Outsourcing tasks or not

Sorry for not posting anything for a while, the move back to Japan has been quite busy. This is actually an article I wrote a while back but did not post.

Today I will change the subject a bit. We will still discuss Japanese real estate investments a bit, but within a much larger discussion.

Today’s topic will deal with the concept of outsourcing daily tasks by using contractors. I am talking here about gardening, car or house repairing and the likes. The idea came to me after reading this article from MMM, which covers the subject nicely. I will discuss it from my own vantage point (a bit different from his, although I share his ideal). I will also expend a bit on it, as he only mentions the tax benefit of the Do It Yourself arrangement as an afterthought while, depending on your jurisdiction, it can be a huge benefit and a decision maker.

First the philosophy of not outsourcing things you could do yourself is really sound.

  • For one, you learn new things, which you may re-use in the future, meaning you are investing in yourself, always a really strong investment (I will do a post on that point later on)
  • Doing things by yourself brings you satisfaction! If we are here on earth to enjoy ourselves, I do not see what can beat this particular aspect of the DIY process. Indeed, after you complete something you did not know how to do before starting, you really feel awesome about it.
  • It is also usually cheaper, sometimes a lot so.

 

I have alas honestly really little experience on that front, but the really little experience I have just makes me want to do more.

I have been a renter most of my life in Japan (rents are tax deductible in Japan if your company arranges for it, a huge benefit when talking about 30-43% tax). As such it means I have not been doing any repairs in the properties I was living in. Once I bought my first apartment (sold since then, a mistake, but not something I really had a choice in), I had some renovations made by an external company. I did not do it myself for the following reasons:

  • We are talking about a central Tokyo apartment here, a tiny thing where storing equipment etc. would have been difficult. I owned no tool at the time, meaning I would have had to buy/rent everything.
  • I did not know how to do such things (not really an excuse with internet and youtube).
  • I was young and less clear on what I wanted to do in my life at the time (retire early!), meaning I was only saving ½ my paycheck at the time, while clearly more could have been done.

After that I moved to India and again I am renting here. I have never owned a car (except the one I have here in India, which is somewhat provided by the company so again not really something I can play with)

The only things I have done by myself till dates therefore are all PC related or investment related.

I have been tinkering with PC since I am 16. I am nowhere near a genius on that front but still, when faced with a problem, between google to browse forums and so forth, I usually find a solution to whatever it is. Recently my older PC had issues. It would sometimes not start, and then it would often freeze. After searching for possible causes linked to those symptoms, I determined the issue to eitherbe  a (quite common for a 6 y/o machine) power supply issue, or much rarer (RAM) corruption problem. After buying power supply and swapping ram sticks around (making mistakes and returning the wrong ones, thank you Amazon) I managed to fully fix the issue and now I know the ins and outs of PC power supply issues and what to look for when shopping around and so forth. I can tell you that it feels great. I am quite sure, being a big PC user, that I will face the problem again, but next time, I will know how to identify the problem, I will know how to shop for parts and I will know how to change them.

I will not cover my DIY experience on the investment front here leaving that for another time.

 

Now, to talk a bit more on the money saving aspect of DIY:

When you use a contractor for anything, you face the following obvious and hidden costs:

  • Of course you have to pay the contractor for his time. Depending on the matter, such salary per hour can be quite costly.
  • Then that person usually needs to come (or you have to go to them), this will cost you quite a bit as well. Depending on the issue, you may end up paying for 3 hours of work, including transport time, to solve a 20min issue.
  • There is an agency risk in having somebody solving the issue for you:
    • Are you sure the person knows his job.
    • Are you sure the parts he is using are good ones or on the contrary knock-offs.
    • Is the person charging you more time than needed, on the basis that you do not know what he is doing.

Although I am always ready to give the benefit of doubt to any new person I met, the various experiences I had in India on that front were eye openers…

  • It is possible you overpay for the parts needed for a repair as the contractor may have special arrangements and kick-back going his way if he chose a particular supplier.

