Japanese real estate property purchase price soft spot(s)

First of all, Happy New Year to everybody around. May 2017 bring health, fulfilment, financial independence and overall enjoyment to all of you! 明けましておめでとうございます!

 

In today’s post, I will discuss a bit on the various price soft spots during a Japanese property life.

Indeed, as discussed a little bit on point 3 here, the building part of the price of a property decrease to zero during the life of a property. Due to that, I found that from a future cash flow standpoint, there are some times where buying the property makes more sense than other.

Normally, a new property costs the price of the land and the price of the building on it (including the margin made by all actors for the constructions, the promotion etc.). Aside from the land price, the rest depreciates during the life of the property. The accounting depreciation varies depending on the building materials. More on that here (figures are of course valid as of today and may change).

It is important to understand that for the buyer and the seller, remaining depreciation on the building on one hand, and the marginal tax rate of both actors on the other hand can play a big part in the bargaining.

For example, imagine the seller tax rate is really high (more than 20mios JPY yearly income, income tax rate at 43%). Any extra yen the seller manages to get on the property, over and above the accounting price of the building (directly linked to its age), will only yield him 0.53 yen (even less actually, since the Real Estate transaction fees are also based on the price). The seller therefore has limited interest to sell the property much higher than the land price (which may have changed since the purchase, but not much can be done about that) and the remaining accounting building price.

Now, the buyer point of view. If the buyer has a low tax rate, any remaining depreciation value on the building will only offset a small amount of tax, so a low price is preferred. On the contrary, if the buyer also is in a high tax bracket, over-paying a bit for the property may not be too bad has it will then be depreciated (all purchase costs plus building value, including VAT can be clubbed in the purchase price and depreciated in Japan for an investment property, even for an individual, a far cry from France for example).

Those considerations are a bit theoretical, as first it may be difficult to assess the seller tax bracket when you buy and secondly not everybody is extremely conscious of those impacts. That being said, in practice such general principles have the following effects:

 

Properties building value decreases very quickly during the first 10-15 years of life, usually as fast as the accounting depreciation itself. After that it slows done a bit, to reach around 0 (unless extensive renovations were made) by the time the building is 25-30 years old (for a wood composite structure property depreciated over 22years). So if you purchase a 25 years old property, you may buy it for barely more than the land price, and still get, with good maintenance, an easy 20-30 years of useful life. Consequently, the price difference between a 25 years old and 45 years old property is usually quite low.

The rent in such properties also decreases a bit with time, but if it is well maintained and clean inside, the difference can be quite low between rents in a similar 10 years old and 40 years old buildings.

The same effect can be found in most properties, but the length of each phases varies, somewhat based on the building materials and the related accounting depreciation. It is useful to keep that in mind when buying. You may not be able to always target exactly 25 years/old properties though. Still, as a general, unless your tax rate is very high, avoid new or less than 10-15 years old properties. Most Japanese, disliking old and 2nd hand things (more here) do exactly the opposite, so your competition may not be as huge as could be expected given the differences in price. It is also advisable to avoid extremely old properties, as you are buying something that will need to be rebuild really soon, so you are overpaying compared to the same property 20 years before. Of course if your plan is to actually rebuild more in line with your standard, then it is fine, but a totally different business altogether, something I want to try at some point.

When buying, you should also consider where you stand in your own life cycle. Some examples:

  • If you are 30 and plan to have kids soon after purchasing, meaning those kids will be out of the house around 25-30 years later, at which point you plan to retire (late retirement that, MMM would not like it ;o) ) and downsize/move somewhere else, a 15-20 years old at the time of purchase wood house may make a lot of sense.
  • If you are 25, have no kids planned yet and plan live there first, then rent the property out for the rest of your life once you marry and have kids, 5-10 years down the line, a 15 years old Steel Frame Reinforced Concrete apartment may be perfect. For concrete apartment, try to always buy something more recent than 1981 as there have been a big change in earthquake regulation at the time and buildings are much more likely to survive something big.
  • If you are 25, plan to buy an old structure, live in it for a few years, then get it totally rebuild when your family grows, a 40+ years old wood house on a nice plot of land can be perfect. You would get the best of several worlds: cheap purchase price at first (good since at 25 you may not be super rich), a house you do not mind damaging a bit (all parties at your place, yeah!), combined with a customize new house for your family later, all of that combined in a smart financing plan, since you do not pay everything upfront (lower locked capital and interest paid overall).

It may seem a lot of information to absorb and you may fear it can restrict your choice a lot. First those are indications, if you really cannot do without a new structure, so be it. Also, in Japan, with its decreasing population, chances are that by taking the time to search, you find what you need, including those criteria.

That’s it for today, cheers!

 

 

 

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