Rental Income v/s Monthly Loan Payment conundrum ?

[RetireJapan]

I hope everyone was listening to me when I told people - repeatedly - that avoiding (paying down) debt was more important than investing. Markets can go up....or down, debt is always debt until it's gone.

How could we forget?

Actually, I overpaid my mortgage this month for the first time. Felt kind of... good.

[jcc]

I hope everyone was listening to me when I told people - repeatedly - that avoiding (paying down) debt was more important than investing. Markets can go up....or down, debt is always debt until it's gone.

My feelings on this remain the exact same as they did at the time:

- I'm investing for the long term and advising with that in mind. The fact that stocks are down now has no relevance if your planned retirement is 20 years from now.

Now, more than ever is the time to continue investing. Stocks are on sale. They might stay on sale for another few months, or even go further down, but eventually they'll go back up higher.

There are cases where you should rush to pay up your mortgage, such as if you have a low tolerance for risk, or if interest rates go up, but a (moderately) young individual with a low rate mortgage needn't be rushing to pay it down.

[zeo]

Renting vs buying is a pretty simple in my opinion. Which costs more? If it's cheaper to rent, then rent. If it's cheaper to buy, then buy with fixed rates. Yes, the fixed rates are higher, but they fix your payment for the duration of the loan. You also need take in to account the real interest rates and not the nominal rates, interest rates minus inflation.

Currently in Japan the interest rates are negative, so they're actually paying you to take out a loan. On a macro level, this creates asset bubbles, hence the sharp increase in the price of real estate in the past few years. This creates the possible problem that you could be overpaying on a property. So you can hedge the risk with the fixed rate loans. A fixed payment for the life of the loan allows you to budget and plan. As long as your income is stable you won't have any issues generally.

Yes the variable rate loans are cheaper, but if you need a variable rate mortgage to be able to afford the monthly payment then the property is too expensive for your budget. Unless you know for a fact that you will be paid more when the loan resets, it's generally a bad idea. When other people's loans reset and you see them start to stress out about losing their home, you and your fixed rate loan will sleep easy knowing it won't change and your budget stays the same. That's my opinion anyway.

In the end, you will always pay "rent", that rent maybe to a landlord or it may be to a bank, but you'll always be paying it. The difference with buying is that after the 35 year term, you can stop paying the "rent" and that's one of the benefits. I'm new to Japan so I'm not sure how it all works here, but in the US there's usually a premium to buy vs rent. So another consideration is usually will be how much more is it worth to you to "own" the property vs renting it? But like as I mentioned earlier, if it's actually cheaper to buy then this a moot point.

It's possible you could lose your job and then you would not be able to pay the mortgage, but you'd have the same problem if you were renting. How long would your landlord let you stay if you stopped paying the rent? So it comes back to which one is cheaper, then take the difference and invest it for your future. Not sure if that all came out the way I wanted it too, it's late and I'm sleepy. Hopefully I got the idea across.

[RetireJapan]

Renting vs buying is a pretty simple in my opinion. Which costs more? If it's cheaper to rent, then rent. If it's cheaper to buy, then buy with fixed rates. Yes, the fixed rates are higher, but they fix your payment for the duration of the loan. You also need take in to account the real interest rates and not the nominal rates, interest rates minus inflation.

I think this is something that does not have a default solution, as you say. Everyone needs to run the numbers for themselves just to make sure they are aware of the real cost of each option.

Then they should make the decision based on both the numbers and their personal preference. It is fine to choose to pay more for your preferred option, but less so to make the decision without understanding things.

A couple of huge costs that are sometimes overlooked are the transaction costs of buying (can be as high as 5-10%), depreciation (especially of a newer dwelling), and maintenance/damage.

Basically if there is a chance someone might want to move within ten years or so it might make more sense to rent, even if it looks more expensive month to month.

[zeo]

Everyone needs to run the numbers for themselves just to make sure they are aware of the real cost of each option.

Yup, you're right I'm oversimplifying. Everyone needs to make decisions they're comfortable with.

I assume if someone is considering purchasing then they've already budgeted the transaction costs in to their calculations, depreciation and ongoing costs (maintenance, property taxes, etc.). You'd have to do this to understand your real costs. Depreciation is significant in Japan since property does appreciate here.

You're also right, if you plan to move then purchasing will very likely not make sense. In the US the usual rule of them is 7 years since properties appreciate.

The sales agent will tell you that you can rent the place out, but I'm skeptical about this. My feeling is that unless you're in a high rent district with high long term demand, it'd be difficult to rent out the property to see a return on that money. At some point down the line, say maybe 15 years, if the property isn't in a high demand area, you'd have to start discounting rent and could go cash flow negative. I've got no data to back that up, just a hunch given what I know about Japanese shrinking population.

[RetireJapan]

The sales agent will tell you that you can rent the place out, but I'm skeptical about this. My feeling is that unless you're in a high rent district with high long term demand, it'd be difficult to rent out the property to see a return on that money. At some point down the line, say maybe 15 years, if the property isn't in a high demand area, you'd have to start discounting rent and could go cash flow negative. I've got no data to back that up, just a hunch given what I know about Japanese shrinking population.

People also need to be aware that they might not be able to rent their place out if they have a residential mortgage. I have heard from RJ readers who were told by their estate agent just to lie to the bank, but this seems somewhat risky to me.

Many banks will ask you to remortgage using a much more expensive commercial mortgage if you are planning to rent out your property.

[TokyoWart]

Two other things to consider: Renters rights are very strong here and the default rental contract allows the renter to renew automatically (although they may have to pay a fee). That means you as landlord can be in a position where you can't sell the home once you start renting. There are fixed-term contracts which do not allow the renter to automatically renew but in general they will come with lower rent payments. Tax treatment of capital gains also changes if you sell a property you are renting out as compared to one you were occupying and you lose the exemption that homeowners get. These two issues were explained to me by the realty agency when I was considering renting out our home (mortgage already paid off) and contributed to my decision not to do so.

[jcc]

People also need to be aware that they might not be able to rent their place out if they have a residential mortgage. I have heard from RJ readers who were told by their estate agent just to lie to the bank, but this seems somewhat risky to me.

Said it before but I want to reiterate again for others jumping to the more recent messages: the estate agent is not your friend. They get a cutof transaction fees and their incentive is to make the biggest sale, not the right sale. They will tell you "oh you can just rent it out", they will tell you it will stay cashflow positive and give you figures that sound great. Technically there are government protections against this, but I have the general feeling that they simply are not enforced.

It is not a 30-day money back transaction and generally they're not looking for your interests or your repeat business.

When talking about 50 million yen sales, every single % saved is 500,000 yen, so it should be worth your time to do the math and research, don^t let smooth talkers con you into buying something that's not right for you

Oh, and any promises/figures they give you, make them write them out. If they lie to you and break the law, you want proof. If they won't write it down they*re covering their asses so something sketchy is going on.