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!

 

 

 

Moving back to Japan!

After almost 3 years in India, it looks like I will be heading back to Japan! I am super excited!

Indeed, life in India has not been much fun…

From the work side of life, it was actually pretty good. The job was really interesting, I got to work with a great boss (that I knew from several years back in Japan), on a great project, building a new Financial control platform to service the other entities of the group world-wide. I got to build and train my whole team from scratch and pretty much setup up the whole thing, with the help of IT, HR, Admin, Legal teams etc. A great experience I hope I will be able to convert in a better position.

From the personal side, my wife lost her job in Japan and was not allowed to work in India (with a dependant visa it is not possible to work in India). Life there was pretty boring due to the heavy traffic everywhere (whatever you do takes HOURS), pollution made us sick during the winter and during summer… you get 4 months a non-stop rain during monsoon… I could not do much sport due to various local circumstances (and gained 7-8kg in 3 years…). We actually decided early during the stay that if it was not possible to do anything as there is nothing available in the first place, we might as well have babies (we would not have done much with babies in Japan anyway). First one was born 10 months after arriving and second one less than 2 months ago, Mission accomplished!

Overall, financially over the 3 years my India stay was a wash, compared with what staying in Japan would have been:

On the plus side:

  • Did not get a raise, but my apartment rental was paid, the equivalent of a ~20% raise.
  • Got pretty good bonuses.
  • The babies delivery were covered by the great health insurance we had as expat’ (each delivery may have cost us 500000 yen each otherwise), but at the same time we still beneficiated from my Japanese contract and health insurance, bringing us ~500000 yen for each delivery).
  • There was so little to do we ended up saving money because of that… Not fully a plus but well.

On the minus side:

  • My wife lost her job (with babies she would not have been able to work in Japan, but she still would have gotten some revenues)
  • We could not buy a place to live, and had to fork a huge rent amount every month. It was paid by my company, but that did not even cover my wife loss of income.
  • We had additional expenses like car, driver etc. that really were not optional here (far too dangerous to cycle here for example, and cycling in suits during the monsoon is a big no-no).

Once we are back, I hope to optimize my savings a bit more. I am quite sure I can spend less and be happier in Japan, but the remaining savings at the end of the month may still take some sort of a hit, as my salary will be back to what it was 6 years ago to start with (without apartment this time), and I will have 2 babies, making it difficult for my wife to work (kindergarten are almost impossible to get into in Japan, unless both parents work… But you need to have a kindergarten ready to actually start working…). Still, we should be able to be far more efficient in our spending thanks to tricks I mentioned here.

  • Worse case scenario, if we opt for leaving a bit far from work, is that I will commute (transport being paid by my company). That will save a huge amount on the car/driver.
  • If we spend a bit more on rent, I can then consider cycling to work (free exercise and free money, as my company will still pay me the commute ticket, tax free). I will have other savings like less train cost during weekends, more friends visits (meaning less eating out) etc.
  • The fact is that in my company today, I can elect to have my rent withdrawn from my salary directly, and it becomes tax free (~95% of the rent becomes tax free to be precise). That is a huge deal since my marginal tax rate will be I think 43% (income tax plus local tax), thanks to my salary and the investment properties I have in Japan. Spending more on the rent (before-tax money) to save on other expenses (after tax money) can be made really efficient that way.
  • Possibility to start an alternate business (Yoga, kindergarten for my wife, more real estate for me), allowing interesting tax optimization.

I am also looking for opportunities out of my company, as it is likely, if I can find something well suited to my profile and experience, that I can get a 30-40% raise (my salary is the same as I had when I had half the experience as I have today, due to my expat’ stint).

My saving rate (compared to my salary only, excluding other investments) I estimate at around 30-33% if I do not change my income at all and my wife does not work. If I can do that, I should be able to be financially independent in about 10years.

That being said, I would like to bring that to 50%+, thanks to a bit of extra savings and more income. If I can do that, assuming once we have enough savings we move out of Tokyo (Chiba, Izu looks nice, if you have other ideas of cheap country side areas with beaches I am interested), we can be independent in 5 years! After that, it is beach, gardening and Air BnB galore, I really look forward to receive lots of foreigner and introduce them to country side Japan. We will have a blast!

If I can make reliable income on FX trading (2016 was quite good!), I can shorten the deadline significantly, but that would not be riskless at all and I am not sure I want to base my financial independence on that.

Somehow I will need to squeeze 1-2 years of French school for my daughter somewhere as I really want her to speak French (once she does, it should be easy for her little brother to pick it up as well). I would like to avoid the “official” French school at it runs at 3~3.5millions JPY/year all inclusive, which is a totally crazy amount for elementary school.

Ideally I would like to setup some sort of classes during the weekend with the other French/Japanese couples having children I know shortly. We would gather together most weekends (fun!), pay a private teacher and share the costs (or more likely at that age, take turns to teach ^^).

Tax treatment of real estate investment in Japan

Today I will explain what makes real estate in Japan a lot better than in other countries, at least for individuals.

In most countries, if you buy an apartment/house for rental as an individual, instead of incorporating, the tax benefits are going to be a bit limited. For example, in most countries, the following may be deductible from your revenues.

  • Interest if you financed through a loan.
  • Renovation and maintenance.
  • Management company.
  • Property tax if any.
  • Insurances.

That is about it. Note that depending on the country, such deduction can only be made on your real estate income itself, not on your global income. This is a lot less interesting as you cannot optimize and make renovations a year you have a lot of income (and therefore a higher income tax bracket). Note also that closing fees (real estate broker and legal costs) are not always deductibles.

