybody point out a few things I can modify that can make these calculations a bit more realistic? Thank you in advance!

 

[notsonicely]

@kitty63 Something to keep in mind is commute time/where you go often. If something is like 30+ min you can also look at Kanagawa and other areas where you’ll get more bang for your buck, bigger space/house, less tax, not in inaka, still same commute, etc.

Happy hunting!

 

[kitty63]

@notsonicely I do wish it was possible for us to move to a different area, but we have spent some recent years here trying to make friends, and it would be really difficult to start all over again. Anyways thanks for sharing your thoughts.

 

[truth239]

@kitty63 I'll just say that we thought the same but ended up becoming close family friends with our new neighbors as soon as we bought a house. I feel that once people know you are committed to living in the area long term they are much more open to friendship.

Especially if you have or will have children. We do sleepovers with our neighbors kids, go to parks or the zoo etc. together. The little things too, like just shooting the shit every day when we send our kids off in the morning or whatever, help each other out for daily life, all that good stuff. They trust us with their kids and we trust them with our kids which is IMO the highest level of trust. Very close friends with 3 families and decently friendly with many others.

Compared to over 10 years of renting where I had never even learned a neighbor's name.

 

[nkhra]

@truth239 Where did you buy?

 

[truth239]

@nkhra Tokyo suburb. Residential area with mostly houses.

 

[gracia1]

@kitty63 You can finance the initial upfront costs as well most times, like 110% loan to value, so that could flip your equation entirely to basically 0 out of pocket.

Also depreciation for tax purposes isn't the same as property value. Depending on location, size, age, layout, etc value of building can appreciate or hold value. Comparables in the area could give you a general idea.

Also rent as you know should include key money + deposit + maint fee + insurance + renewal fee. Also rent increase is possible (probably not likely but possible).

Good hunting

 

[kitty63]

@gracia1 Thank you, so I suppose the depreciation is probably the deciding factor on when I can break even. We live in JKK, so no key money, etc. The rents don't really increase either, though I don't know how they will be decades from now.

 

[farmer4life]

@kitty63 Does your calc sheet factor the benefit of not paying rent? I’m on my phone and can’t see it clearly.

If second hand I don’t think you get the tax benefit for 13 years. Limit is 10 and amount will be capped to 20-30mil I think..

Brave to assume that increase in land value.

Property tax estimate is reasonable and your budget for maint looks ok. You’ll have several years of no maint but then occasional large expenses. Pay attention to what has been done to exterior if looking at places over 10 years. An independent assessment is advised.

Allow more up front cost as agent alone could be 3%.

 

[kitty63]

@farmer4life Thanks for your reply. I did account for not paying rent, and since I'm still paying EMI and other expenses, I'm actually in negative, in other words, I end up paying more than now.

But I'm continuously losing on the value of house. If you don't even believe the land will increase in value by 3.5%, it's really hard to believe how buying a house can be justified here. I just ran numbers with 2% land increase and break even barely at 35 years.

 

[farmer4life]

@kitty63 Are you in some sort of subsidized housing arrangement? In which case it’s not a reasonable comparison.

It’s safe to assume there will be some appreciation of land values but in a place averse to inflation or wage increases you might want to temper your expectations. 2% is more believable..

How long is your projected loan term?

it's really hard to believe how buying a house can be justified here.

I guess the “here” means your personal situation and not Japan. I was renting at market rates. Got somewhere of similar quality/size/location, paid it off in a short time by paying more than I paid in rent. The land has appreciated more than the value assigned to the building.

It’s nice living rent free even though I don’t benefit from the land it’s a good asset for my partner to have assuming I pass first.
Also, paying rent in retirement will consume a bunch of retirement savings/income..

BTW, “Break even” for me was when I’d be able to sell for more than the outstanding loan. Is that how you are defining “break even”?

 

[benjohnson1966]

@kitty63 friendly reminder that while interest rates may be low right now, and have been low for a long time, that may not continue to be the case in the future, as people in aus/canada/usa are finding out right now. I'm not sure if the loan you're looking at is fixed rate or variable, but if it's variable, it's worth considering how the plan might change if that rate increased by 3-5%, as it has in those other countries in the last 24 months.

 

[kitty63]

@benjohnson1966 That's something I should consider too, yeah. Well it's only making it harder to justify owning property here, isn't it? However if the interest rates do increase, there will be several other things that will happen. The rents will increase for one and that would be something that can push people like me to buy a property.

