RetireJapan

vapid wrote: ↑Sat Mar 31, 2018 8:14 am My wife has a work colleague (Japanese citizen), who is looking to sell there second hand mansion. If my wife and I wanted to buy it, can it be done entirely in cash or can we get a loan from a bank and figure out how to transfer the title from him to us?

Would the same principle apply for buying a home from someone looking to sell?

We bought our manshon from a friend, but ended up asking another friend who is an estate agent to do the deal for us. There is a fair amount of paperwork that has to be done officially, as well as due diligence on any remaning debts on the property, etc. For manshons there is also the state of the communal funds, etc.

I'm pretty sure a bank is going to want to see these details before writing a loan. For a cash-only transaction, you might be able to save about half the costs (but I would be very wary of doing so).

jcc wrote: ↑Fri Mar 30, 2018 6:30 am I think Ben's manshion dropping to 30% of its original value has a lot to do with him being in sendai Population growth in Tokyo, population decrease everywhere else drives prices

Er, I think the 30% drop in value has a heck of a lot more to do with what was going on in Japan 25 years ago...

My wife has a work colleague (Japanese citizen), who is looking to sell there second hand mansion. If my wife and I wanted to buy it, can it be done entirely in cash or can we get a loan from a bank and figure out how to transfer the title from him to us?

Yes, you can do it entirely in cash, and you'll save quite a bit of money - no real estate brokerage cut, no consumption tax.
It's how I purchased my house. Those costs can add up to 7-10% of the price of the house, for us it was less than 1%.

As RetireJapan noted, you absolutely will want to have assistance from a real estate professional because there's a lot of specific paperwork involved that only licensed agents can handle. Normally the friend selling the house would have someone handling it anyway, or you can get one of the agents at a local real estate place to handle it for a small fee - note that you'd still have to pay these fees even if it wasn't a cash transaction.

I highly highly recommend paying in cash if you're in position to do so, not only do you save on costs, you save millions of yen on interest that would otherwise go to the bank. As long as you have a bit of money saved up as an emergency fund, I heartily recommend pursing the pay-cash option.

If you have no intention of investing the money in the long term, paying it straight up can save you some.

But with interest rates as low as they are you could do better investing that cash for the long term and getting a low interest loan. The tax deduction alone pays for most of the interest, and then your investments just need to beat out the intitial costs(the largest of which, the chuukai tesuuryou has nothing to do with the banks).

This is obviously a difference in philosophy though. DragonAsh clearly does not want any debt hanging over him. I see the pre-payed house as non liquid assets that you can get a low interest mortgage on freeing up those assets to work for you. I don't think DragonAsh is necessarily wrong. Paying straight up for the whole thing is viable if you're extremely risk averse and have no intention to invest. But taking the loan and putting the funds in long term investments would win out in the long run.

jcc wrote: ↑Thu Apr 05, 2018 1:33 am This is obviously a difference in philosophy though.

I've gone back and forth on this multiple times, and I don't think there is a clear answer. It depends on what happens in the future, so either could work out. Go with what fits your mindset/goals/personality, would be my advice.

RetireJapan wrote: ↑Thu Apr 05, 2018 2:28 am

jcc wrote: ↑Thu Apr 05, 2018 1:33 am This is obviously a difference in philosophy though.

I've gone back and forth on this multiple times, and I don't think there is a clear answer. It depends on what happens in the future, so either could work out. Go with what fits your mindset/goals/personality, would be my advice.

I would also add, make sure that you can handle the worst possible case (i.e. keep paying your mortgage even though your invested assets are going downhill) before making a decision.

jcc wrote: ↑Thu Apr 05, 2018 1:33 amBut taking the loan and putting the funds in long term investments would win out in the long run.

In that case - would you take out 30-year $10 million loan and invest it?

You don't know what will happen in the long run. I agree that in the long run, yes, you would probably come out ahead. But you very well might not. I mean, it's not like '10-15yr bear market & real estate crash' is ancient history. What if it happens again? What if you lose your job?

This ties into below:

jcc wrote: ↑Thu Apr 05, 2018 1:33 am Paying straight up for the whole thing is viable if you're extremely risk averse and have no intention to invest. But taking the loan and putting the funds in long term investments would win out in the long run.

You have it slightly wrong - I'm very far from 'extremely risk averse' (my biggest single investment in terms of asset class is emerging market equities).