 

Now of course, using a contractor comes with several benefits:

  • Some things are just too dangerous or require costly equipment that makes it really unpractical to do yourself (still, consider renting equipment, it may make sense).
  • Some things just cannot be learnt like that, using youtube.
  • The main one is that you can do something else during that time. Meaning if you earn something like 10 000 JPY/hour when working and the contractor charges you 5 000JPY/hour, it looks like you may be ahead in just outsourcing everything.

This last point is wrong for 2 reasons:

  • First, is it really true that you would be able to work more than usual to earn those extra 10 000JPY/hour. Maybe you have a fixed job and working more will not net you anything extra. Worse, maybe you are a freelance, already struggling to get enough business to make a decent living.
  • Second, especially in a high income tax jurisdiction, your 10 000JPY/hour, after a 43% tax are only 5 700JPY. Since you pay the contractor 5 000JPY/hour, it is basically a wash between doing it yourself and having it done. And then you have to deal with the various risks listed above, and you lose the benefit of learning new thing, getting self-satisfaction and all.

 

Now, doing everything yourself, while a great goal and a really worthwhile endeavor, may not always make sense. This is why I advise, before talking a decision, to really crunch the numbers down.

A few Japanese example:

  • Let us say we are talking about a house related repair. If instead of owning the house as an individual, you create a company that will buy the house, then this company (fully owned by you of course) can rent the property to you (meaning you can then get the tax break on your rent related to you salary income). Then all the repairs that are needed would be done by your company, deductible of taxes. Having a 43% discount on anything can really change the decision on whether or not doing it yourself; on top of that, the fact that Japanese people are really conscientious in their work and particularly honest reduces the agency risk.

I really want to try to build this structure now that I am back to Japan and will speak at length on the subject once I have done it. I know it is possible as I have seen people do it but I prefer not to speak too much about it before having real experience on that front.

 

  • I am using an accountant in Japan to do my tax declaration for non-salary income. This person is also advising me on tax matters to manage the accounting of the rental property I own in Japan as well as the other income I have.

Important information:

  • I can deduce any costs incurred to run my little property business in Japan (even owning the property as an individual). The accountant fees are definitely part of that.
  • If you fill correctly your tax following the government guidelines every year (called the “blue sheet” tax filling), you are allowed to deduce 100 000JPY from your income, reducing your taxes.

So for an accountant cost of 86 400JPY/year (my situation today), I can reduce my property rental income by 186 400 JPY. At a marginal tax of 43% that means I saved 80 152 JPY compared to doing that reporting myself. I also avoid the hassle of doing that in Japanese, which, although I can read a bit, is no small benefit. Finally, as I am not currently physically in Japan, doing the tax filling myself would have been challenging. Now, in this calculation, I assume 2 things:

  • First, my accountant is an ex-colleague of my wife and is offering a price that is not particularly high. Your mileage may vary.
  • Second, it assumes that doing the reporting myself, I would not meet the standard of the “blue sheet” reporting and not get the deduction, which may not be true in the long run (once I have seen the report once, I suppose I can fill it myself next time, Japanese or no Japanese.

The next best thing on the tax front will be for my wife (Japanese) to do the tax thing. Since she is currently not working, any income she gets is tax free up to roughtly 1 000 000JPY. In doing so I would still get the tax benefit on my property business side, but the money stays in the familly and is not taxed at all.

My overall conclusion is that before deciding to do something by yourself or not, you should really crunch the numbers and weight the advantages and the drawbacks. This should not be seen as an excuse to outsource everything, but as a reality check on whether doing the things by yourself is possible or cost/time effective.

Although I may change that once I am back to Japan, the property I owned is under management for example. This is not a good deal and costs me close to 15% of my gross rental income, for limited benefit. The main one being that the Japanese market is still quite traditional and tenants are definitely not used to talk directly to the landlord. Even with those drawbacks, it would not be physically possible for me to manage the property remotely so here, there is just no choice.

I am not sure a good website exists for direct rental (something that definitely exists in France or elsewhere). If you know any good website to find tenants in Japan, I would be happy to hear from you!

 

 

 

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