Who's Working Harder – You or Your Money?

By Hirokazu Mukai, CEO, Minato Asset Management

To maximize cash-flow, you have two choices, one is to work harder at your office. The other is to make your money work for you and dedicate more of your time to your own concerns. And if you’re thinking about making an investment, the smart money is in real estate. Since Japanese interest rates are so low, and the Japanese currency is so weak against other currencies such as the Euro, or the Pound, you’ll find Japanese real estate a very attractive option.

Recently, a Chinese lady told me that she is surprised at the prices of Tokyo restaurants. Initially I was rather taken aback given that the price of dumplings in Japan is well known to be higher than over in China, until I realized she was talking about the property and not the menu. According to her, the selling price of a restaurant in Tokyo is sometimes even cheaper than in Beijing. Although Japanese real estate bottomed out, it is still attractive compared to other countries, especially given the weakness of the yen.

Indeed, investment in the Japanese real estate market is uniquely profitable. One client told me “the Australian economy has been good for a long time; the real estate market went up substantially and rent in central areas is very high. The interest rate on borrowing is around 7% and return is 5%, so negative yield is normal.” Doesn’t sound like a good place to invest to me.

A House in Japan

And if you are worried about tax, we have some good news for you as well. Of course, if you work harder, make money and receive a higher salary, you have to pay higher tax on the total income. However, if you invest your money wisely together with borrowing money from a bank if possible, you can offset painful income tax deductions. Since 1 April 2007 the tax laws in Japan have changed so that residual value (amounting to 10% of the purchase price) will no longer be considered in working out the depreciation of an asset.

One of our clients bought a JPY50 million wooden apartment (pictured above) that was built nearly 19 years ago. It generates a JPY4.5 million cash flow every year, that is supplementary to his salary. The apartment has 10 rooms and occupancy is high. We negotiated a price breakdown with the seller to maximize the amount spent on the structure part compared with the land part in order to get a higher depreciation on the wooden building. (Since the seller pays a 5% consumption tax on the building part, if they are a corporation, they want to minimize the wooden structure part to lower their consumption tax.)

The seller accepted our breakdown of 20 million for the land and 30 million for the wooden structure. In the end, cash flow from this apartment is nontaxable since the depreciation period is roughly 6 years, i.e. you won’t be taxed during this period. If the buyer had made the transaction after 1 April 2007 the result would have been even more favorable so now is the time to invest.

(*Please keep in mind we are not qualified tax advisers, so seek advice from your international tax adviser or Japanese tax adviser as well. Different countries are subject to different regulations so the above example may not apply in all situations. We are very happy to help you on all aspects of real estate investment decisions.)

Minato Asset Management Co

Hirokazu Mukai