All Forum Posts by: Eric Sato

My question uses details about real estate investment in Japan, but I am looking for general advice based on, hopefully consistent, basic principles of investing in real estate.

I have mortgages on three long term rental properties in Japan. Each property is a single room single bathroom, aka a 1k (1 = one room, and k = kitchen unit attached to room). Each property was around 200k USD based on current exchange rate. These are units in a larger “mansion” (what Japan calls concrete built apartments, and the most common type of living unit in metropolitan areas).

The mortgage rate on each is fixed 30 year at 1.76% (this is actually high for Japan. Personal mortgages are under 1%).

I paid zero down for each property, which is common for this type of investment due to low rates.

Japan bespoke dynamics-

- Properties do not appreciate typically, ever. There are some exceptions but RE in Japan is not an appreciation game (no flipping, no selling for 2x after 10 years). 

- Cash flow is negative for zero down deals, but barely.

- RE investment in Japan like this is primarily for tax benefits and loan pay down, with selling equity in the property at year 10 or 15.

- There is no such thing (to my knowledge) as cash out refinancing. This is because 

1. Properties do not appreciate and these types of units are in large apartment buildings, thus not subject to being able to rehab for increased value per unit. Even SFH do not appreciate over time (Japanese people love brand new things)...

2. Rents are controlled. It is very very difficult to raise rents in Japan in these types of Mansion/Apartment units (SFH rents can be adjusted between tenants of course... but can't hike up prices on current tenants).

3. Loans can ONLY (typically) be taken out against your W2 earnings, not the value of owned assets. This makes things like BRRR not possible. The only way to grow your portfolio is in W2 based earning potential. (combination of can't increase value in a property through rehab generally, and can't refinance based on property value).

Okay So

Now all of that being said, because I can purchase properties with zero down at 1.7-1.8 rates, with near 97-98% occupancy rates, with only about -100 USD per month in negative cash flow (could be net positive if I do some money down), is there any reason to NOT buy more as long as I can continue to get loans. This is considering

- I have JP income to offset with the standard tax benefits (depreciation, expenses, mortgage interest) 

- Loan pay down for selling my equity in properties at year 10-15. (One strategy is to sell off a few properties to pay off the remaining principle on other properties to create all net new cash flow).

Concerns

One concern is that because loan potential is based on my W2, I don't want to throw all my eggs in one basket. E.g. I am also looking at potentially going the STR route or MTR route on full buildings. But I am ultimately capped on the number of loan financed properties / total amounts. At one point I won't get approved for more loans due to income no longer supporting total value of all loans (typically 8x-10x my yearly income).

I would love to crowd source some opinions / thoughts from some more seasoned professionals here. Please note, I do not own any US based real estate yet =( (I have other forum posts on that topic). 

Quote from @Bill B.:

The only downside is because it’s not a primary first, you will never qualify for 100% tax free capital gains. What I mean is if you rent it out for 2 years and then live there for 8 years before selling. 20% of the appreciation would still be taxed. Not a huge deal, but might wipe out any gains you get by renting it out for the 2 years. (I would expect those 2 years to be a loss as well.) For this to be a good deal you have to expect big price run ups and interest rates to stay high. I’m not saying to not do it. I’m saying don’t do it expecting a financial win. Do it if you find your DREAM home. 

I was going to add you might be able to furnish it with your dream furnishings and expense those as well, but you probably won’t have any taxable income at the time unless you’re paying US taxes on your foreign income. 

 @Bill B. thank you very much! Yes you are correct, my CPA does amazing wonders in reducing my US taxable income. US does try to tax everything I own even though its JPY based income… but in the end the magic if international Tax tricks always comes through, and as such, I wouldn’t have much US taxable income to offset at all. 

Thank you as well @Ryan Thomson for the clarification. 

Maybe my best course of action is as follows, “don’t mix personal and investment (for now), until I am US based (US W2) and ready to live there.”

1. I pursue my personal (owner occupied) residence after I move there and can actually live in it for the 2 years (2 years? Or basically make sure I spread across 2 tax years?), before potentially moving out and changing it to LTR/MTR. 

2. If I want to purchase something now to “get in the market as soon as possible”, I treat it strictly as an investment property, and go straight for a MTR or LTR. 

I am okay with taking cash flow losses month on month/year on year, to let appreciation do its thing. 

