“Should I buy or rent in Japan?”. It’s a question on which even the Japanese themselves haven’t come to a clear consensus. 60% of Japanese own their own homes, and 40% rent. Among foreigners, 17% own. There are many pros and cons to both buying and renting, and that goes for both foreigners and Japanese people. There are also some points that only pertain to foreigners.
Buying And Owning
The Pros Of Buying And Owning
One of the most common arguments in favour of buying is that mortgage payments are often cheaper than rent payments. This is especially true in Japan, where there are low interest rates. They’re as low as 0.65% for a floating/variable-interest-rate mortgage, or 1~1.5% for a fixed-interest-rate mortgage. The cap rate on renting a property out is much higher. Therefore, the prices to buy real estate/mortgage payments (including interest) are relatively low, and rents are relatively high. It makes financial sense when you purchase the home, then later, if you rent it out for passive income. Thanks to mortgage repayments being cheaper than rent payments, you can either pay less, or buy a bigger or better home.
If you buy a home, you can redecorate it. You can increase its value. These are possible through reforms and renovations; you can change the interior as you wish, no landlord approval required.
There are tax benefits to buying a home. You may be able to make depreciation deductions on your taxes. Is it a (relatively) new home with a mortgage? If so, you can deduct a certain percentage of the outstanding mortgage balance or the purchase price of the home.
You can rent it out.
If you tried to sublease your rented apartment, it would be grounds for the landlord to cancel your lease. You could get evicted. However, as the owner, you have the freedom to rent it out. You can enjoy that 5.5% average return on investment (ROI) in the 23 Special Wards of Tokyo. Or you can receive a 6.5% average ROI in the outlying areas.
Even if you eventually leave Japan, you can use it as a base when you visit Japan in the future. Or perhaps you could rent it out, and then during a brief period of vacancy, time your trip to Japan then and use it as a “free hotel”.
Should you rent or buy? Well, if you buy, then when you pass away, you can bequeath it to your children.
They get a high-value asset in which they can live, or which they can rent out. There are even estate planning-related tax benefits to doing this. Under Japanese inheritance law, you can pass more wealth using real estate than you could in cash.
What if you suffer an injury and are unable to continue working? If you were renting, this would be a problem. However, if you have a mortgage and group credit life insurance, the insurance company will take care of your mortgage payments even if you become unable to work.
It’ll give you more social credibility. Anyone can rent a beautiful apartment for a month or a year. If you own such a dwelling, though, it shows people your hard work and financial savvy. It also shows them that you plan to stay for a while.
Finally, there’s no need to worry about 2-year lease terms, or the landlord increasing your rent or terminating the lease, or paying “key money”. You don’t have to move when these things happen. As you approach retirement age, when you’ll soon be elderly, you’ll have a secure living situation. Many landlords discriminate against the elderly, but you won’t have to worry about that, because you’ll already have a place. It’ll be much easier, financially-speaking, to keep living there on a fixed income. This is especially true if you already paid off the mortgage.
Cons Of Buying And Owning
Cons Of Buying And OwningOf course, every rose has its thorns. You’ll be responsible for the costs. These include transaction costs (typically 5~8% of the purchase price), annual possession tax (固定資産税, koteishisanzei), and insurance. They also include maintenance costs, as well as opportunity costs. If you put down ¥5,000,000, that’s ¥5,000,000 that you can’t invest in the stock market. Of course, the stock market is typically much more volatile an investment than real estate, so keep that in mind.
There’s less flexibility. You might end up disliking the area. You might want/have to move to another area or another country. In Japan, especially for permanent employees, (正社員, seishain), transfers elsewhere are common. If you have a child/(more) children, you might need a bigger place. When you’re in your 80s/90s, you might go into a nursing home/senior housing. Of course you can sell your home when you move. However, you paid 5~8% of the purchase price in transaction costs. Soon, you’ll pay more in transaction costs. This could get expensive. In order for ownership to be financially worthwhile, you should live in the home for 7~8 years.
Although you gain certain tax benefits from owning (depreciation deductions, mortgage interest deductions), you also might lose certain tax benefits. If your employer offers employee housing, your employer deducts rent payments from your salary. This decreases your taxable income.
The building’s value will probably go down over time. Lately, land in Tokyo has been appreciating, but the home itself will likely decrease in value as time goes on.
There is also the risk you won’t be able to pay the mortgage. However, fortunately, one way to hedge against this risk is through group credit life insurance.
