Part 1: What is Early Retirement? is here.
Laying the Foundation
I’ll say right from the start that I’m no different to anyone else. I don’t come from a rich family, I’ve never received any kind of windfall, and I’ve made more than a few financial blunders in my life. In fact, I was flat broke at age 30 having just arrived home from a two-year backpacking trip around the world. I guess that was my first taste of early-retirement!
We didn’t have much money when we came to Japan either, though we did at least have a house in the UK that we started letting in order to cover the mortgage. It wasn’t long after we started our small English school that the realisation dawned on me. What were we going to live on in retirement? And by that I mean normal retirement, from age 65. The idea of early retirement didn’t occur to me until much later! State and company pensions we had built up so far were woefully inadequate. It was time to start saving, and fast.
That’s when I made yet another financial blunder. I was convinced by a financial advisor that actively-managed mutual funds were the best way to save for retirement, and so I dutifully signed up for a 15-year plan during which I would contribute a fixed amount of EUR and USD every month. Big mistake! Not only was I tying up my savings for 15 years – with high penalties for early withdrawals – but I was paying outrageous management fees too. I found out much later that there are better ways to invest in the financial markets (discussed later), but at the time I felt it was a step in the right direction. Fortunately I committed to only about 50,000 yen per month (depending on exchange rates), and the funds are currently worth more than I’ve put into them. But I shudder to think how much better they would have performed in low-cost index funds.
We soon realised that we still weren’t saving enough for normal retirement, and our low income and poor spending habits weren’t allowing us to save much more. I started reading books about investing, including the excellent “Cashflow Quadrant” by Robert Kiyosaki (of “Rich Dad, Poor Dad” fame). This book inspired me to start investing in property. So we sold our house in the UK for a modest profit, and started to look for investment property in Hokkaido.
At first glance, buying property in Japan seems like a bad idea. On top of the earthquake risks, poor construction standards, inadequate insulation, property taxes, and everything else, the value of the building only goes down! The land value might go up, if you’re lucky, but the building itself is doomed for depreciation. On the flip side, second-hand property is cheap, particularly shabby ones that most Japanese wouldn’t touch with a barge pole. It’s quite common for an old house on a plot of land to be worth less than an empty piece of land in the same area, because it costs money to pull the old house down.
Anyway, it soon became apparent that the best city near us for investment property was Sapporo, and the best yields were on blocks of small-size apartments. So we focused on blocks containing between four and eight units of size 1R to 1LDK. Second-hand blocks – about 15 years old – could be found that returned a yield of 14% or more when fully occupied, and they weren’t excessively expensive either. We were lucky to find a good local estate agent who patiently answered all our questions and showed us many properties for sale. His most important advice was to buy one close to a subway station, if possible.
After a while, we realised that second-hand properties weren’t so attractive after all, due to their poor construction and old-fashioned design. Also, by the time we retired the blocks would be really old (by Japanese standards), probably making them difficult to let. And on top of everything, the banks were much more willing to lend us money on newer apartments, because they considered them to be a safer investment.
So we switched our focus to new apartments, and soon found ourselves the proud owners of a modern, well-designed block of eight 1DK units, less than five minutes from a subway station. We paid almost 25% of the purchase costs ourselves, and took out a 20-year mortgage for the remainder. The yield was almost 10%, and we would break even on the monthly expenses (including the huge mortgage payment) if the occupancy was 75% or more. At 100% occupancy, which is virtually guaranteed at first, we would receive a reasonable amount of passive income.
And so, at last, our future was looking more secure. The school income was steadily increasing and we now had some apartment income too. We were starting to save a bit more each month, and our fears of living a miserable retirement were finally receding. However, it wasn't until several years later that we started thinking about early retirement, so in the next article I’ll write about that.