RetireJapan

So, I am facing a financial dilemma and thought I would ask the wiser people of the forum about it.

My finances have been doing pretty well lately, in no small part thanks to the advice of this site. On the other hand I haven't been making much progress when it comes to owning my own residence, since I am still renting at 40 with a family. Recently it has turned out that we need a larger place (4 or even 5LDK) for everyone to get a room and for me to have an office to work from, so renting is getting more and more difficult (and expensive) and I am thinking of buying or building a house.

I have found a land that looks almost perfect in terms of location and size, but is a bit on the pricey side at 6,500万 (still not completely crazy levels for the Tokyo area). If that was the total price I have to pay, I would have no fear taking a loan, but I also need to build a 5LDK house on top of it ; I am not very familiar with the prices but even with a low-cost builder like Tama, and taking into account the taxes and fees, I don't think it would be easy to go below 10,000万, the dreaded 億!

Even with a comfortable atamakin we are talking about roughly 9,000万 of borrowed money, and a monthly reimbursement of about 250,000円 (similar to my current rent) for 35 years, which makes me much less comfortable. I have no problem supporting that at the moment, but cannot guarantee that my income will remain the same until (and after) I retire.

So I was thinking, since the stock market is very high right now, why not sell 2,000万 or 3,000万 of stocks in order to cover the cost of the building and bring the loan down to a more reasonable level? On the other hand, loans are cheap and that means a big investment opportunity cost. Until now I have been investing most of my income and the momentum has been great ; putting a large dent into that does not seem very wise.

Another solution would be to give up on that almost perfect land and find something else in a less ideal but cheaper place. This means sacrificing some quality of life in order to protect my current financial peace of mind.

I know that buying a house is an emotional decision first and foremost, but from a financial perspective what do you think makes the most sense? I am tempted to think that it would be wiser to use the loan as leverage and preserve my current assets, which will keep growing and allow me to eventually repay the loan when I retire, but that's a perfect scenario with little room for headwinds and I am not sure I would sleep well at night.

Personally speaking, I would go for the cheaper house and borrow the money.

Hopefully this will be useful to you as a mirror to find your true feelings

Well, the cheapest you can build a house that size is around 1500万 (think tateuri quality), and for 2500万 or so you can build a good quality house with local komuten (but without any luxuries like natural wood or designer stuff etc).

As for your question, I had same doubts, and eventually went with buying used house instead of building, FWIW. I can't say that I don't have any regrets, especially because after long search I've found a perfect builder cost/quality wise, but I still think it was a right decision for us.
Although, I must say the cost was only one of the considerations, the other one was not knowing how long we will have to keep looking for the land we like. You seem to not have that problem.

Ori wrote: ↑Mon Nov 01, 2021 10:23 am Well, the cheapest you can build a house that size is around 1500万 (think tateuri quality), and for 2500万 or so you can build a good quality house with local komuten (but without any luxuries like natural wood or designer stuff etc).

I wouldn't mind tateuri quality as long as the bare minimums in terms of insulation and earthquake resistance are met. I expect the house to be demolished in 20-30 years when we decide to scale back down, as the house will be too big when the kids are grown up and me retired anyway. So the plan is to build cheap and get a partial return from the land, which is unlikely to lose much value due to location.

I am surprised by the 1,500万 estimate for a 5LDK, mine starting at 2,000万 (without taxes) for the bare minimum, or a 坪単価 (price per tsubo) of around 50万 for a 125sqm/38tsubo 2-story building. Maybe I need to look better, if you have references can you share them?

Ori wrote: ↑Mon Nov 01, 2021 10:23 am As for your question, I had same doubts, and eventually went with buying used house instead of building, FWIW. I can't say that I don't have any regrets, especially because after long search I've found a perfect builder cost/quality wise, but I still think it was a right decision for us.
Although, I must say the cost was only one of the considerations, the other one was not knowing how long we will have to keep looking for the land we like. You seem to not have that problem.

Buying a 10-15 years used house was my initial plan, but they have become extremely rare and expensive in Tokyo, and building new doesn't seem to cost much (if at all) more. The advantage being less hassle as building takes more time and have more potential for going the wrong way, with a used house at least you know what you are buying.