Pros And Cons Of Renting
The Pros of Renting
You’re not responsible for the costs of ownership such as transaction costs, annual possession based taxes, insurance, and maintenance costs. Of course you’ll have rent-related costs such as key money, renewal fees, security deposits, cleaning fees, etc. instead. You have more flexibility. You don’t have to pay a large sum of cash upfront. You might get employer-provided housing tax benefits (if your company offers company housing). If your company is the leaseholder for your apartment you’re actually getting a large tax break because that money paying your rent is pre-tax money. You won’t have to pay the same insurance that homeowners pay, though you’ll probably still have to pay renter’s insurance. You won’t need to worry about the building’s value going down, opportunity cost, or defaulting on your mortgage.
If you grow old in Japan and need a nursing home/senior housing, just finish your 2-year lease. There’s no need to go through the lengthy selling process.
Cons of Renting
“Money down the drain”
If you rent, the landlord takes your rental payments. You never see them again. With mortgage payments, a considerable amount is going into the equity of your home. This is part of your personal net worth (PNW).
2-year terms for leases aren’t suitable for everyone.
Maybe this is your vacation home and you only plan to visit Japan occasionally. You may visit multiple times per year, or on extra-long trips. Perhaps you plan to live there for an odd number of years.
Moving involves considerable expenses.
The moving costs for just one person are circa 50,000 JPY in Tokyo. Staying in one place for a long time may allow you to save more money.
Rent increases/termination of leases are an issue when renting.
It’s difficult to make plans for more than two years in the future, and leads to instability.
As you become elderly, it’s harder to find places that’ll rent to you.
There’s considerable discrimination against aged tenants.
Rent can sometimes be costly. You might end up in a situation in which you are unable to continue paying it.
Especially if you’re on a fixed income (such as a National Pension), it might be difficult to continue paying rent if something bad happens to your cashflow.
Rent is more expensive than mortgage payments.
Furthermore, you need the landlord’s permission to redecorate and renovate(such as reforming/changing the interior). You can’t use depreciation tax benefits. You can’t rent it out (because subleasing is likely to get you in trouble). It’s not likely to be economical to be able to use it as a base when you visit Japan. You can’t leave a rental property to your children when you die. It also conveys to people that you’re more temporary than if you own.
Should you rent or buy? For Non-Japanese (Foreigners) Only
Imagine that James and Haruto both want a “one-room” (studio apartment). Each goes to western Tokyo to look for one-rooms. Haruto goes to a real estate agent and quickly gets a print-out with 100 results. He finds a one-room for ¥50,000 per month on the first day that he visits the real estate agent. The real estate agent calls the landlord; yes, Haruto is welcome to rent there.
James tries to enter the real estate agent’s office. However, the real estate agent gives him the ‘X’ with his arms. James goes to another real estate agent who tells him it’s “muzukashii” to find a one-room for a reasonable price. However, the second real estate agent does a search anyway, for “foreigner-friendly” properties. This results in 10 results. Oh look, there’s one for only ¥60,000. James isn’t sure whether to rent that one, or stay at the local gaijin house, (base rent: ¥50,000 or so)… …but at the gaijin house, they really overcharge for utilities… …and he doesn’t like the contract there or the way the manager spoke to him… Hmmm…
However, if both men went to a real estate brokerage to buy, then their results would be very similar (to each other). They would see real estate listings with the same selection and prices. No matter what the prejudices of the seller may or may not be… …they all seem to evaporate, as if by magic, when several million yen come into the picture.
When Haruto does his financial calculations, he’s making his calculations using ¥50,000 to calculate the break-even point. James is using ¥60,000 because that’s the cheapest rent he can find. Therefore, James’ break-even point is over 20% earlier than Haruto’s break-even point. Therefore, it may make more sense for a foreigner to rent than a Japanese, in some situations.
Should you rent or buy? Other examples of when it is advantageous specifically for foreigners:
- It shows (financial) stability. This can help you get better visa extensions (e.g. three years instead of one year) at the Immigration Office.
- Your chances of receiving “Permanent Residency” are higher if you own property. This is according to many administrative scriveners (行政書士, gyōseishoshi) in the Tokyo area.
- It shows potential employers or business contacts that you’re here to stay. They might otherwise assume that you’re just going to be here for a year or two and then go home.
Should I Rent Or Buy In Japan? Conclusion
Whether buying or renting makes sense to you will depend on your individual situation. The longer you plan to stay in Japan, the more advantageous buying a home will be. You’ll also be better-equipped to buy the longer you’ve been living here. Home ownership is attractive enough that 60% of Japanese have gone through with it. As a foreigner, there are ways it can significantly improve your life as well.
