Conventional wisdom asserts that buying a house or apartment is always better than renting; a popular reason being that “rent is just wasting money – at least with a mortgage I’m building equity.” While the statement technically is correct, it has a laundry list of implied assumptions. It may be far less risky, and cheaper, to rent.
I do not wish to discourage people from purchasing their own home. It can be a solid start to building up long-term assets; and Japan offers some of the lowest interest rates in the world.
However, I would like to dispel some misconceptions associated with home ownership. It is important to clarify, though, that this article will not have the space to address buy-to-let, property speculation, or tax and accounting gymnastics. It will focus on the nuts and bolts of the seemingly innocent question “should I buy or rent?”
The simplest way to begin thinking this through is to list out the costs, and weigh them against the benefits.
Broker Fee: The standard fee in Japan is 3.24%, plus 64,800 yen. It is no simple endeavor to find a broker willing to offer a discount.
Judicial Scrivener Fee and Registration Tax: This can run around 60-150,000 yen plus 1.5% (plus another 0.4% if using a loan; less if it is a residence mortgage).
Stamp Duty: If you have lived in Japan for more than 15 minutes, you should be no stranger to visiting the post office or ward office to buy a stamp for some paperwork. Real estate is no different. This will cost around 10,000-80,000 yen.
Acquisition Tax: This will vary depending on the budget the local government needs each year, but expect to pay between 0.5% and 1%.
Annual Possession Taxes: This consists of a 1.4% fixed assets tax and 0.3% city planning tax, though these can be reduced for primary residences.
Total: This usually comes out to around 7% or more just in transaction costs. The good news is you can start digging yourself out of this hole with your first mortgage payment. The bad news is not all of the mortgage payment goes towards equity.
Simplified example:
Purchase Price: 60,000,000 yen
Mortgage: 50,000,000 yen
Loan Terms: 30 years @ 1% interest
Total Transaction Costs: 4,200,000 yen
Monthly Mortgage: ~160,000 yen
From the initial 160,000 yen payment, ~40,000 yen is interest and 120,000 yen settles the mortgage. This builds approximately 1.4 million in equity each year, appearing to bring you back to even in about 3 years (4.2 / 1.4 = 3).
However, owning and residing in a piece of real property involves real annual costs.
Annual Possession Taxes: Mentioned above, these fixed percent taxes come back to roost every year.
Maintenance Costs and Building Fees: Now when something breaks, it is your responsibility to fix or replace. (leaky faucets, air conditioners, windows, hot water heaters, exterior, elevator or roof repair, etc.)
Returning to the simplified example above, with 600-800,000 yen in annual costs; the break-even time increases to 5-6 years. Furthermore, selling the home involves another 3-4% in transaction costs, bringing the round-trip cost to around 6.3 Million yen.
So in other words, for the famous “rent is just throwing money away, at least with a mortgage I’m building equity” statement to hold water, you may need to be certain that you are able and willing to stay put in one place for more than 7 or 8 years, just to break even (6.3 / 0.8 = 7.9).
Other considerations:
Will the land and structure values increase or decrease? Real estate tends to at least hold its value in the long term, but this is not guaranteed.
What about opportunity cost? If you instead put the down payment into any other investment, how much would you make?
Is your employer paying your rent direct? In Japan, employers can pay rent with before-tax income; meaning hundreds of thousands of yen in annual tax benefits could disappear if you get a mortgage.
If you move out but keep the property to rent, what then? The friendly loan terms were likely on the basis of a primary residence, not an investment property. If this changes, would your interest rate go up? Would rental yields cover the mortgage, taxes, and maintenance costs? What about vacancies?
What are the intangible benefits of home ownership? This article crunched some numbers, but what are the unquantifiable benefits?
As expected, there is no one simple answer to “should I buy or rent?” There are also tax deductions involved with home ownership; but their impact depends on the property and homeowner’s tax situation, and it should be assumed that taxes paid as result of domestic real estate will outweigh any kinds of deductions. The tax office is not in the business of giving more than it receives.
Author: Andrew Meredith. Andrew Meredith is an American living in Tokyo, and is a Partner at Tyton Capital Advisors.
This article was originally published on Japan Today and is re-published here with permission.
Photo: Tea house on the Kodai-ji Temple grounds in the Gion section of Kyoto.
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