A six-figure income. For many, it’s the mark of financial success, the prerequisite to being upper-middle class. Only 9.08% of Americans make an income of six figures or more. The threshold for a six-figure income is $100,000 a year.
People associate six-figure incomes with stressful, professional jobs. Doctor. Lawyer. Wall Street Stockbroker. The association between six figures and stress is very high. If we search Google for “six-figure income heart attack”…
…we end up with 30,900,000 results.
Is there an easier, less stressful way to make $100,000 a year? Well, yes, there is. It involves “getting your money to work for you” as opposed to “working for your money.” You’ve probably heard the cliche before, but what exactly does it mean?
What Exactly Does “Get Your Money To Work For You” Mean Vs. “Work For Your Money?”
“Working for your money” means you work. You earn a wage (usually hourly, weekly, monthly). For example, you work 1,000 hours for $10 per hour and make $10,000.
“Getting your money to work for you” means having (a) passive income stream(s). For example, you invest $200,000 at 5% interest, and make $10,000.
If you’re young and just starting out, chances are that you’re predominantly “working for your money.” There’s nothing wrong with that. Most people, including some who go on to become billionaires, do it. Warren Buffet was a newspaper delivery boy. Oprah Winfrey was a grocery store clerk. Michael Bloomberg was a parking lot attendant.
However, eventually, you should aim to get your money to work for you. Because trying to become a millionaire, let alone a billionaire by working for somebody else is unheard of. Passive income is limitless, whereas wages from work are limited by how much you can work. There are only so many hours in the day, and you’re only human, and can’t work all of them. If you want to grow your income beyond a certain point, you need to create a passive income. You need to get your money to work for you. You can do this with an investment that generates Return on Investment (ROI), such as real estate.
Return On Investment (ROI) And Your Passive Income
In order to get passive income, you generally need Return on Investment (ROI). E.g., if I put my money in the US bank with the best interest rate, I’ll get 1.9% ROI. If I put in $1,000 right now, it’ll be worth approximately $1,019 next year.
How Much Is ROI For Rental Real Estate In Tokyo And the Outlying Areas?
What’s the ROI for Japanese real estate? Well, in the 23 Special Wards of Tokyo, the average gross ROI is 5.5%. For the outlying areas of Tokyo, it’s 6.5%. Of course, these are averages. If you buy a property specifically for the purpose of investment, you can do better. E.g., non-new building, no elevator, several floors, perhaps with some refurbishments and amenities that increase the value.
Of course, those are gross ROIs. They don’t take into account things like taxes, building maintenance and repairs, property management fees, etc. Therefore, let’s use the number 5% for ROI.
How Do You Make $100,000 A Year From Real Estate?
To make $100,000 per year from real estate investment, at 5% ROI, how much property would you need to buy? Well, we’ve identified our goal:
$100,000 that we want
We’ve identified our ROI:
Now, we need the reciprocal of the ROI:
5%=1/20 (ROI in fraction form)
The reciprocal is therefore, 20/1, or more simply, just “20.”
Finally, we multiply how much we want by the reciprocal of the ROI:
$100,000 that we want × 20 (reciprocal of the ROI) = $2,000,000 that we need to invest in Japanese real estate to make $100,000 a year
Whew, $2,000,000? Is There Any Way To Earn $100,000 A Year In Passive Income With Less?
Yes, indeed there is. One way is to somehow get a higher ROI, for example, by taking more risk. With a 6% ROI, only $1,666,666.66 would be necessary. The beast smiles.
Is there another way to do it, though? Yes, there is: Japan’s low-interest mortgages.
In Japan, mortgages are typically 1~1.5% interest, and require a down payment of approximately 20%. Let’s ignore that pesky 1 or 1.5% interest for the moment and focus on the down payment. Don’t worry, we’ll come back to it a little bit later. Basically, instead of actually having $2,000,000, you can simply borrow $2,000,000, as a mortgage. The financial institution will take care of the majority of it. Of course, you’ll need a 20% down payment.
$2,000,000 × 20% = $400,000
You put down $400,000 and get a building worth $2,000,000. It has an ROI of $100,000 per year. Of course, there will be some mortgage interest: $296,959.90 over the course of the 35-year, 1% interest loan. However, that comes out to less than $8,500 per year ($100,000→$91,500-a-year income). $91,500 a year is still great. However, if we’re dead set on $100,000 passive income, perhaps it would be better to put $500,000 down. Because that would get us a mortgage for a $2.5 million property.
To Receive $100,000 A Year In Passive Income, Which Is Best?
Right now, occupancy rates in Tokyo are exceptionally high. For example, in residential real estate, the occupancy rate in the 23 Special Wards is 95% (similar in Osaka). Even more impressive is commercial real estate, in which the vacancy rate is a mere 1.68% in five wards of Tokyo. I.e., the occupancy rate is 98.32%. Therefore, there are currently ample opportunities to make money in Japanese real estate. However, is it better to spend $2,000,000 in cash to make $100,000 a year? Or is it better to put $500,000 on the down payment, with a mortgage, to make the same amount? Certainly it depends on your tolerance for risk and also your eligibility for an investment mortgage from a Japanese financial institution.