It does however seem though that if I want to buy a property now, for lending, I would most likely need:

1. DSCR loan (not too familiar with these, but my instinct is "I'm scared, cuz its a higher rate! Oh no!"

2. Nonconventional financing (private lender, “hey mom, can I have 200k?”)

3. Find a lender that WOULD be open to a conventional loan even if I don’t have a US W2, perhaps if I show them my JP statements and tax returns, and screenshot of Bank of America and fidelity balance? 

Quote from @Ryan Thomson:

@Eric Sato I think its a great idea to grab one now so you can have something more affordable when you move here in the future. Cashflowing in Colorado Springs will be tough, but there are a couple strategies that have potential to make that work. 

 Hi @Ryan Thomson. Thanks for the information. Is general cash flow investing strategies not in a great spot with Col Springs atm in general, or more specifically due to my situation? (If you don’t mind me asking). I saw your DM as well. Will get back to you shortly! 

Also, when you say "great idea to grab one now so you can have something more affordable when you move here", is this generally because prices and or rates will continue to make total PITI increase over the next year? Or something else.

Quote from @Bonnie Low:

The option of using it as an STR or MTR is a solid plan until you move there, but as others have said, the financing is what'll trip you up if you're looking to get in with a low down payment as an owner-occupied property.

 Yeah that is the impressions I am getting! 

I will look into potentially furnishing it and living in it personally for a few weeks, then doing the STR/MTR when I go back to Japan. Then move in again once I am back in the USA. Hopefully that could allow me to get lending / financing as a private/personal/owner occupied property.

Quote from @Ben Einspahr:

@Eric Sato Love the idea and thinking outside the box. You best option would be 2nd home loan. Must stay at home minimum 14 days out of the year. Would be able to put as low as 10% down. But to be frank, when it comes to the 14 days the right hand does not speak to the left... if that makes sense.
Regarding MTR vs. STR. MTR would be your best bet. STR rules and regs can be a PIA to navigate. Here is a link to the rules and regs to dive into it.

Oh, interesting. So if I am reading this correctly. 
- purchase the property, furnish it
- move in, and live there personally for at least 14 days (out of the year)
- while I am not there, SRT or MTR it out
- perhaps even travel back to USA and live in it again while I am there on vacation (I do travel to USA quite a bit)
- then when I do finally move back 1-2 years from now, finally do the full move in

I will continue to read further into things. Thanks for the information, and the kind words! 

Thanks for the input, @Hamp Lee III. I was afraid of that. I will see what a lender can do, but if needs be, I will just wait until I know I can move in before purchasing for owner-occupied property. 

Quote from @V.G Jason:

Would you buy it as a primary or as an investment?

 Goal is to live in it as a primary. But, I want to potentially buy it before I am actually able to live in it, and rent it out in the meantime until I personally can move in. 

I currently live in Japan, but am a US citizen and am planning to move back to the United States (Colorado Springs area) after 18+ years living abroad (I also have a thread about buying rental properties as an investment). At one point I will be looking to buy my own personal home with intent to live in that home about 1->2 years from now. 

Is there a smart way to potentially purchase a home now, rent it out (MTR or STR, or even perhaps fixed term 2year LTR), and then move into it myself with my family once we are back in the USA and ready to move in (we intend to live with family at first).

My thought process is

1. Build up my personal equity in the house starting ASAP

2. Make some potential cash flow on the property in the meantime

3. If in the end we do not end up wanting to move in, we keep it as a rental property

4. This first home would most likely not be our "long term" home, as I am thinking of some sort of house hack even. 

What I really do not understand is how would the loans work out, if I do intend for it to be a personal dwelling, but at first I would rent it out... Then what about potential refinancing, and any other tax benefits that come from actions taken on a Personal Home. 

Thank you in advance for any advice and or resources. 

Quote from @Caroline Gerardo:

Every state the tax and insurance may vary. Insurance in flood/hurricane/fire zone costs double. Use 1.25 % for tax and 4% for insurance as a starting point and add the HOA fees if they exist.

Rents advertised in listing might be incorrect. Go look for rentals available in the city/area to get a range.

 Thank you once again! Very helpful. 

@Caroline Gerardo thank you for this. I do love working with numbers. I know BP has various calculators that can help, but I do need to get my general knowledge up and build the ability to do these basic math principles on the spot in my head. 

I know there are basic PITI calculators out there, but I do want to learn the ins and outs of how much tax and insurance costs are in the different circumstances / situations.