In Japan, on top of the above items which can be deduced from your total income (not only the property income itself), you can also deduct:

  • Real estate broker and legal closing fees can be added to the building value (excluding the land value). Then such building value can be depreciated. It is huge, especially in a country where the building value really goes to zero in practice.

Any other charges that can reasonably be linked to the purchase/management of the company can also be deduced.

  • A few examples in case of cost linked to the purchase itself:
    • While looking for a property to purchase, transportation costs to do the visit and go to the appointments.
    • Lunch out during visit days (limit of 5000yen/person/meal I think).
    • Advises from accountant/financial advisor with whom you have lunch (if you invite).
    • If living abroad a plane ticket to Japan for 3 weeks vacations, out of which, 1 week is dedicated to visits.

All the above can be added to the building value and then be amortized* over the remaining life of the building (in the case of the plane ticket example above, 1/3 of the ticket value can be made deductible that way since one third of the time was used for the real estate business).

  • A few example in case of costs linked to the management of the property (see more here):
    • Yearly vacation to Japan, during which time, you taker a few days to see your accountant, see the management company, see the property itself, possibly discuss with contractors for renovation -> the prorated plane ticket value of the time spent over vacations on that can be deducted of your yearly income.
    • Yearly accountant fee used for the tax returns.
    • Bank fees for fund transfers related to the management of the property.
    • PC or a printer purchaser, assuming they will be used, among other things to correspond with the management company, the tenants, the contractors, the accountant etc. assuming it will also be used to keep a clean accounting. -> A certain part of the PC (say 50%) can be considered as an asset which will then be depreciated like a PC bought by a regular company.
    • Train tickets, restaurants expense on the days visiting the management company, the accountant etc.

All those costs can be deduced (or in the case of the PC, amortized), reducing year income directly, saving tax at marginal rate.

Now if you also consider the fact Income tax in Japan is quite high (see here), and the fact that on top of it you have to pay 10% local tax, all those deductions can really help.

Of course, at the end of the days, the above expenses are really used to manage the property so it is perfectly normal to be deducting that, but since it is not deductible in other countries (at least not for an individual owning a few rental properties), that makes Japan a great place for real estate investment.

In other countries, you would have to incorporate to get the same benefits. Depending on the jurisdiction, it may come with tax on capital, onerous reporting requirements, the need to have a partner etc…

* Note that if you end up not buying a property on the same year those expenses are made, it will not be possible to deduce such expenses in further year.

A few more Japanese Real estate tricks

Today, I will share with you a few more rules regarding the Japanese real estate and some of the tricks to work with them.

  1. A) First let me explain the few rules of Japanese real estate.

1- First is the zoning. In Japan, especially in big historical cities, area are divided in various categories restricting what can be built where. I will depends on what is already in the area, the easiness to access it (train/road) and plain old political horse trading (not to say corruption, like in every country, really…) at the time of the zoning decision. More on that in the following link. You may also find this document interesting.

Different zones also have different ratio of what can be built.

Those ratio are 2-fold.

2- The first one is the 建ぺい率 (Kenpei-ritsu) or the maximum building footprint to land ratio. A rate for 60% for example means that for a 100m2 land plot, the maximum building size, at ground level cannot exceed 60m2.

3- The 2nd one is the 容積率 (youseki-ritsu) or the volume to land ratio (total building size, all floor included) to the land plot size. A rate of 200% for example means that for a 100m2 land plot, the maximum living area, all floor included, will have not to exceed 200m2.

If you combine the 2 above rates and you try to maximize the build-up on that 100m2 plot of land, you will therefore have a 3 floors building of 60m2 each floor, totalling 180m2. If you really want to optimize, you may add a 4th floor of 20m2 and a huge terrace of 40m2. Indeed, terraces, balconies and external navigating area between apartments (as opposed to an internal corridor) are not counted in those limits.

4- An additional factor before you building construction is approved is that the  new structure should not create too much shadow for the neighbouring buildings. I am not an expert on that yet, as it is a bit complicated and I am having a hard time finding resources in English on the internet on that point.

5- Another factor is that your land plot should have a sufficient part adjacent to a “statutory” road. A statutory road is more than 2m wide on its full length (to allow a fire fighting truck to go through it). You land plot should also have a minimum 2m of continuous connection to that statutory road, otherwise you would need a special authorization to build on it, something that is not easy to do, especially as a foreigner. It also mean that an existing structure on a land plot without a 2m+ access to a statutory road cannot be rebuilt if destroyed. More information here. Such building usually sell for much cheaper than a normal structure for the following reasons:

  • High risk of not being able to rebuild. In a country where the life expectancy of a structure is 40-70 years (as mentioned here), this is a potentially big problem.
  • Impossibility to use that building/land as collateral for a loan.
  • Impossibility for a buyer to get a loan from a bank to buy such property (meaning the buyer needs to purchase cash, greatly limiting the pool of candidates).
  1. B) Now some of the tricks to circumvent some of those issues:

1- Floors with less than 1.40m for roof heights do not count in the volume to land ratio, providing that all other rules are respected. A popular way to increase the potential building size of a land plot is therefore to add small lofts to each small rental unit built in the building. The idea being that the tenant would put his/her bed here (remember that Japanese mostly uses futons and low height beds). Such bed would then not clutter the room below it (the living room) and such a living room would have quite a nice volume as well.

2- For building not adjacent to a statutory road, if you manage later to purchase a neighbouring plot which itself connect to the statutory road, then you will be able to redevelop your initial plot if you manage the new plot so that it gives access to the road to the initial one. The ideal way is just to combine both plots in one and rebuild something bigger.

There are other ways to have the rules changed in your favour, but it usually requires political connections and the like so not for us foreigners…

 

 

 

 

 

 

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!