 

[guineagirl]

@kitty63 Nah don't worry about Japanese interest rates rising like the West did. That is just overthinking. Japan's economy has been flatish and no sane central banker is going to raise rates to crash their own economy. The higher the interest rate, the more costly it is for companies to expand, limited growth. Japan had decades of deflation, and now to raise rates for what lol? This is the last thing Japan wants to happen. It will remain low for a very long time, no worries.

 

[myfindings]

@kitty63 Could please share your calculator template. I would like to run the numbers for a place I'm checking out.

 

[kitty63]

@myfindings Sure, but I'm still trying to get it validated, so please use it at your risk.
Japan Home Loan Simulation

 

[myfindings]

@kitty63 thank you.

 

[abdelas]

@kitty63

1. Tax deductions has been fading away over the years with a stricter and less favorable terms. I assumed no deductions
2. For me, depreciation is linear but has two phases: 0-8 years and then 8-20+years. The price depreciates fast in the first phase and then almost flat after that. You can verify this using Suumo and find similar houses with different years.
3. 2.2% for bank loan fees, 3% for agency commission, a few percentage points for regulatory fees. Agency fees cost 2x if you sell afterwards. These can be made lower by doing more research
4. The price of houses are substituted with asset price and thus, it’s correlated with the Nikkei. Nikkei is correlated with the printing of money despite the shit economy. Also the house price can be attributed with the rise of population in Tokyo; this is still positive at 2%. Therefore your bet is BoJ will keep printing money and the migration to Tokyo continues. In my calculation, I assumed the depreciation will be larger than appreciation and still, I’m net positive than renting after fees.

 

[mellie]

@kitty63 3.5% land increase per year is rather aggressive. Real estate prices in the Tokyo area are up 9% over the past five years, which is already well below your forecast of 3.5% annual growth.

In the right area / location, you can expect some appreciation, but Tokyo overall is going to see a decline in population from around 2030 or so. I'd assume maybe 1% growth if you feel lucky, or zero growth to be conservative.

Not sure where you live but Y150,000 a year for property tax feels high. Conversely, Y250,000 a year might be low, particularly if it's an older house.

I honestly wouldn't bother with quake insurance. It's not going to cover a lot of what you'd want it to cover, and you're capped at 1/2 the amount of your fire insurance coverage. Put another way - you'll never be able to rebuild your house with your quake insurance payout. If you're making enough to afford a Y50-60 million yen house, you might as well just self-insure and save another 60-80,000 a year. You can get fire insurance for less than Y20,000 a year.

Interest rate of 0.5% - tough to say. You can get something in the 0.3-0.4% range on a variable rate loan, while 10-year fixed are at 1%, full-term fixed around 1.4%. If you can get a variable rate loan and then pay it back aggressively, that's what I would do (make surey ou can make extra payments at no additional cost).

Various costs are going to be closer to 5-6% of the purchase price, so that's what you should budget for. HOWEVER - if you are patient, I'd try to get properties that are owned by the realator (ie, the realator isn't acting as broker). Most real estate agents also own properties, and when you buy from them, you save a lot on the various costs.

If you're buying a 10-15yr old structure, the house will be a fraction of the overall cost. Ignore it.

A simpler way to do this:

If you spent 175,000 a month on rent, for 35 years, you'd spend: 73.5 million. At the end of 35 years, you own nothing.

If you took out a 60 million yen loan to buy a 65 million yen house (putting 5 million down), at 0.5% interest, for 35 years, you'd pay 65.4 million plus the downpayment of 5 million, or 70.4 million, plus using your assumptions, another Y14 million for tax & repairs. So Y84 million.

That's 10.5 million more than if you paid rent for 35 years.

However, at the end of the 35 years, you own the property.

Do you think you could sell the land for more than 10.5 million?

 

[kitty63]

@mellie Thank you for your pointers. Really good ones and I really appreciate it.
I definitely believe I will be in profit after 35 years, I will have a place to live in and will be able to sell it of needed to get some of my money back. However, my question was at what point can I do that at the earliest. And I think by my calculations, it would be somewhere around 15 years.
I think the only way to really expedite it is by buying something where the cost of building is much smaller than the cost of land, and if I get lucky with the repairs.