Budgeting and general tips for homebuying

[cowcamo]

Hi all,

Found this site via /r/japanlife and have been finding the comments/experiences from other posters very useful so thought I'd ask some questions too.

I've got a little over a year on the lease for my current apartment rental and am thinking that I'm ready to get a place of my own once it's up.  Obviously a big step financially, so I've got lots to think about.. looking for pointers on how best to get started, and hoping to get some advice  

A little background: I've been in Japan (I have citizenship) for many years, working at the same company for over a decade now.  Not the highest paying job, but I do have about a year's worth of cash sitting in the local bank so I'm good with the "emergency fund".(I know I should probably be finding some way to make that money work for me but I've been kind of in the "saving" mindset for getting a place of my own for a few years now).

I live with my partner, she works part-time but I am the primary source of income, and we're not planning to have kids.

I guess first of all I'd like to ask about advice on setting a budget.  Looking at english websites like Investopedia, they recommend a mortgage that's 2-2.5% of gross income.  If you're earning something like 6 million yen a year, that's a mortgage of around 15 million yen - which is not going to get you anything more than maybe a studio in the Tokyo area!  How did some of  you set your budgets?

My next question is just to ask for general tips on sites or companies to use in terms of searching.  Do you recommend doing self-searches online (say via suumo, livable, cowcamo, etc) and then reaching out to the agents if you find something you like?  When searching for apartments this would be a long process just because so much of what you saw online was already gone... Are there any sites (or agents) that some of you recommend more than others?

I would really prefer to get a home instead of a manshon simply because I'd love to have the additional space.  I've lived in 30-40sqm apartments for so long now and I'd love to have a home that's big enough for me to actually be able to invite family/friends over when they're visiting Japan.

I have more questions but I think I've written enough to start with..

Any advice from folks would be greatly appreciated, thank you!

[StockBeard]

 Looking at english websites like Investopedia, they recommend a mortgage that's 2-2.5% of gross income.  If you're earning something like 6 million yen a year, that's a mortgage of around 15 million yen - which is not going to get you anything more than maybe a studio in the Tokyo area!  How did some of  you set your budgets?

I was scratching my head on this one. The investopedia recommendation is actually 2-2.5 times yearly gross income, not percentage

Our house (including land, fees, everything) cost 3.5 times my salary. It's worth mentioning I have side income and investment as well so when I include all of that it's not far from 2.5 times my income. But I make great money (my wife has no income, though), and our house was "cheap" compared to what I see my colleagues do. Basically, I've seen people with my salary purchase houses that are 1.5 to 2 times what I paid for mine.

Bottom line, I can say that people I know (including myself) have purchased houses that cost somewhere between 2.5 and 6 times their gross income (4 being the most common I've seen). The mortgage itself is probably 80% of that (20% of downpayment), so it falls to a mortgage that's between 2 and 5 times your gross income, and your downpayment adding 0.5 to 1 year of income to that.

Those are not rules of course, just what I've seen people do. I'm not surprised if the investopedia rule of thumb is on the "low end" of this number: loan interest rates are way higher in the US, and houses in Japan are, in my opinion, overpriced. People (have to) sink a lot of money in housing in Japan, so the reality here is a bit different from the US-centric articles you might have found. So, if your house costs you 5 times your annual income, and your mortgage is 80% of that, I'm not totally surprised.

With that being said, as someone trying to achieve financial independence I have to mention that taking such a high mortgage in my case would have been heresy. So, I had to make a choice: Live outside of Tokyo, or buy a tiny house, or buy an old house. I chose to move far (very far) away from Tokyo. So, I have a great house and a terrible commute to work. Life is all about compromises. My colleagues chose to not compromise on their house or commute, which means the compromise they are making is on their future retirement. It's a choice

Sorry, that's a long rant just to say that 2.5 times your income is not necessarily unrealistic, depending on your life choices. But if your household income is indeed 6 million and you expect to buy a house in the Tokyo area, start to think about the other compromises you are willing to make (buy an old house, buy a tiny house, or in a poorly located area, etc...)

