Renting out a mansion - is it worth it?

[HankNeva]

Hi...I've been considering whether to sell or rent out the mansion I own when I buy a new one. I could use more Japanese based rental income to cover the expenses I have to live here. But does the owner usually continue to pay the monthly mansion fees for repair etc? I'm guessing it is probably the owner that pays these, which would be an argument for selling.

I'm sure one could try and include those in the rental price but I know what mansions rent for in this building and taking monthly fees away from that would not leave a very good return on the money invested. Considering what I could get selling this mansion, I guess the annual return on its rental (minus monthly fees) would be between 4-5%. That doesn't seem very good considering the potential costs that could arise when rentors move out.

It raises a question for me as to what is the percentage of return one should hope to get on a rental unit one owns to make it worthwhile renting it out? I'm calculating the annual percentage of return as the total rent received minus the monthly mansion fees divided by the value of the mansion if I were to sell it.

Are there other factors not mentioned I should consider?

Thanks!

[RetireJapan]

Similar situation for us: market rent - manshon fees, mortgage, rental agency fee, repairs etc. means that the hassle of renting is probably not worth it.

We would probably sell rather than rent it out.

[Deep Blue]

Gross and net rental yields are not very attractive in Japan. I would not invest here for rental income. Even if you consider the costs of selling, I would expect you would make those back and more by investing in higher return assets elsewhere.

[RetireJapan]

I think this just shows the importance of running the numbers for each place. There are doubtless great investment properties, and bad ones.

Our numbers, just for the record.

Market rent for our building (est.): 85,000-90,000 yen a month

Mortgage: 30,000 yen
Manshon fees: 25,000 yen
Rental agency fees: 8,000 yen (?)

Could sell it for 15-20m(?), remaining mortgage 7m.

My quick take is that investing the 8-13m capital gain in an index fund is going to be more profitable, less stress, and less risky than renting the manshon out.

Any counterargument?

[northSaver]

Any counterargument?

Yes, the mortgage doesn't make it attractive, especially if your interest rate goes up due to renting it out. Not much profit after that, possibly zero after property tax, additional fees and repairs.
On the other hand, stocks could go sideways or even down over the next few years. History says they probably won't, but they might.
If you want to dabble in rental property for the experience, and/or diversify your portfolio, then go for it. Otherwise just sell it and put it in index funds.

[Deep Blue]

Do you have a mortgage and can you keep it?
Many banks require to repay the old mortgage to get s new one.
If you have it financed, obviously leverage is very different.

Let me give an example:
I put in 15m into my place, if renting out after mortgage I’d net 1.3m plus 1.2m principal annually. I expect the price to be stable over the long term (at the moment it’s up about 20%), so 2.5m on 15m would be 16%pa, good enough for me even after property taxes etc.
But selling it, deducting the remaining mortgage and selling costs, I’d probably be able to cash in 25m. Still, getting 5-10% return not considering renovations, I’d probably still keep the place and rent out. Stable low risk income flow.

Those numbers are attractive, I assume this is an old place? If so is the assumption of stable price accurate? Most condo’s tend to depreciate in value over time and the higher rental yields tend to compensate for the capital loss.

[SLW]

Just be sure the net income includes more than just the mortgage. You have lots of other operating expenses on a rental unit including insurance, repairs, landscaping, re-investment in appliances and AC units, renovation costs every few years for carpet/flooring/wall paper/painting during which you get no revenue. My experience with a rental property is that net income is about 50-60% of gross rental income in the best of cases over the long term. If your numbers still work, then go for it, but be careful accounting for all costs.

[HankNeva]

Do you have a mortgage and can you keep it?

The mortgage is paid off. Your example of a 16% return seems quite good. I had not included capital appreciation in my calculations. If I do so, things improve a bit. I bought this mansion for 13m and it is now worth 18m 15 years later, which would be an annual gain of 33.3man a year added to the annual rent - monthly fees of 72.0man. Overall annual income would be approximately 1.05m. So 1.05m/18m = 5.8% return on the money invested. Since this is a best case scenario with few hassles and no need for repairs, it doesn't sound like such a good idea from an investment perspective.

[Roger Van Zant]

Do you have a mortgage and can you keep it?

The mortgage is paid off. Your example of a 16% return seems quite good. I had not included capital appreciation in my calculations. If I do so, things improve a bit. I bought this mansion for 13m and it is now worth 18m 15 years later, which would be an annual gain of 333man a year added to the annual rent - monthly fees of 720man. Overall annual income would be approximately 1.05m. So 1.05m/18m = 5.8% return on the money invested. Since this is a best case scenario with few hassles and no need for repairs, it doesn't sound like such a good idea from an investment perspective.

Not 333man but 33.3man per year.
Same mistake with "monthly fees of 720man", I am hoping!

[Tkydon]

Renting out a mansion - is it worth it? _ No Outstanding Debt Version.

If you decide to sell the property:

If the property is your Primary Residence, then any Capital Gain when you sell, up to Y30M Primary Residence Allowance is completely free of Capital Gains Tax.
If the Capital Gain is greater than the Y30M Allowance, then the tax rate on the excess depends on whether you have owned the property for less than, or more than 5 years.

