← BiggerPockets Money Podcast
Loading summary
Transcript85 lines
- [00:00]
A
What if I told you that you could double your investing power without getting a raise, changing careers, or winning the lottery? Today, we're diving into Geo Arbitrage, the strategy that's helping remote workers live like millionaires on middle class salaries. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me, as always, is my stage saying stateside co host, Scott Trench.
- [00:29]
B
That's right, Mindy. For me, the United States.
- [00:32]
C
See that?
- [00:33]
B
Oh, yeah, yeah, you got it. We are so excited to be joined again by Daniel Mills today. Daniel joined us on the podcast a few years ago to tell his FI story, and we are so excited to be joined with him once again to talk about the power of geo arbitrage. Daniel, welcome back to Pickerpockets Money.
- [00:47]
C
Thank you so much for having me, guys. I'm really excited to be back on and hope hoping to see you guys maybe next year when I come out to the U.S. ooh, yes, absolutely.
- [00:57]
B
And thank you for joining us so early. Your time as well today.
- [01:01]
C
Not too bad. It's about eight in the morning here, so.
- [01:03]
A
Oh, nice. Konnichiwa. That's the end of my Japanese konnichiwa.
- [01:08]
C
Ohayo gozaimasu is the morning. But I guess it's konichiwa.
- [01:11]
A
Oh, oh, is that good night? I thought that was hello.
- [01:14]
C
No, you said, yeah, good afternoon.
- [01:16]
A
Clearly my Japanese needs a little work. So, Daniel, when you joined us before, way back in 2021, you weren't quite. Where are you on your journey now? Do you consider yourself financially independent?
- [01:29]
C
Yes, I do. Especially here in Japan. Maybe I can kind of show where my portfolio is now, and then we can kind of compare it to what we had before or what I had when I came in the first time. My wife and I do a net worth update every month. We put our numbers in a shared spreadsheet and sometimes we have a little money date about it. And so these are my sort of updated numbers. And I think the big headlines or the difference between what I have now and what I have when I first came on the podcast is that it's a simplified portfolio and it's also has a lot less leverage. Basically, I have about a $2.1 million net worth right now. 3% or so of that is in cash. I group my equities, my bonds, and cryptocurrency kind of together. It's about 44% of my portfolio. Just so you don't get upset, Mindy, my cryptocurrency is still only 1% of my total net worth used to be.
- [02:25]
B
Point one.
- [02:27]
C
Yeah. So I have a paid off condominium that I'm sitting in right now in Japan. That's about 8% or 9% of my net worth. And then I have a portfolio of residential real estate, mostly single family houses. There's one duplex in there that's all in the US in Alabama, Idaho and Tennessee. And now four of the 10 properties are paid off. Okay, so I'm almost at half of the portfolio paid off. And then I also include one of my pensions from my job. And the reason I do that is that there's several pensions that I'll probably get when I retire, but this one in particular is specific for tenured professors at my university. So we get a million yen a year, which currently is about $7,000 every year gets added to this pension. And the day I leave my job, I get it all in cash. And so I sort of consider that as part of my net worth because it's so easy to calculate, of course I'll have to pay taxes on it. So that's basically how everything is, is divided. Now the big difference from before is that before I had a couple of commercial real estate properties that I owned with partners. There was a 12 plex and we, we also touched on a 20 duplex deal I did in Huntsville, Alabama, which was the bane of my existence then and pretty much all the way until I sold it. And then finally I also had a number of syndication investments. So during COVID when all the prices were going up, I was able to sell the commercial real estate. I sold the syndication investments. Well, I didn't sell, but the sponsors did. I did really well with it and that's what I used to pay off most of my portfolio and also to get more of an even split between real estate and my equities. So that's kind of where I'm standing now just to go through cash flow really quick, the real estate portfolio, after all my expenses, including some buffer there, about 15% for variables, I think I'm pulling in about. Well, I have my sheet right here, so it's about $45,000 a year, of course, pre tax, but after all the expenses and with the portfolio of equities that I have at the 4% rule, that's about $36,000 a year. So I think I'm right around 84,000, including some of my cash that's invested as well at lower interest rates. So here in Japan that's living like a king. And I can Go into a little bit more about that and what the expenses are like here.
- [05:10]
B
Yeah, I think that'd be great. And I think people, at least I would imagine that Japan is very expensive. Right. You know, you hear about that when people travel there, how expensive it is. Why is it so, so inexpensive? Think there's a myth about how expensive it is.
