“Millionaire”. “The Million-Dollar Retirement”. 1 million USD. Our society fixates on the magical amount, one million dollars. In the past, a millionaire was “rich”. Nowadays, there are more than 20 million millionaires in the world. Yet being a “millionaire” is still an important milestone. Many, from laymen to financial planners, see it as the threshold. The threshold one must cross to become financially independent, to have the option of retiring and no longer depending on wages from working. Being able to do so at a middle-class level. Just another million or two dollars and you’re wealthy.
How can you get a net worth of 1 million US Dollars with Japanese real estate? Well, if you have $1,000,000 in cash to spend, then you’re already a millionaire. You don’t need to read on! If you don’t have $1,000,000 already, though…
How The Unique Japanese Financial System Makes It Feasible For Many To Become Millionaires
The special feature is this: It allows an investor with far, far less than $1,000,000 to become a millionaire thanks to low-interest rate mortgages. When you hear “mortgages”, various preconceived notions might flash through your mind, based on your home country’s mortgage situation; 3.75% interest rates, and only if you have excellent credit. Borrowing $1,000,000 and owing $533,772.90 in interest alone over the lifetime of the mortgage. Or worse, variable-rate mortgages that start off with low initial interest rates, then shoot up. This leaves borrowers unable to keep up with the payments, and some might even have to declare bankruptcy! Scary stuff.
Good news, though: Japanese mortgages aren’t like that. You see, in Japan, mortgage interest rates are extremely low, typically only 1~1.5%. Paying $533,772.90 over the lifetime of a loan? Forget that. $148,479.95 is how much you would pay if your mortgage interest rate is 1%. Rather than paying 53% of the value of the investment property in interest, you pay less than 15%.
To summarise:
- An American mortgage with excellent credit, at 3.75% interest, for 30 years (typical in the US): $533,772.90 in interest over the lifetime of the loan
- A Japanese mortgage at 1% interest, for 35 years (typical in Japan): $148,479.95 in interest over the lifetime of the loan
Once you own a $1,000,000 property in Japan and rent it out, you can begin making passive income. In the 23 Special Wards of Tokyo, average return on investment (ROI) is 5.5%. In the outlying areas of Tokyo, the average is about 6.5%. For some speciality properties (for example, the Niseko ski resort area), the average can be higher. At any rate, a property manager (PM) will take some of your profits, as will repairs and taxes. Therefore, let’s make that ROI an easy-to-deal with 5% net ROI.
Now, the interest on the mortgage is $148,479.95. The mortgage principal is $1,000,000. Let’s round up, because there will be some fees, so let’s say $1.2 million total. How long would it take the property to pay for itself?
$1,000,000 in real estate × 5% net ROI = $50,000 passive income per year
$1,200,000 principal and interest combined ÷ $50,000 passive income per year = 24 years
If you get a mortgage for $1,000,000 and rent the property out, you’ll become a millionaire in approximately 24 years. At that point, you’ll have a $1,000,000, passive-income-generating property, and no outstanding debts.
Now, of course, there are certain requirements to get that mortgage. You’ll likely have to put down 20% of the value of the property ($200,000 in this example). It is sometimes possible to put down as little as 10%, but putting down 20~35% is more common. However, the interest rate on the mortgage is so low that the outcome is almost the same as paying 100% cash. Paying for the investment property in cash, it would be 20 years to get your million back; 24 years is with a mortgage.
The benefits of real estate are cash flows and passive equity (paying down the loan). Therefore, after, for example, 24 years, you own an asset worth $1,000,000 and are debt-free. Your assets ($1,000,000) minus your liabilities ($0) give you a personal net worth of 1 million USD. Initially, you borrow the $1,000,000. You’ve only had to use $200,000 of your own. The tenants will pay the remaining $800,000 throughout the period of living there. This is ‘passive equity building’. Someone is paying for that equity for you. This is as opposed to ‘active equity building’, in which you work (e.g. at a job) and pay for that equity. Thus, the benefits of investing in Japanese real estate to get a net worth of 1 million USD are twofold. The amount 1 million USD is entirely arbitrary. If one uses the same formula, it could be 2 million, 3 million, or 100 million.
How To Get A Net Worth Of 1 Million USD: Conclusion
There are many investments that will eventually return 1 million USD, but Japanese real estate is an exceptional one. It’s exceptional because the ROI is higher than typical savings accounts/CDs/bonds, but without the stock market’s volatility. Therefore, in a reasonable time frame, and with little stress, one will become a millionaire if investing properly. The mortgages offered by Japanese financial institutions almost seem too good to be true to the investor. They only require a 20% down payment and 1~1.5% interest rate.