If the property is NOT your Primary Residence, then any Capital Gain when you sell, up to Y500,000 Basic Allowance is completely free of Capital Gains Tax.
If the Capital Gain is greater than Y500,000 Allowance, then the tax rate on the excess depends on whether you have owned the property for less than, or more than 5 years.

If you owned the property for less than 5 years, then Capital Gains Tax on the excess amount over the Allowance above is 40.63% (30% National, 0.63% Reconstruction, and 10% Residents' Taxes).

If you owned the property for more than 5 years, then Capital Gains Tax on the excess amount over the Allowance above is 20.315% (15% National, 0.315% Reconstruction, and 5% Residents' Taxes).

The Capital Gain = Selling Price - (Purchase Price - Any Depreciation Claimed) - any investments in the property - Purchase Costs - Disposal Costs

The Capital Gain = Selling Price - Purchase Price + Any Depreciation Claimed - any investments in the property - Purchase Costs - Disposal Costs

Note: The change of sign when bringing the Depreciation outside the brackets...

Your Return Yield = ((The Cash Out / All Cash Inputs ) - 1) x 100%

Your Annual Return Yield = (((The Cash Out / All Cash Inputs )^(1/ number of years)) - 1) x 100% p.a.


On the other hand, if you decide to keep the property and rent it out - No Outstanding Loan Case:

If the property is rented out, the tenant usually pays the Mansion Management Fees, which include the operating costs; garbage, shared services, etc., and the maintenance pool... in addition to the rent...

See what I wrote here:

viewtopic.php?p=29360#p29360

I initially typed my response not knowing that you have no mortgage on the property. The above thread also assumed the use of property loans.

As you have no outstanding loan on the property:

If you rent out the mansion you will create Free Cashflow on a monthly basis. 4% to 5% yield - Rimawari - on the current Market Price would seem about right. You probably won't be able to rent it out for more than that. You would cover other costs and property taxes out of that income, and the net would be taxable as income at your marginal tax rate.

However, you would be eligible to claim Depreciation as an expense against the Income from the property...

We are considering a Manson, so Steel Reinforced Concrete, so the Structure can be depreciated over 47 Years...
If you bought new, or from a company, you paid Consumption Tax on the purchase, which is actually charged on Structure and the Fixtures and Fittings, but NOT on the land...
Divide the Consumption Tax Paid by the Rate of Consumption Tax at the time will give you the amount paid for the Structure and Fixtures and Fittings. You would need to work out a division of that amount between the Structure and Fixtures and Fittings. You can claim 1/47 of the Structure (until the building is 47 years old) and 1/15 of the Fixtures and Fittings (until the building is 15 years old) as a Depreciation Expense against the income from the property, creating a tax loss, so no tax, and you can carry over the tax loss to your salary income, so that you reduce your taxable salary and tax at your Marginal Tax Rate, and get a tax rebate when you do your Tax Return - Kakutei Shinkoku in March and receive the rebate in April. That will produce a positive cashflow, but how much depends on your salary level...

If you do any improvements like new kitchen, new bathroom, new flooring, decoration, etc., before renting out the property, those investments can also be depreciated and taken as an expenses over 15 years...

If you keep the books correctly (double entry book-keeping), you can apply to use the Blue Return, which is more tax advantageous than the White Return, with more deductions, etc..

If you bought is as an older mansion then you would need to speak with an accountant regarding the accelerated depreciation that can be claimed, for how many years, and so on...

The claimed depreciation expense is deducted from the rental income, creating a tax loss, which you can then offset against your other taxable salary income, reducing the aggregate income tax you pay. However, the claimed Depreciation does reduce the Tax Basis if/when you come to sell and calculate the Capital Gains Tax...

The Capital Gain = The Selling Price - The Purchase Price - (The Purchase Costs - Any Depreciation Claimed) - The Disposal Costs - any Improvement Investments

The Capital Gain = The Selling Price - The Purchase Price - The Purchase Costs + Any Depreciation Claimed - The Disposal Costs - any Improvement Investments

Note: The change of sign of the Depreciation when bringing it outside the brackets...

and the Capital Gain will be taxed at:

If you owned the property for less than 5 years, then Capital Gains Tax on the amount over the Allowance above is 40.63% (30% National, 0.63% Reconstruction, and 10% Residents' Taxes).

If you owned the property for more than 5 years, then Capital Gains Tax on the amount over the Allowance above is 20.315% (15% National, 0.315% Reconstruction, and 5% Residents' Taxes).

Therefore, claiming the Depreciation Expense is a Tax Arbitrage Play between the tax saved at your current Marginal Income Tax Rate and Residents' Tax Rate of 10%, vs. the Capital Gains Tax Rates when you sell...

Having rented out the property and established the cashflow income stream, you would then be able to go to a bank and take out a real-estate secured commercial loan against upto 70% of the value of the property at maybe 3% (payments covered by the rental income), and use that cash to put a down payment on another property (Rinse and Repeat), or put it into other higher yield investments (leverage), (or go on a monster blowout vacation (only joking)...).