5 years ago I bought a whole building with around 30 units located in Tokyo. it's been getting a decent monthly cash flow of 300-500K per month, depending on the repairs and vacancies for the month. As it's coming around to the 6th year where cap gain tax is more favorable and given the market value has increased quite a bit, I've been thinking about selling it. The property agent I work with is confident he can sell it for the price I'm asking for. After paying all fees and cap gain taxes, there would be a little more than 100 mil in profit.
I'm also currently talking with the bank where my loan is at and I know I can negotiate a rate reduction. I'm not sure yet how much of a reduction, but hypothetically I think it would increase my monthly cash flow to around 400-600K per month. Every year I keep the property, the principal reduces by 5 mil or so. Within the next 10 years I foresee there could be major repairs such as roof/side walls waterproofing and elevator repairs which would cost 10-20 mil or so which would eat in to my cash flow savings. The property is 15 years old, not that old, but would definitely need major repairs in the future.
Tokyo property price has increased quite a lot these few years, but I can't see it rising much further. The reason being that rents are not really rising. When I bought the property the rental yield was 8% and now I'm selling for around 4-5% yield.
So my question is:
Would you continue to keep the property and rake in the cash flow of 400-600K and revisit selling again in a few years ? Likely the selling price would be the same as now (possibly a tad higher). But, the principal would have reduced. There would also be the unknown major repair risk which would eat into any profit for keeping the property longer.
or
Keep the property indefinitely and enjoy the CF?
or
Sell the property now, take the 100 mil in profit and invest it all into index funds?
I'm leaning towards the last option. but, want to check with all the experts on RetireJapan.
Thanks
Cash flow or Capital gain
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Re: Cash flow or Capital gain
Not sure how many RE professionals we have on here. This is certainly way outside of my competence zone.
Would recommend also asking at other sites/forums (Reddit's r/JapanFinance, some real estate ones?).
Good luck with your decision. Seems like a good problem to have
English teacher and writer. RetireJapan founder. Avid reader.
eMaxis Slim Shady
eMaxis Slim Shady
Re: Cash flow or Capital gain
The way you’ve framed the question is a bit insufficient, as the focus is purely on the merits of the property in question. To properly address this, ie. to look at it like a financial advisor would, a more holistic, high-level view is required. To get there, more information is required, for example:
The second two are an attempt to assess the value, to you, of the ongoing cash flow that the property can generate. The decision to keep it (or get rid of it) will depend on your overall financial situation.
Your current equity position will also come into play, more specifically, how much cash-in-hand are we talking about if you sell, ... i.e. if that 100m yen is a figure significant enough to offset the value of the ongoing cash flow. I’m assuming the monthly cash flow figures are net of all expenses, so you’re already generating the type of cash flow levels that would go a long way to offsetting post-retirement expenses, and that is nothing to scoff at (people pay big money for annuities that give the same output).
You sound like you’ve got a solid grasp of the numbers when it comes to the property itself, so you will already know that things like repairs are part-and-parcel of ownership, but can be managed/budgeted for, so I wouldn’t make any huge decisions based on the fact that there will be repairs.
If you want to provide some of the information above, I'm sure the community here could chime in in a more effective way.
- What does your overall asset allocation look like?
- What % does this property represent of your net worth?
- What is your age? How many years until retirement?
- How are you planning to meet your income needs in retirement?
The second two are an attempt to assess the value, to you, of the ongoing cash flow that the property can generate. The decision to keep it (or get rid of it) will depend on your overall financial situation.
Your current equity position will also come into play, more specifically, how much cash-in-hand are we talking about if you sell, ... i.e. if that 100m yen is a figure significant enough to offset the value of the ongoing cash flow. I’m assuming the monthly cash flow figures are net of all expenses, so you’re already generating the type of cash flow levels that would go a long way to offsetting post-retirement expenses, and that is nothing to scoff at (people pay big money for annuities that give the same output).
You sound like you’ve got a solid grasp of the numbers when it comes to the property itself, so you will already know that things like repairs are part-and-parcel of ownership, but can be managed/budgeted for, so I wouldn’t make any huge decisions based on the fact that there will be repairs.
If you want to provide some of the information above, I'm sure the community here could chime in in a more effective way.