I do feel strongly, however, that debt is the number one hurdle keeping people from generating actual wealth.
As I wrote in a post in another thread, people need to get over this allure of 'omg low interest rates' like it's some sort of guaranteed path to riches by taking out debt and investing. Would you take out a mortgage at 3% in the US and try to invest? If not, why not? Why do you think Japan is different? Yes, interest rates are lower in absolute terms but in finance everything is relative, and you're just swapping one risk for a different kind of risk...but instead of just taking on risk, you're taking on debt as well.

I prefer to take on risk when I'm debt free with a paid-for house.

I'm not seeing you 'must' pay cash for your home, and I'm not saying you shouldn't invest when you have a mortgage.

I am saying that when you buy a home, you should pay as much as possible up front and get a mortgage that's at 15-20 years max, with monthly payments no more than 25% or so of your monthly take home pay, then you should focus on paying off that mortgage ASAP (which is why you should ensure the bank lets you make extra payments at no extra cost).

DragonAsh wrote: ↑Thu Apr 05, 2018 8:36 am I am saying that when you buy a home, you should pay as much as possible up front and get a mortgage that's at 15-20 years max, with monthly payments no more than 25% or so of your monthly take home pay, then you should focus on paying off that mortgage ASAP (which is why you should ensure the bank lets you make extra payments at no extra cost).

And yet I have a 9m yen mortgage at 0.5% for 30 years that I could pay off tomorrow, but paying it off doesn't feel right to me. Definitely agree on minimising the monthly cost though (our mortgage payment is under 5% of our income).

Ok, I think it's worth going deeper into my own personal reasoning and also clearing up that this reasoning does *absolutely not* apply to everyone.

So for starters, I'm fortunate enough to be making enough that I will have no issue paying up a mortgage even if I get no return on the investments. This is an important thing to consider since returns are NOT guarranteed on the stock market. The risk is significantly lessened over long periods of time, but there is no guarrantee.(see notes)

Second, I absolutely agree that most debts should come before investments. Absolutely pay off your credit cards before anything else. Hell, anything with an interest of say 3% or more should be payed down asap. But if you can get cheap interest and can afford not to win on investments then you should probably use that as an opportunity.

1) The investments are a calculated risk to allow me to retire earlier, that's my objective. If they go really well(10+ a year, unlikely), I can retire in 15 years. If they do moderately(~6% a year), ~20, and if they produce no return, I retire around 25-30 years from now.

Whichever pattern they do take, I will be able to pay off the house so long as I do not lose my job, and the only realistic scenario for that is covered by danshin hoken that is built into pretty much every serious home loan out there.

2) say you have 10mil lying around in cash, and have 300k a month after other costs to put aside for rent/mortgage/savings and want to buy a 40mil home. You can either
a) keep on renting to avoid debt until you can outright buy a home. Lets say you decide to really push this hard and move into a 10man rent manshon(which if you're living in tokyo is really pushing it for a family). That leaves you 200k to set aside each month. You can either i) invest that(and your initial savings) or ii) set it aside in savings
b) you take out a loan for the remaining 30mil, buy the home and pay it off asap. Once you're done paying for the home you start investing.
c) you take off the longest loan you can(35 years) for the full sum buy the home with no up front payment, investing the rest. I'm just going to use a fixed interest of 1.5% for this as it's the lower risk choice.

I've simulated ai), aii) and c). b) is just going to be in between the two. My work is here https://docs.google.com/spreadsheets/d/ ... sp=sharing

It's not perfect(e.g. the remaining mortgage calculation is slightly off), but it's good enough to get a reasonable idea. It could use with additions for property tax and fees but that's beyond the amount of work I'm willing to do on this, please make a copy, edit, and share if you'd like to do that work.

Results:

For a modest return on investments of 3%:
rent+save->buy->invest: 35 year return of 112mil plus a 23 year old home, spent 12 years in a modest rental
rent+invest->buy->invest: 35 year return of 135mil plus a 25 year old home, spent 10 years in a modest rental
mortgage+invest: 35 year return of 165mil.

For an average return of 6%:
164mil,
238mil, buy after 8 years
334mil

for an average return of 0%:
80mil,
80mil,
88mil (surprising? Not paying rent turns out to be more important than paying interest!)

for an average return of -3%(extremely unlikely):
58mil (not being in the market is obviously a good thing),
41mil,
51mil (not paying rent beats out losses in the market)

finally, if you get lucky and get 10% annual returns(you'd be very lucky):
286mil
568mil
921mil

The long and short of it?