Another approach is that if you can secure a mortgage with a loan payment that's roughly equivalent to what you pay today in rent, you'll probably feel ok. So, for example if your rent is 150'000 yen per month and you want a similar monthly loan repayment, assuming a floating interest rate around 1%, a 35 year mortgage, you're looking at about 50'000'000. (for what it's worth, for my house I went with a fixed interest rate at 1.72%).
Calculator here if you want to play with it: https://housingjapan.com/buy/yen-mortgage-calculator/

As far as researching: if I recall correctly we started with Suumo, but we had specific insulation requirements so that helped us narrow things down to specific building companies. After a bit of research we ended up contacting 2 or 3 building companies that were known for their great insulation and have them do the work of sending us proposals for the land. There are multiple steps and they don't specifically happen in order, it's more of an organic cycle of all these things happening constantly:
1) Decide the area(s) where you want to buy
2) Search on suumo, visit the local "model homes" group (places where a dozen builders showcase their work), find builders who match your requirements through word of mouth, visit the area you want to buy in and go in person to the model houses that are in the area.
3) Decide whether you want to buy a house or a manshion, and whether you want to buy new or used
4) Disagree on the decisions you made in steps 1 to 3, realize your couple is not as strong and unified as you thought it was, argue, agree that you're only having an argument because those house builders are morons, you're fine, you've known from the start exactly what you wanted but they're the ones bringing confusion, agree on what you really want to buy, and go back to step 1

[cowcamo]

Thanks for the in-depth response!

First, apologies for the income percentage confusion
Numbers have never been a strong point of mine, and scare me a little

I admire your determination to retire early (FYI I tried looking at your site but for some reason nearly all the posts are in "mojibake"/garbled, I can post a screenshot later if you want - the main page is fine, but actually clicking on most of the posts generates mojibake for some reason).
I don't think I have the fortitude to compromise as much as you though - I used to have a terrible commute (3+hrs a day via foot, bus, and train to/from work), and I don't want to go back to that. At the same time, I don't particularly want to get an old house. I've lived in enough old rented places in the past 10+ years that I am sick of mold, crappy insulation, and being woken up in the early morning because my I can hear my neighbors vacuuming through the thin walls..
So I may need to compromise on size and/or possibly less desirable locations. Logically I guess I know this, but it is good to get this reinforced, even from an internet stranger

Your suggestion of looking at it in terms of how much rent I'd be willing to pay is good (and thank you for that calculator link by the way). Couple of questions related to this:
- what was the main reason you went with the fixed interest rate? Simply for the peace of mind/knowing exactly what you will be paying for the duration of the loan?
- I assume it would be possible to pay extra (to pay down the loan more quickly); is there anything I should be aware of/watch out for, ie penalties I might be hit with?

4) Disagree on the decisions you made in steps 1 to 3, realize your couple is not as strong and unified as you thought it was, argue, agree that you're only having an argument because those house builders are morons, you're fine, you've known from the start exactly what you wanted but they're the ones bringing confusion, agree on what you really want to buy, and go back to step 1

Interesting that you started with Suumo, but I'm not clear on if you used them for the whole process from searching to buying, or you just used them to find properties, but then afterwards sent a list of places you found to companies that matched the construction requirements you had? (sorry if I'm missing the obvious, it's 1AM and my brain is shutting down..)

[StockBeard]

- what was the main reason you went with the fixed interest rate? Simply for the peace of mind/knowing exactly what you will be paying for the duration of the loan?

Exactly. The variable rates are really attractive, but I wanted something I could enter in my spreadsheets with as much confidence as possible for 35 years of future estimates. I felt that 1.72% fixed was a very good number and as close as it gets to "free money", so I decided not to be "greedy" and take additional risk with the variable rate. Most people I know went with variable rate. In particular since apparently it might be easy to renegotiate if that rate ever goes too high. Variable rate doesn't seem like a bad choice, really.

- I assume it would be possible to pay extra (to pay down the loan more quickly); is there anything I should be aware of/watch out for, ie penalties I might be hit with?

It's not in my plans to pay the mortgage faster so I haven't looked much into that, but it's definitely a possibility. One thing a friend mentioned is that paying it down faster, at least in the early years, might not be advisable because the amount of your remaining mortgage also determines how much of a tax discount you get at the end of the year. This tax discount is going for 10 years, so basically it is likely to be in your interest to keep a "sufficiently high" mortgage at least in the first 10 years. Sorry, I don't have much details on that

Interesting that you started with Suumo, but I'm not clear on if you used them for the whole process from searching to buying, or you just used them to find properties, but then afterwards sent a list of places you found to companies that matched the construction requirements you had? (sorry if I'm missing the obvious, it's 1AM and my brain is shutting down..)

