Depreciation in real estate. Questions.

[dirtybob]

Hey all, been lurking a reading for a while and thought i would pop in with a question about real estate in japan.

I've read from many different sources that the depreciation in japan is pretty bad when it comes to buying a home/condo. How exactly does that work?

You buy say a 4 unit building for 4,500,000 yen, and the next year the building worth less, lets say 4,300,000 yen. Does that mean the rent also goes down per unit? Those numbers are just off the wall i know, just made them up for an example.

Im having trouble with that whole concept. Are remodels the key to keep the value of the property up? It just seems that with the loss of value in buildings that every place would be vacant. I know thats not the case, im just having trouble wrapping my mind around it.

Does the rent for the units stay the same for X amount of years until the place is run down and then rebuilt/remodeled?

any ideas?

DB

[MMM]

From what I understand from book titled "Saying Yes to Japan" contractors have basically lobbied politicians into passing laws that charge taxes for buying a used home. As a result 5 out of 6 home purchases in Japan are of new homes. Old homes are demolished and new ones are built.

I don't know that the value of a building has anything to with how much renter's pay to live there. Have you ever heard of rent going down?

[dirtybob]

Nope, never heard about that. Its one of the reasons i found it odd. So is it safe to assume in japan taxes are based on age rather than value of the property?

[MMM]

I can't help you with that one. Hopefully someone else will know.

[Nyororin]

We own a condo, so I might be able to answer this.

In general, houses in Japan are considered consumable goods... Not investment like in other places. While the value of the land itself may rise, the value of the home decreases as time passes. It`s much more similar to vehicles than houses if you want to compare it to something outside of Japan. A "used" home is cheaper than a "new" home, just as a used car is cheaper than a new one. The span is longer, and at a certain point it sort of bottoms out (or in some cases may actually rise a bit at the end for a condo. Many have contracts to rebuild after 25 years or more - if you`re in just before the rebuild you can possibly get a new condo for bargain prices.)

To move on to your next question about the "4,500,000 4 unit building". First, you`ll NEVER in a million years find a new 4 unit building for that price... But I`ll ignore that. I`m assuming you mean purchasing the entire building, and not a single unit.

The rent will not go change even with depreciation of the building`s value. That is resale value, not the sort of thing rents are calculated on. For anything under 10 or 15 years old, rent is based (in order of priority) on location, size of the room, type of building, and then the age of the building. When you get into the 20+ year range, yes, rents may go down... But not for current residents. They are usually lowered when they move out to attract new tenants to a less appealing property. I have NEVER heard of rent going down while there was a tenant. They agreed on the original amount, and any wear and tear on the room after they moved in is their doing...
Remodeling will raise the appeal a bit and get new tenants, but aren`t all that likely to raise the rental value - just sustain it longer.

The big thing is, you`re talking about *renting*, and how that connects to resale value. It doesn`t. Rental value and resale value are pretty distant. If I am renting a room, I am not at all concerned about how much the property would cost if sold - why? Because it`s not being sold. I couldn`t buy it and live there even if I WANTED to. Renting and ownership are drastically different.

To move on to ownership. When you buy a condo, you buy the unit (percentage of the building) and a percentage of the land the building stands on. Yearly taxes are calculated based upon the estimated resale value of the entire building combined with the value of the land it is standing on. There is no calculation for individual units, so remodeling, etc, makes no difference. You will still pay the however many percent your unit takes of the entire building. (Hallways, public spaces in the building are split according to how much of the living space your unit takes. If your unit uses 15% of the private space in the building, you`re responsible for the taxes on 15% of the public areas.)

The amount you pay each month for living in a purchased condo is not "rent", so I don`t think it`s what you meant... But there are some parts that do depend upon the age of the building. The biggest thing you pay is the actually loan, which includes sales tax, etc. That will never change no matter what happens to the value of the building. You also pay for building maintenance, which as the building itself ages will rise. More maintenance required, more money needed. The last thing you pay for is "construction". Condos are required by law to save up enough money to rebuild\remodel after so many years, or in the case of a natural disaster. As building costs do not equal sale value, this isn`t nearly as big of a cost as it may seem at first. Depending on how the plan is set up, it can also increase as the age of the building and the value of the land increases.

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Japan has a history of tearing down old houses and building new. There are cultural and religious reasons for this, which matter much more than any tax incentive. (Which, by the way, MMM - you`re not quite right. There are no additional taxes for used properties. There are, however, tax incentives for new buildings. The tax returned to you is a higher percentage, and they waive part of the regular sales tax, if I recall correctly. There is no "special tax" on used property. You also can`t get a loan from government for a used home, but fewer people are doing that anyway these days as they only give you less than half of the actual cost and it ends up being easier - if a tad more expensive - to just go through a bank for the total amount.)
Once you have had a relative die and a butsudan set up in your home, it is pretty much taboo to sell the home. The only way to bring the spirits of the relatives with you in a move is to destroy the house as you are not supposed to disturb the butsudan as long as the house it stands in exists. Even if someone doesn`t believe this, most people don`t feel comfortable living in a "used" home. So the houses are torn down and new houses built to suit the next family. Properties don`t stay empty. They`re torn down and something new put in their place.

[MMM]

Thanks for clearing that up Nyororin...that makes more sense. (I read that book a couple years ago, so my memory was a bit foggy, it seems.)

[Nyororin]

Originally Posted by MMM

Thanks for clearing that up Nyororin...that makes more sense. (I read that book a couple years ago, so my memory was a bit foggy, it seems.)

Actually, you`re probably right about what the book said. That doesn`t mean it`s exactly accurate though. Too many people seem to interpret "lack of tax breaks" as "additional taxes". In the end it looks like the same thing, after all. The motivation is different though. With a used house, the value is low from being "used" (which is linked to the social taboo aspect of it) - if someone is planning to buy a used home, they won`t have to pay all that much to get one.
However, as it is part of the culture to shun used homes and only buy new, even with the (sometime painfully) higher costs, a family will hold out on buying until they can afford a new home. Obviously, this isn`t good for the families, the builders of new homes, and the economy in general (people don`t spend when they`re trying to save up for a down payment.)
So the government offers subsidies to people who are buying a new home. You get so much of the loan taxes back each year, along with other tax breaks. Not offering these breaks on used homes helps to stop speculation - as often when someone buys a used home, they do so for the land - not to actually live there. When the value of the area goes up, they tear down the old house and cash in with a new home. Giving those sort of people and companies tax breaks for buying used just wouldn`t be right.
Even in the case of an individual buying the home to live in, used home prices are low enough that they don`t really *need* a break.

[dirtybob]

Nyororin, thank you very much for your post. It cleared up a few questions i had. I was just unclear on the way real estate tended to work in japan. The used car analogy cleared it up for me.

DB

[Shouganai]

Japan has not recognise depreciation as generously as a tax deduction as other countries, also in another sense, if you are buying properties, it penalises you since you are required to pay maintenance or management fees, which are very steep. This is the reason why you don't buy apartments. Land taxes in Japan are very low, so best to get a house & land. See Foreclosed Property.

By implication it makes a lot of sense to buy cheaper property rather than premium new properties. I recommend buying 12yo house & lots through foreclosed tender route because they are still able to rent, and you will get your money back in 4 years. Very good yields, few bidders. You just need a strategy, and a few key pieces of information on the types of property to buy, and which to avoid.