Rent or own… Which is best?

Whether to rent or own a Tokyo residential property is a hotly contested issue. Beacon Reports investigated the matter. We put together this simple guide to help you make a rational choice.

At one extreme, there are those that can’t afford a down payment on a mortgage. For them the choice is simple. They must rent. The choice is also simple for those to whom money is not a concern and where the psychological benefits of ownership outweigh any economic analysis. Such people should buy a property.

For this analysis we ignored the issue of capital gains because property prices are probably not going to go up. Japan has faced years of deflation and has a shrinking population. We also ignored the issue of depreciation. It is an issue, but not a key one. The typical new Japanese home, the physical structure, usually represents no more than 20% of the total purchase price of land and building.

That said, a most unusual aspect of Japan’s property market is that mortgage rates are low while rental yields are high. The current mortgage rate is about 1%. Rental yields in central Tokyo are between 4% – 6%. This means that mortgage payments, especially on smaller properties, are often significantly less than you would need to spend on rent in an equivalent rental property.

A colleague, who owns two homes, one in Tokyo and another in the U.S.A., reported that a full 75% of payments made during the early years on his Japanese mortgage went to reducing principal. On his U.S. mortgage however, virtually nothing went to paying off principal. Furthermore, he calculated that mortgage payments on his Tokyo home were only 30% of what he would have paid in rental fees for a like property.

Zoe Ward, the publisher of Japan Property Central, similarly made buy vs. rent calculations on a number of Tokyo properties. She found on smaller apartments it was possible to save on average 50% through ownership:

With Japanese interest rates so low, does it ever make sense to rent rather than buy? If you and your family need to live in a large home, the economics are more favorable if you rent. According to Seth Sulkin, President & CEO of Pacifica Capital (a real estate asset management and property development company), the price of a home per m² starts increasing from 120 m² upwards. Between 150 m² to 250 m² it then increases exponentially. In addition, he says there is little demand for larger rental units, so the rents per m² drop with increasing size. Sulkin concludes that on larger accommodations above 150 m², you save money by renting.

If you are a representative director, however, you can write-off 35% – 50% of your rental payments as a company expense. Although the deduction applies to rentals up 240 m² only and the deductible amount depends upon the space dedicated to business use, if you are a company director it probably never makes economic sense to own your own home.

2 comments to “Rent or own… Which is best?”
  1. Interesting article but it would have been more useful with some basic information about land taxes / city taxes applicable when buying in Japan. Obviously the rate will vary from city to city, but some examples of the rates and/or info of where this info can be found would have added to the article greatly. I did find the comparison table from Zoe Ward very interesting.

  2. Just to give you an idea of property taxes in Tokyo 23 wards.
    Kita Ku, 54m2 Apartment 30 years old, 4 minutes from station: 62,400JPY/year
    Minato Ku, 35m2 Apartment, 30 years old, 2 minutes from station: 69,200JPY/year
    AdachiKu, 100m2 House, 40 years old, 17minutes from station: 39,200 JPY/year

    The figure is a bit of a complex calculation of the government’s appraisal value for that property per year. In general Appraisals are low compared to market values and are generally determined by land prices, building age and structure type. A new building for example has little depreciation and therefore will boost the government’s appraisal value. Similarly will being closer to a station, commercial zoning, etc. Better just to look at some more examples!!:
    MinatoKu, 18m2 sml apartment, 8 years old, 4minutes from Toronomon station: 56,764 JPY/year.
    ShinagawaKu, 108m2 apartment, 7 years old, 5minutes from station: 187,265JPY/yr.
    ChuoKu, 53m2 apartment, 7 years old, 5minutes from Ningyocho Station: 117,330JPY/yr.
    As you can see, the newer places tend to double the tax.
    You cannot generally find these tax values on the net apart from possibly real estate adverts. I only buy foreclosures so the tax is usually quoted on the 2nd page of the 3 part set or “pdf” which is the property specification published with every foreclosed property. If you are looking at Tokyo 23 wards, you can go to my website, and even being a free member download these pdf’s yourself. My website is in english but the pdf is in Japanese. if u need clarification, etc just ask me or possibly a friend.
    Note: add the 2 figures: 固定資産税、Kotei Sanzei(property asset tax) with the 都市計画税Toshi Keikaku Zei (Town Planning Tax) to arrive at the Total tax figure for the year. if “KoteiSanzei” is not quoted, safe to use: Total tax= 5.7 * Town Planning Tax as a guide.
    hope this helps.

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