Whether one goes used or new, the process is extremely intimidating for the non-initiated like myself. You have absolutely no ally in your quest, and the only people in the know are here to screw you. I really wish renting for life was a viable option in my case (up to 3LDK it was, but not anymore unfortunately).

RetireJapan wrote: ↑Mon Nov 01, 2021 9:28 am Personally speaking, I would go for the cheaper house and borrow the money.

Hopefully this will be useful to you as a mirror to find your true feelings

That's what my rational self says as well.

The emotional self however yells to blow it all on something really nice.

N00bster wrote: ↑Mon Nov 01, 2021 10:54 am I wouldn't mind tateuri quality as long as the bare minimums in terms of insulation and earthquake resistance are met. I expect the house to be demolished in 20-30 years when we decide to scale back down, as the house will be too big when the kids are grown up and me retired anyway. So the plan is to build cheap and get a partial return from the land, which is unlikely to lose much value due to location.

"Tateuri quality" and "bare minimums in terms of insulation" should not be used in one sentence There are very few builder who build truly well insulated houses and which are airtight at the same time (well insulated without air tightness is even worse than bad insulated, because hello mold in the walls). Every builder now boasts their Q, U values, but most are very shy about their C values. This, actually, goes to both cheap and expensive builders. If you want truly well insulated house, you will need spend time looking (or ask for my excel sheet, haha).
What you will get from typical builder is bags of 10-20K glass wool with god knows how much empty space between them.

I am surprised by the 1,500万 estimate for a 5LDK, mine starting at 2,000万 (without taxes) for the bare minimum, or a 坪単価 (price per tsubo) of around 50万 for a 125sqm/38tsubo 2-story building. Maybe I need to look better, if you have references can you share them?

You won't find truly cheap house builders in those house exhibitions. You need to look at sites like Suumo and such. And even Google, because smaller koumutens might not be there.
Here are few from my list: 三陽工務店, ノーザンハウス, サートンホーム, 匠技建, コタエルハウス、横尾材木店、ステーツ,晃栄建設　ＣＨＯＩＣＥ　ＨＯＵＳＥ
Mind you, some of them might not work in Tokyo, as I was looking in Kanagawa and Saitama.

Buying a 10-15 years used house was my initial plan, but they have become extremely rare and expensive in Tokyo, and building new doesn't seem to cost much (if at all) more. The advantage being less hassle as building takes more time and have more potential for going the wrong way, with a used house at least you know what you are buying.

True, used houses are not as cheap as one would expect hearing that after 20 years the value of the house goes to zero. Also, you don't really know what you are buying with the used one, because home inspector can only see that much.

Whether one goes used or new, the process is extremely intimidating for the non-initiated like myself. You have absolutely no ally in your quest, and the only people in the know are here to screw you. I really wish renting for life was a viable option in my case (up to 3LDK it was, but not anymore unfortunately).

One thing you must be wary about is that good land sells fast, very fast. It's seller market now. So basically you don't really have time to look for a builder after finding a land plot. The realtor will ask you to apply for loan pre-approval and for that you need an estimate from a builder. Realtor might be able to help you with getting that from "their" builder, but after pre-approval you need to move fast to approval, and on that stage you will need to finalize everything.
If your realtor is not pressing you with pre-approval and stuff, then there might be something wrong with the land (too expensive, hazards etc), so there are no buyers expected anytime soon. Heck, our realtor told us to go away simply because we didn't want to get loan at the bank he was endorsing. That plot of land never re-appeared on Suumo.
You also need to start choosing the banks for the loan as early as possible, as there will be little time for that later.