It was the latter. We first looked around with suumo, and that coupled with actual visits to the local "model house village" is how we found 1) a handful of building companies we thought looked ok and 2) areas we were interested in. Once we had determined that, we didn't use suumo that much. As you've mentioned too, the stuff you find on suumo is generally already sold by the time you ask about it, so we found it not super useful. Generally you would call the agency, and they also latch onto you: "this property is sold but let's schedule something so we can show you what we have in stock", which worked for us. Actually after we had found the builders though, my wife would still regularly look on suumo and send them links of land slots, asking them if they could check if this or that spot is still available.

Thanks for the heads up on my blog issue. Several people have mentioned that but I have no clue what's going on...in my experience, reloading the page works but I don't know...

[mighty58]

On costs and budgeting:
- I would second the recommendation to look at what you're comfortable paying monthly, rather than working with some rule of thumb developed in a different country with different conditions. I think you'll find pretty quickly that there is precious little of quality out there in the 15million yen range anyway.
- Tip: if comparing manshons to houses, don't forget to account for the management fee (kanri-hi), repair fund (shuzen tsumitate kin), and parking (and think into the future for this as well even if you don't have a car now) If you assume 50,000/yen for those three costs, over the course of a 35 year mortgage, this adds up to roughly the equivalent of 20million yen difference. In other words, a 50million house and a 30million manshon will end up costing a similar amount over the course of 35 years.

Searching:
- Absolutely start with one of the big three portal sites (athome, suumo, or homes). Personally, I prefer athome as I think it's easier to navigate and filter.
- Many (but not all) properties will be listed on all three sites, so focusing on one is not a huge mistake so simplify your life, but it does pays to check the other sites from time to time.
- Browsing the listing are a great way to gauge market prices. Look at enough listings and you'll get an idea for what things cost where.
- Don't worry too much about the "that one just sold" bait-and-switch runaround. I've been to see several (over 10) different properties in person that I found on athome, and that only happened once. If it does happen, just walk away and move on with your life, no biggie.

On compromises:
- Location will likely be the biggest compromise.
- It sounds like you prefer a house, and as you look at the sites, you'll realize the price differences between Tokyo and the surrounding prefectures (Kanagawa, Saitama, Chiba) are significant. As such, and especially if you want a home, you'll be forced to move further out.
- There's a big difference between a three hour commute and a 45-60minutes commute. If you can do 45-60min, a lot of options open up. Some commutes from the prefectures to central Tokyo are not something I would want to subject myself to, but some are actually decently manageable. Do research on this when selecting an area to live.

Finally:
- (similar to the new/used car market here) new houses in Japan carry a premium simply because Japanese people prefer them. Builders take advantage of this by charging a premium for new but sub-par builds (particularly seen on the "tateuri"'s) out there. Most "affordable" looking new houses are cheaply built tateuri's.
- Used places, conversely, can save you a lot of cash, and you can use some of the savings to renovate the interior as you like, and it'll feel new but be much cheaper. Renovation costs can also be bundled into your mortgage, at the same rates. A complete renovation that includes flooring, kitchen, bathroom, toilets, wallpapers, wallpapers, and even some layout/room changes, depending on how far you go or course, will run approximately between 5-10 million yen. Even factoring this cost in, it often works out cheaper than buying new.

[StockBeard]

Lots of great points, mighty58!

If you assume 50,000/yen for those three costs, over the course of a 35 year mortgage, this adds up to roughly the equivalent of 20million yen difference. In other words, a 50million house and a 30million manshon will end up costing a similar amount over the course of 35 years.

We've thought about it this way with my wife too, but I think this was a mistake: a house will need repairs and changes during those 35 years. Budgeting "some amount" of money to plan for these repairs is probably important. What the manshion system does is planning on your behalf. After 35 years, it's definitely not 20 million yen on on side and zero on the other. I think.

[mighty58]

We've thought about it this way with my wife too, but I think this was a mistake: a house will need repairs and changes during those 35 years. Budgeting "some amount" of money to plan for these repairs is probably important. What the manshion system does is planning on your behalf. After 35 years, it's definitely not 20 million yen on on side and zero on the other. I think.

