So you want to invest. You may have read a copy of “Rich Dad Poor Dad”, seen Warren Buffet on Television talking about his love of Cherry Coke, or you may just be dissatisfied with having your money sat in a Japanese bank account earning 0.01% p.a. Now that you’ve decided to do something with your money, the next question is where to put it.
The good, and the bad news is that there are no shortage of places for you to put your hard-earned money. In Japan, and likely everywhere else too, you will have access to stocks, bonds, mutual funds, ETF’s, hedge funds (if you’re wealthy), cryptocurrency (if you’re under 50!), and traditional options like starting a small business. Even if you’re not intimately familiar or experienced with any of the above investment options, you probably know a lot about the one that was curiously absent from the list- real estate.
So Why Invest In Real Estate?
People buy houses in Japan because they want to live here. People buy real estate properties because they want to make money. Motivating the decision to buy Japanese real estate above any of the other investment options mentioned above is a number of factors fundamental to real estate as an asset class:
The volatility (standard deviation or SD) for the S&P 500 (the accepted investment proxy for the US stock market) has been over 14% per month since 1950. This means that investors see huge fluctuation in the value of their investments on a regular basis. Many people understand that stock market investments are a long-term commitment so the monthly performance is of little significance to their long term goals, but those same people will still experience the gut-wrenching feeling of looking at their portfolio and finding it to be worth less than they invested, statistically, in one year out of every three. Although real estate always has a value, luckily the value does not float over the roof of the property and change on a daily basis. Even if it did, it probably wouldn’t go down -14% in a calendar month.
As many people will already have a stock market portfolio, and despite our best efforts to diversify the portfolio with various companies, the value of the portfolio will still go down when the overall market goes down; for example, in a market crash. Investors look to diversify across different asset classes that have negative or limited correlation to their existing investments. Real estate is proven to have very little correlation to the stock market, so a stock market investor with a portion of their wealth in real estate will experience less overall volatility than somebody that is 100% committed to one asset class. They may even outperform others with more concentrated portfolios.
If you make money on a stock here in Japan you will be paying between 15% and 30% in capital gains tax before municipal taxes. You can offset that capital gain with other capital losses that you may have suffered elsewhere, but you are left out in the cold during the years where you have no losses and make a net profit. Real estate investments in Japan have various tax benefits. You get tax deductions for mortgage expenses, interest payments, operating expenses, insurance, repairs and depreciation. This, on top of the cash flow from your property, mean that not only can you produce extra net income, but you’ll also pay less taxes on your employment income. Unsurprisingly, many high-earners in Japan will consider Japanese real estate investment primarily as a tax planning tool to reduce their taxable income.
Many investments require a firm understanding of what you are buying. For example, to invest in biotechnology stocks, you would have to understand what each and every company did, who their competitors were, what challenges face their industry, their products, the regulatory environment and so on. If you work in biotechnology then this may be within your comfort zone, but to create a diversified portfolio you will need to spread your capital across numerous industries. Even as a first time real estate investor, you start with experience- you have lived in real estate all of your life. Conceptually it is simple. You buy an asset, rent it to somebody else, and they pay you to live there. Of course, there is a lot more to learn, but the profit mechanism itself is crystal clear. No matter what asset class you invest in, having a strong knowledge of its concepts is a recipe for success and real estate is, by far, the most universally accessible choice for investors big and small.
If you buy an investment property with cash then your annual return is calculated as the total of the payments throughout the year as a percentage of the total that you paid. Simple. It is however possible to get higher returns from the very same investment property without changing the rent, the purchase price or anything else. How? Bank financing. If you buy your investment property using a mortgage from the bank, you will only be using between 10-30% of your own money as a down-payment. This means you earn the cashflows from the asset despite only paying for 10-30% of it yourself, with the rest of the money being provided by the bank. Of course, you will have repayments to make to the bank, but even after loan repayments, your total annual return on investment (ROI) will be proportionately higher. Such is the power of leverage.
Although it is highly unlikely that a property you buy will jump in value by 30% in a calendar year, historically, real estate has kept pace and moved in lock-step with inflation. Putting your money in bricks and mortar is historically proven to maintain the purchasing power of the money invested as the price of land appreciates at the same pace as the inflation on its valuation currency. Although not the most aggressive asset class, real estate provides a high degree of stability and attractive risk-adjusted returns for investors the world over. Hence the wisdom, “don’t wait to buy real estate, buy real estate and wait”.
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