As explored in Part 1 we have already covered four solid reasons why real estate is the best asset class (and did not even speak about the unique benefits of real estate in Japan either, just to keep things fair). Hold on for four more universal reasons ‘why‘….
Real Estate Is A Hedge Against Inflation
Under Abenomics, the government targets a 2% inflation rate. Prices in Japan are going up. When a beef bowl at Yoshinoya goes up in price for the first time in decades, this can make us groan, but what if there were a way to cash in on this inflation? Good news: there is. Rents track inflation, and by investing in real estate, you will get a pay raise when the CPI (Consumer Price Index) goes up, which, since 2012, it has been doing, steadily.
Inflation also erodes the power of your money. If most of your money is in a Japanese bank account making 0.001% interest, this means it becomes worth less every year relative to inflation, because inflation is far higher than 0.001% per year. Essentially, money left in a Japanese savings account is slowly creeping towards becoming worthless. However, one of the reasons why real estate is the best asset class is that your property will never be worthless, and what’s more, you can enjoy substantial rental income and savings on your taxes.
One of the most common investment vehicles is stock mutual funds. This is great in a bull market, but in a bear market, when the stock market is plunging, an investor will wish that he or she had held more than one type of asset (diversification). Real estate is a wonderful way to do this. It is something that you can add to your portfolio, perhaps in addition to stocks and bonds, so as to avoid putting all your eggs in one basket, so this is just one more reason why it is the best asset class.
Passive Income From Japanese Real Estate
Imagine that I offer you ¥20,000,000 per year. Does that sound interesting?
Now imagine that I add one condition: “You have to work for me 100 hours per week.” Are you still interested? My guess is “Probably not.”
There are plenty of opportunities in this world to make money. Unfortunately, most of them require long hours, and time is our most valuable resource.
With real estate, though, you go through the process of buying it, then you own it, and no additional effort is required. You can pay someone else to administer to it, to deal with the tenants, etc.
It is “passive income”—you can sit back and watch the yen roll in. Of course, if you want, you can choose to actively manage the property. You can paint it yourself, repair things yourself, even do the construction work yourself if you have the skills and the time. This can increase your ROI, if you are interested. If not, if you would prefer to spend your time on other pursuits, you can have someone else do those things and still make a decent ROI. Real estate is passive income: income that requires little or no effort from the investor.
You might also want to consider that this passive income can help one overcome a “cap” in one’s annual income. Imagine this scenario: There are two men, Tarō and Haruto. Both men are IT workers. Both men work very hard at similar jobs. Both men work for companies that cap their annual salaries at ¥3,000,000 per year, and both men save similar percentages of their salaries. Tarō saves his money (¥10,000,000) in the bank, making 0.001% interest. Haruto, on the other hand, takes his ¥10,000,000 and invests it in real estate, getting a 10% ROI. The next year, both men are still working in IT, both doing the same job, but Tarō’s annual income (salary plus bank interest) is only ¥3,003,000, whereas Haruto’s is ¥4,000,000 (32% higher). He can also claim tax deductions that Tarō can’t claim. Yet both men are still doing the same job, working the same number of hours per week. Haruto’s advantage is thanks to his prudent investment, not working more hours than Tarō, and as a result, he can provide better for his family, enjoy his leisure time more, take more exciting vacations, etc.
Money Isn’t Everything
The previous seven reasons have dealt with the financial merits of investing in real estate. What are the non-financial benefits?
Since we’re discussing the situation in Japan, let’s take a brief trip into Japanese history, to the feudal era. During most of the past millennium, Japan has been controlled by various daimyō (大名) and hanshu (藩主). Often, these words are just translated as “feudal ruler,” but actually, myō comes from myōden (名田), meaning “private land.” Similarly, hanshu consists of “han” (藩), or “feudal domain” (a large piece of land, basically), and “shu” (主), or “master.” The most powerful, respected people in all of Japan (except for perhaps the emperor) were the greatest land owners. They were not only the most powerful, but could also collect the most in profits (usually rice) from those who rented their land.
For over a millennium, being a “great private land [owner]” or a “feudal domain-master” has engendered much respect, and unlike the katana or elaborate suits of armor, this concept has transferred over to the 21st century, as strong as ever. Regardless of ROI or various financial aspects, owning Japanese real estate, in other words, having your own “han,” so to speak, will increase the respect you receive, both from Japanese and other expats. It is a visible display of wealth, and is just one more reason that real estate is the best asset class.
You can also use it to make a positive contribution to society and improve the community. When you invest in a mutual fund, do you know that every yen you invest is going into something that aligns with your personal ethics? As a real estate investor, you can do all kinds of good, from restoring and maintaining historical properties, to improving your community through improving property values, contributing to the tax base, and being a great landlord for a family that otherwise might not have one. You can make a great ROI, and do it ethically.