Time in the market matters. By saving up for a home you're reducing your time in the market. By making a full payment on the house, you're reducing the time(and volume) in the market. And finally, by paying rent for ~10 years, that's money that's never returning. Compounded interests are powerful.

One point however is that with buying later you do have a newer house so it retains some more value. But the difference between a 25 year old home and a 35 year old home will not make up for these big differences. You can also add on an insignificant amount of costs to the bank for the loan itself, but it's not going to change the numbers in any significant way. Property taxes will do some more damage, but not enough to change the outcomes outside of the worst case scenarios..

Another important note here: If you are definitely going to buy(there are plenty of valid reasons for not buying including mobility) so long as home prices stay the same or rise, and interest on mortgage is reasonable, buying sooner will be cheaper than buying later.

notes:
http://observationsandnotes.blogspot.jp ... arket.html

Observer that the best and worst 35 year returns aren't that far apart. And that even through the great depression the 35 year returns were significantly positive. Does that mean that they could never go bad? No. The US economy could collapse entirely. But they probably will be decent.

DragonAsh wrote: ↑Thu Apr 05, 2018 8:36 am

jcc wrote: ↑Thu Apr 05, 2018 1:33 amBut taking the loan and putting the funds in long term investments would win out in the long run.

In that case - would you take out 30-year $10 million loan and invest it?

You don't know what will happen in the long run. I agree that in the long run, yes, you would probably come out ahead. But you very well might not. I mean, it's not like '10-15yr bear market & real estate crash' is ancient history. What if it happens again? What if you lose your job?

My post above more or less answers that, but the crux of it is that even if I see 35 year annual returns of -3% (which has never happened, see the links above) I would still be fine with a fully payed off house and I wouldn't have wasted a load of money on rent.

And if someone would give me a $10 mil 0.5% 30 year loan I'd be seriously tempted. No such thing exists of course.

The math itself is of course irrefutable - if the market consistently goes up, never goes down, and your returns are always higher than the mortgage - well, duh, of course you're better off in the market than not in the market.

The problem is, 35-year bull markets are not the norm and you don't know when a bear market is going to come. You don't know when you're going to lose your job, or be faced with other emergencies. Between 1990 and 2003, Japanese stocks lost 75% of their value. After falling below 8,000 in 2003 and rebounding, Japanese stocks fell back to below 8,000 in 2008 and basically bounced between 8000 and 10000 up until 2013. Back in 1996, the Nikkei was at around 23,000 - about where it is now - and people thought things were going great. The Nikkei promptly slid by 40% over three years, rebounded back to around 22000...then lost 60% over the next three years.

Going back to 1989, that's 25 years if poor performance, and the Nikkei has only barely recovered to 60% of the previous peak.

Do you know how you'd react to a 40-60% market crash? Because it will happen, it's only a matter of when. Your biggest draw-down is always in front of you.

For example, looking at three scenarios:
a) Save up for 10 years and pay cash
b) Borrow 40mn at 1.5%, zero down, pay back over 35 years
c) Pay 10mn down, borrow 30mn at 1.5%, pay back in 15 years

And then just for kicks and giggles, break up the time period in to three: years 1-10, 11-20 and 21-40.
Here's a link to a quick 'n' dirty excel where I do just that.
https://www.dropbox.com/sh/y8iyeuyfn1pc ... VN1Ka?dl=0

I've made some assumptions but they're equal in all three scenarios.

If you assume constant returns of more than 1.5%, you're better off with option 2. Less than 1.5%, and the lower you go the more option 3 is best.

However, look what happens when you start factoring in periods of negative returns:
+5% in period 1, 0% period 2, -5% period 3: Option 1 is best, Option 2 is worst.
0%, -5%, +5%: Option 3 is best, Option 2 is worst.
+5%, -5%, 05: Option 3 is best, Option 2 is worst.

You can play around with the numbers and the periods, but the point is, it appears that once you factor in periods of even mild negative returns, Option 2 - borrowing the max with zero down - is apparently never the best option, and in most cases, it appears to be the worst option.

Don't think 5% negative returns for 10 years is likely? That's -exactly- what happened in real terms for investors in the 10 years through 2008.
There was a compound annual decline of over 4% in the 10 years through 1974 (the 'rolling returns' chart above is in nominal terms, not real terms, and thus is kinda meaningless).