There are so many variables that need to be considered… most of which go directly to the ultimate question of how much money you have, so you'll likely prefer to work through this yourself, but some thoughts:

• Tokyo is expensive. Simply crossing a river into Kanagawa or Chiba can save you 20-50%, even for the exact same specification house. You can, effectively, get the same effect of paying a down payment but without needing to dip into your investment account. Of course, moving to Kanagawa or Chiba will likely ensure your children grow up to be degenerates, so there is that… but let's stick to financial talk here.
• Run the numbers with a higher rate, say 1.0-1.4%, rather than 0.75% or whatever you’re using. You may want insurance, or variable rates may rise. Besides, it's useful to have a bit of a buffer.
• Career - you’re 40, but how long do you see yourself working? Big difference in planning depending on the answer to this question.
• Salary - Will it likely rise looking forward? Or fall? By how much? Again, big impact on planning depending on the answer.
• Savings rate - how high is it, and can you continue saving sufficiently post-mortgage? Continuing to grow the nest egg is so important.
• Your stash - how much have you got? i.e. if you did the down payment, how big is that impact? The old adage of “the first million is the hardest” is true because of the compounding effect. If you’re forced to start from scratch again it will take a long time to get back up. As such, I would lean towards 100% mortgage, as you've already said you can afford the payments easily. (as long as savings rate is good)
• Exiting - selling is the easiest way to pay it all off. But how much will you recoup? Well, it's a 6,500man plot in Tokyo that you describe as "almost perfect", so it's reasonable to assume it's got some redeeming features and will maintain a decent level of value. But your cheap quality house won’t. So in 20-30 years we can reasonably estimate a range of 5,500-7,500man, depending on what land prices do in the convening decades. Desirable locations in Tokyo won't drop precipitously, but upside potential will also be limited.
• Even at the low end at 5,500, if you sell after 20 years, that amount recouped will be sufficient to cover the remaining 15 years of the mortgage, so you'll be free and clear at that point. You'll then have a new problem... finding somewhere else to live.
• What if you don't sell? - You hinted about being worried about ability to pay in the future, so you seem to be acknowledging there may be a scenario where you end up not selling. The questions about savings rate and your starting line (account size) above are for assessing your ability to pay in the future. Map that out realistically.
• Taishoku-kin - will you get it? How much?

btw, I'm sure you're aware already, but it takes upwards of two years to build a house, but you’ll need to pay for the land upfront, and pay for the house in stages as the builders reach milestones. So you’ll be paying double for housing for at least two years.

Personally, I would cross a river. It's the same game, essentially, just played with lower numbers.

mighty58 wrote: ↑Mon Nov 01, 2021 3:04 pm btw, I'm sure you're aware already, but it takes upwards of two years to build a house, but you’ll need to pay for the land upfront, and pay for the house in stages as the builders reach milestones. So you’ll be paying double for housing for at least two years.

Not necessarily. Usually people use つなぎ融資, or bridge loan, to solve that issue. Only interest will have to be paid until the building is finished. Not all banks provide that kind of loan, though.
And two years are a bit on a longer end, I think. Construction itself usually takes 4-6 months, I've been told, plus 1-2 months on planning, but it doesn't have to take that long if one already knows what they want.

I wouldn't mind tateuri quality as long as the bare minimums in terms of insulation and earthquake resistance are met. I expect the house to be demolished in 20-30 years when we decide to scale back down, as the house will be too big when the kids are grown up and me retired anyway. So the plan is to build cheap and get a partial return from the land, which is unlikely to lose much value due to location

I personally would have issues with this kind of approach. It just seems extremely wasteful.

Buying used might be a better option.

I was in a somewhat similar situation taking on a 20 year mortgage at 48, although for much less money. Ultimately I retired early at 63 and was able to use a chunk of the generous retirement bonus to pay off the remaining debt. When we sold up recently, the 17 year old house had lost most of its value, despite being extremely well built and still in excellent condition. Luckily the land value had appreciated a bit because of infrastructure improvements (subway, shopping, etc) in that outer suburban location.

Unless you are prepared to basically kiss the value of your dream home goodbye, then I would suggest that you take the secondhand option given that a large suburban home is unlikely to be an ideal environment for your future aged self anyway. (We now find the convenience of living in town to be incredible. There is virtually nothing you cannot obtain within a 20 minute stroll - it helps having 5 department stores in that range and multiple transportation modes to use if you need to venture further.) Buying secondhand lets someone else suffer a lot of the home’s depreciation, keeps more for you to invest and grow, and maintains flexibility for your future by not tying too much up in a dream home, which realistically will probably not be a dream home for all life stages anyway. But it’s your money!