Well ... yes and no. I agree, of course, that home ownership will come with maintenance costs that are not zero.

However, if you believe your manshon maintenance costs are covered by the repair fund, you're sorely mistaken.
A few points (some of which may be obvious, but bear with me):
- these funds are only for the exterior and common areas of a manshon (elevators, lobbies, exterior tiling, etc).
- interior repairs/renovations are therefore almost all on the homeowners dime.
- many buildings keep the repair fund cost artifically low in order to assuage owner concerns (concerns usually revolve around negative impacts on either monthly cashflow or negative impact on resaleability ... both of which are legitimate concerns). What happens then is that owners are asked to cough up 1-2 million yen every decade or so when major repairs are scheduled in order to cover the shortfalls. The amounts and situation is case-by-case and will vary by building, of course. This is not as uncommon a situation as you may think. Because of the difficulty of gaining consensus from so many people in a manshon over what can be a very large sum of money, necessary repairs can be unduly delayed as well. Often if there are stragglers the homeowners association will take on debt to cover the shortfall and get the necessary work done, but the owners end up paying in the end either way.

These two factors (monthly repairs fund costs not covering a large chunk of your potential maintenance outlay (i.e. the interior), and often being insufficient to cover what it's supposed to cover anyway), lead me to believe that the difference in manshon vs. home ownership may not be quite as large as some make it out to be. In fact, the manshon may work out to be more, depending on the state of your house.

[cowcamo]

It's not in my plans to pay the mortgage faster so I haven't looked much into that, but it's definitely a possibility. One thing a friend mentioned is that paying it down faster, at least in the early years, might not be advisable because the amount of your remaining mortgage also determines how much of a tax discount you get at the end of the year. This tax discount is going for 10 years, so basically it is likely to be in your interest to keep a "sufficiently high" mortgage at least in the first 10 years. Sorry, I don't have much details on that

Thanks for reminding me about this - I do recall reading about this briefly somewhere else but I had forgotten. Definitely something to keep in mind. I dislike the idea of having any sort of debt so I need to get around the mindset that all debt is bad/detrimental...

It was the latter. We first looked around with suumo, and that coupled with actual visits to the local "model house village" is how we found 1) a handful of building companies we thought looked ok and 2) areas we were interested in.

Are there any websites that list information about these "model house villages" (locations, show times, etc), or is it more or less just checking out the websites of the various building companies? I have read on other posts that Yamato Juken and Ichijo are good builders so I was thinking of reaching out to them first...

Thanks for all the great points mighty58! I am very much leaning towards an actual house if I can afford it (as you say, there is precious little available in the 15m range unless I move to the countryside or something)
I'm currently about 35 min away from work (door to door), and I know I'm very likely going to have to sacrifice that, but I would love to keep it under an hour. I spend enough time at the office... (yes, I do read in the train but still...)

Looks like I just need to start searching and reaching out to the building companies. I noticed that Yamato Juken has an english section on their site so they may very well be the first ones I reach out to. Are there any other recommended building companies that you all know of that might have english-speaking staff? My partner speaks Japanese fluently, but I would like to be as involved as possible in the process..

[RetireJapan]

The mortgage tax credit (if you are eligible for it) runs for 13 years now, so to maximise that you could make early payments on your mortgage into a separate bank account, then pay that in bulk once you reach the 13-year mark.

The model house villages are fairly common, and tend to be open on holidays/weekends and working hours on weekdays. If you Google モデルハウス + your area I'm sure you'll find some

[cowcamo]

The mortgage tax credit (if you are eligible for it) runs for 13 years now, so to maximise that you could make early payments on your mortgage into a separate bank account, then pay that in bulk once you reach the 13-year mark.

The model house villages are fairly common, and tend to be open on holidays/weekends and working hours on weekdays. If you Google モデルハウス + your area I'm sure you'll find some

Thank you for the search tip, I'll be searching this weekend

And good to know about the extra 3 years! Are the eligibility terms the same as they were when it was originally 10 years, or have those changed? (reason I asked is because searching for info about the loan got me this site, but it's still showing 10 year term: https://japanpropertycentral.com/real-e ... deduction/ )