If you are an investor, you have many choices of asset to make your money grow. This can make it difficult to decide which asset class is best for you and your situation. Real estate not only has excellent ROI, but it is an asset class that has stood the test of time. Just look at the Code of Hammurabi (Hammurabi was the sixth king of the First Babylonian dynasty, reigning from c. 1792 BC to c. 1750 BC,) one of the world’s oldest codes of law, from over 3,700 years ago:
“If he transform waste land into arable fields and return it to its owner, the latter shall pay him for one year ten gur for ten gan.”
In this quote from the Code of Hammurabi, we can see that, even 3,700 years ago, several key real estate concepts already existed: land (real estate) ownership, the ability to rent it from its owner, the ability of someone to improve it, and financial rewards for doing so. The units have changed—it would no longer be a good idea to walk up to a real estate agent and ask him for “ten gan” of land or offer to pay “ten gur” for it—we now use more modern measurements of area such as “square meters” or “tsubo” (坪), and more modern currencies such as “dollars” and “yen.” However, the concepts have not changed so much in 3,700 years—people still own, rent, buy, and sell that property, improve it (or pay someone else to improve it), and make a profit from it.
Owning real estate used to be a special privilege in many societies, restricted to only a chosen few. The lower classes, such as serfs, could not own it. Well, the good news is, in 21st century Japan, anyone can own property—even foreign nationals. You don’t even have to be a resident. Looking around the world, there are so many examples of countries that restrict or even ban real estate ownership, either by foreigners, or even by their own citizens. New Zealand recently banned most non-resident foreigners from buying pre-existing homes. Just turn on the news and you will see constant reports on the economic rise of China, which may interest some foreign investors, but actually, in China, the state owns urban land. Private ownership of urban land is not allowed; the best you can hope for is a condominium or other structure, not the land underneath. In Japan, foreign nationals can own not only condominiums, houses, commercial real estate, etc. but also the underlying land, without regard to visa status! This can be in rural, suburban, or urban areas. Of course, just because we “can” do something doesn’t mean we “should.” Is real estate investment worth it? Here are eight reasons why we say “Yes!”
You Can Rent It Out
No matter what the economy does, people still need a place to live, so there will be tenants to whom you can rent it out. This will provide a steady income stream. Let’s not just think in terms of residential real estate, though. Commercial real estate is quite lucrative, as well, because of the stability of long-term leases: businesses want to stay put in the same location for as long as possible. If a business moves, it will lose some of its clientele. Owning commercial real estate and renting it out to businesses can provide income from stable, long-term leases. Japanese corporations have been awash with cash since 2012, due to “Abenomics,” the economic policy of Prime Minister Shinzō Abe which has boosted exports through QE (quantitative easing) and resulted in huge amounts of investment into companies, as seen on the Nikkei 225. Now that they’re holding large amounts of cash, many are expanding. Purchase commercial real estate and tap into this expansion, using it to increase your personal net worth!
Depreciation And Tax Reduction
Owning real estate in Japan is a great strategy to lower one’s taxes. There are tax deductions for owners of investment real estate via depreciation (減価償却, genka shōkyaku) and also tax deductions based on one’s mortgage. First, about depreciation-based tax deductions: “depreciation” might sound like a negative word, but actually, it has very positive connotations from the standpoint of lowering your taxes. Basically, each property is divided into land and a building. The government of Japan assumes that the building is losing value each year, and allows you to declare this “loss” on your taxes each year, which significantly lowers one’s taxes.
For example, imagine that a man named “John” has an annual taxable income of 6 million yen. This means he is in the 20% personal income tax bracket (which applies to taxable income between ¥3.3 million and ¥6.95 million per year). For every ¥100,000 he makes, he will pay 20% of it (¥20,000) to the government in personal income tax. For his taxable income of ¥6 million yen per year, he will pay ¥770,250 per year in income tax (5% on the amount between ¥0 and ¥1.95 million, 10% on the amount between ¥1.95 million and ¥3.3 million, and 20% on the amount between ¥3.3 million and ¥6 million). However, imagine that John owns a ¥30 million reinforced concrete building. The government assumes the building is losing value (depreciating) by about ¥630,000 yen per year. They allow John to subtract this amount from his taxable income! Considering he is in the 20% tax bracket, this means John reduces his taxable income from ¥6 million to ¥5.37 million per year, which saves him ¥126,000 per year on his taxes! There’s even more good news: John’s building is actually still in great shape, and is just as durable as it was ten years ago. The government is just making the assumption that it depreciated based on a depreciation table, which ignores the good condition that John’s building is actually in. John ends up with the best of both worlds: he still has a durable building, which will last for many years to come (during which he can rent it out to many tenants), but the government gives him generous tax deductions on it.
One can also deduct 1% of the year-end mortgage balance on a residential property from one’s personal income and resident’s taxes, or, at a certain point in the mortgage, ⅔% of the purchase price, whichever is smaller. It is possible to do this for ten years. Imagine that you have a mortgage for a ¥40,000,000 property. 1% of that is ¥400,000 yen. You can therefore deduct that amount from your taxable income, which can result in lowering your taxes up to ¥180,000 per year if you’re in the highest personal income tax bracket (45%). In fact, you can deduct even more (up to 1% of ¥50,000,000) if your property is “Long-Term Excellent Housing” (長期優良住宅, chōki yūryō jūtaku) or “Low-Carbon Housing” (低炭素住宅, tei tanso jūtaku). “Long-Term Excellent Housing” is a certification which is issued by the Ministry of Land, Infrastructure Transport and Tourism. It was passed into law in 2008 and became effective in 2009. It is given to buildings which have a certain high standard of earthquake- and aging-resistance, and are also more environmentally-friendly.
Imagine going to your stockbroker and saying “I’d like to buy some shares of this company, but I don’t have the money. Can you lend me 80% of the money I’m about to invest?” He’d call you crazy (though perhaps not in those exact words). With real estate, though, you can do exactly that. You can walk into a bank and get a mortgage, only having to pay 20% of the price of the asset yourself upfront, with the bank taking care of the other 80%. For example, imagine that you buy a property worth ¥10,000,000. This requires a mortgage for the same amount. You need to come up with ¥2,000,000, but the lender takes care of the other ¥8,000,000, in the beginning. Through renting it out to many tenants, you get an ROI of 10%. Now, in addition to being the owner of the ¥10,000,000 piece of real estate (for which you only put ¥2,000,000 down), you have also managed to get ¥1,000,000 in income from owning that asset: a 50% ROI on what you put down in the first place, after only a year! This is the power of “positive leverage.”
If you invest in stocks or bonds, you can’t control their performance, only watch helplessly. However, in real estate, there are so many things you can do to influence the outcome. You can add a fresh coat of paint, add amenities, expand the property, etc. Done strategically, these significantly increase the ROI of the real estate investment! More tenants will want to stay there and pay higher rents to do so, and such strategic improvements need not cost the investor much money.
By now, it should be pretty easy to see why real estate is the best investment class, accounting for many of the world’s billionaires. Even some of those individuals and companies who appear to have gotten rich by other means (e.g. running a successful fast food chain) actually made the bulk of their profits from shrewd real estate deals. To quote McDonald’s CFO Harry J. Sonneborn, “We are not technically in the food business. We are in the real estate business.“ Now, prepare yourself for four more reasons why real estate is the best asset class!