Your Key To Japanese Real Estate

Should I Invest In Real Estate For Retirement?

income investing in japanese real estate

Meet Michael. He’s a 59-year-old Tokyo resident. On LinkedIn, he’s a “Consultant”, an “Industry Leader.” He has “35 Years’ Experience Changing The World One Treasured Client At A Time In The APAC Region”. His LinkedIn profile contains an inspirational quote: “Choose a job you love, and you will never have to work a day in your life -Confucius” His latest post says “Thank you to everyone for giving me this opportunity to challenge myself! I love every moment of my work!” However, Michael has a deep, dark secret, something unspeakable… He’s actually sick and tired of his job and can’t wait to retire! …he’s actually a bored paper-pusher, paid less than he thinks he deserves. He can’t wait to go home in the evening. He’d like to know which investment would be best for the majority of his retirement portfolio. Michael wonders “Is real estate a good investment for retirement?

investing for retirement

Fears About Retirement

Unfortunately, Michael has many fears about retirement, and rightfully so. He has researched retirement in Japan. He has read claims from Japanese financial planners that recommend ¥1 million PER MONTH in passive income to retire… Is that really necessary? Common sense: only 7% of households have an annual income of more than ¥10 million, so that figure seems high. He concludes “probably not”, but still, compared to FY2012, by FY2025… …there’ll need to be 1.6~2 times more staff to take care of elderly in acute care settings. With more demand comes a rise in prices. Will he be able to afford it?

Perhaps he should move back to the US. When he’s in his 80s/90s, he might need a nursing home, though. Nursing homes there aren’t cheap—$8,365 a month, on average with a private room, $7,441 if shared. Will he be able to afford that?

He reads about the “million-dollar retirement” and worries about his own situation, whether he retires in the US or Japan. Then he finds out that, in Japan, there are few people who have financial assets over ¥30 million. This is even if they have an annual income of ¥10 million or more. They’re in the same boat he is.

He crunches the numbers for himself. Will he be able to afford retirement in his 60s? Yes, but he’s going to need to invest a little bit aggressively. Keeping his money in a savings account, CDs, or bonds, isn’t going to cut it. He’s going to need something with high return on investment (ROI). That way, he can generate tens of thousands of dollars per year in passive income.

Real Estate Versus Stocks For Retirement

Unlike savings accounts, CDs, and non-junk bonds, both real estate and stocks typically generate returns that exceed inflation.

That’s over the long run. Over the short run, however, the stock market is extremely volatile.

Just this year, we’ve seen the US stock market exhibit more than double its annualised volatility.

When will it recover? Who knows? For the past 100+ years, the stock market has always recovered, but sometimes it takes many years to do so. Stocks are definitely a great part of an investment portfolio for a younger person investing for a long-term goal. A younger person still has several economic cycles before retirement and has time to wait out financial storms. Does a senior citizen have 5~10 years for the stock market to recover from a correction, recession, or depression?

pension premium exemptionWith real estate, on the other hand, dropping 14% in value in just a few days is virtually unheard-of.

If investing ¥100 million in real estate, one knows that next year, it’ll still be worth ~¥100 million. Maybe it’ll be worth ¥95 million, or, if he/she’s lucky, ¥105 or ¥110 million. It won’t be worth only ¥86 million.

Real estate is less volatile than stocks, but also has higher ROI than bonds.

In the 23 Special Wards of Tokyo, the average ROI is 5.5%, 6.5% in the outlying areas. Some real estate, such as share houses or hotel properties yield even more than that.

With real estate, the retiree can fix it up and add value.

This will increase the ROI.

With real estate, you can “leverage” a relatively small amount of money to invest alongside the bank’s money to fund your retirement.

For example, Michael could put $100,000 down, getting a $500,000 mortgage with a 1.5% interest rate. Then he could have a passive income of $55,000 per year. This would be if he invested in Tokyo. He could make $65,000 or $70,000 in outlying areas or speciality properties. It helps to still be working and have a salary to get a loan. However, a retiree can also use the equity in one property to get an investment loan for an additional property.

A real estate investor can get a better mortgage (lower interest/down payment) if it’s “conventional owner-occupied financing”. This often requires living in the building for a certain amount of time. The building may not contain too many units, either.

A retiree may know the area very well, which is an asset in real estate.

He or she could have access to the city’s development plans (or at least have the time to get them). He/she may have contractor contacts that could help him/her get repairs, reforms, and renovations done at a discount. After decades of saving and investing, he/she could have deep pockets. Of course real estate is profitable, but sometimes vacancies, repairs, reforms, or renovations can cost considerable amounts of money. In the long-term, it’ll pay off; in the short-term, one may need to use some of his/her own money. This can be a barrier for a young person interested in real estate. However, for someone more senior, this is usually not as much of a problem.

real estate retirement portfolio

Add Up Your Expenses To Figure Out How Much You Really Need For Retirement

For example, in Michael’s case, maybe he opens up Microsoft Excel and totals up his expenses. This gives him an idea of his necessities (food, water, shelter, healthcare, etc.) and his discretionary spending (e.g. entertainment).

First, he should try to trim both of these as much as possible. Once he has done this, he has a “retirement number.” For example, his retirement number might be ¥3 million yen.

Next, he needs to figure out how many properties/what type of properties will generate that retirement number. For example, if he has ten apartments, each yielding ¥300,000 a year, then that’s ¥3 million a year total.

¥300,000 a year from each apartment × 10 apartments = ¥3,000,000 in passive retirement income

Make sure that the ¥3 million takes into account repairs, maintenance, reforms, renovations, management association/company fees, taxes, etc. If he reaches that number after these expenses, then he can retire.

Is Real Estate A Good Investment For Retirement?

Due to stock market volatility, financial planners often advise that retirees decrease the percentage of their portfolios held in stocks as they approach retirement. Some use formulas such as 110-your age (if you’re 70 years old, you should have no more than 40% stocks). More conservative formulas use 100 and more aggressive/risky formulas use 120. Either way, most of your retirement money should be in something more stable, like real estate. Real estate has similar stability to savings accounts, CDs, and bonds, with much higher yields. Finally, leverage and using one property as collateral for a mortgage to purchase another can turn a small nest egg into a large and lucrative real estate investment portfolio.

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