- [05:21]
C
I think that myth started during the bubble years in Japan, which is what they used to call it in the 80s and the 90s and you know, people were living large at that time and things were really expensive. I moved here in 2006 and even this is after the bubble burst and you know, especially real estate prices had really gone down. Wages have been stagnant. There was, has been no inflation the most part until just recently for all of those years. So this post bubble era is nothing like it was in the 80s and 90s. It's always been cheap probably for the last 20 years. But I think the myth still persists. So if you look at most figures when they compare the countries, Japan is usually seen as about 50% cheaper in general than, than the U.S. of course there's exceptions to that. When we're looking at places in Tokyo, you know, there's some really expensive places. I think part of that is that there are real lower prices on certain things definitely, like housing. Also, it's that there's more variability in what you can choose. So for example, I don't own a car, but I sometimes walk by a dealership and you can find tons of brand new cars for under $10,000 here. And the reason is that they sell really small cars with very small engines that are not legal in the US but they are in Japan near my university, so I'm a university professor. I also walk by the real estate office and there are apartments for students that are $250 a month, $300 a month. This is a very small room that is okay in Japan. You know, people are used to living sort of a smaller lifestyle. And I actually think that's part of the beauty of it, especially in many places abroad, is that while maybe you don't get as big of a house or some of the comforts that you normally have, this sort of inconvenience actually makes your life better. Right. And I think people are discovering that more and more. But you know, it's something to think about. So we do have more variation. A big one though is food and eating out. There's no tipping here in Japan. It's so much cheaper of an experience to go out and then finally, what I'll kind of say about that is that I think tourists have a different experience, of course, because they're in certain accommodations, certain areas that are made for tourists that are going to be more expensive, restaurants that cater to foreigners, where they're going to be able to speak English, those type of things. But when you're actually living here, I think the experience for most people is much cheaper than the US So I'm.
- [08:04]
B
Hearing it's walkable or at least you don't need a car for much of what you want. So transportation costs are tiny fraction of what they are in the U.S. housing is tiny fraction of the cost in the U.S. but it may be similar at a price per square footage basis. It's just that it's so common to live in very small square footage homes or apartments. And then how about healthcare?
- [08:23]
C
I mean, I think like the rest of the world, except for the US we have a form of socialized health care. Personally, I like a lot, I think it works very well in Japan and there's going to be some caveats to this, but basically it's, you pay a, it's, it's usually paid out in quarterly payments based on your last year's income. So there's a percentage, it's different depending on where you live. So the highest percentage you may pay is when you live in Tokyo. And I believe that even then it's capped for your, your premiums. Not really, I guess your premiums to the government of under $10,000 a year, that's for like the highest salary. I may be a little bit wrong on that, but it's different for different places, depending on what. And then in Japan, it's not like the UK NHS where everything is covered after that and everything is free. You still pay a 30% copay when you go for health services, unless you're a child, where I believe I don't have kids, but I believe that it's capped at 500 yen per treatment, which is like $3 for children. And then for seniors there's also a cap. It's just really reasonable, like a typical doctor's visit. If I went in and I wasn't feeling well, it's going to be less than $10 with my insurance to go in. And the medicine I get is going to be about $10 for two months. You know, I love the system. I know people that are young and super healthy that are upset about it because they don't like to spend the money every month for something they don't see that they need. But this covers your medical insurance and your long term care. And so if you're paying into the system over a number of years, I think it's a, it's a great deal. And there's no wait times or any of these things, or at least I haven't experienced anything like that. And then final thing I'll say is there's also a cap on the amount you'll pay every month. If you had a serious disease, let's say you had cancer or something. The cap is about $500 a month, so it will never go above that even if the expenses really go through the roof.
- [10:30]
A
How easy is it to move to Japan? Not easy because I just paid $16 for 10 days of, of meds, which is still like nothing that was with discount cards and it would have been like way more expensive. All right, we are going to take a quick ad break but more from Daniel when we're back.
- [10:46]
B
Finances can be messy and confusing and it's a lot of work for many of us just to get to the starting point in personal finance, which is understanding what you've got and where your money's going. That's why Virginia, my wife and I use Monarch Money as our personal financial command center for our bank accounts, credit cards, investment portfolio and as our budgeting and spending tracker. Monarch automates everything. It's all linked and every transaction is automatically categorized into each category of spending. In just a few minutes a month, I have a complete picture of where every dollar is being spent and I have a real time net worth statement. I've recommended and personally used Monarch Money for years. I am thrilled and proud to be sponsored by and partnered with Monarch Money here at Bigger Pockets Money. Bigger Pockets money listener get 50% off their first year, which is usually 99 bucks with the code pockets@monimalmoney.com that's monarchmoney.com with the code Pockets. When I evaluate debt funds, I look for things like first position loans, personal guarantees, deep experience by the fund operator, low fund leverage, fast liquidity and consistent returns. These are some of the reasons why I'm excited to partner with Pine Financial Group. Their Fund 6 offers investors exposure to real estate credit, largely for construction and rehab, largely here in Colorado. With loans originated by an experienced originator. With over $1 billion in origination volume, 75% of their borrowers have been repeat customers over 17 years. They offer investors an 8% preferred return paid monthly and a 7030 LP GP split of everything over 10% paid annually. The lockup period is nine months with liquidity available within 90 days. After that nine month commitment, the fund is open to accredited investors only. The fund's minimum investment is typically $100,000, but Pine Financial is able to reduce that minimum for some investors and have agreed to do so for Biggerpockets Money listeners to a minimum of $25,000. Full disclosure, I am personally invested in this fund through my self directed ira. And of course, Pine Financial is sponsoring this message and our podcast. If you'd like to invest or check out their Prospectus, go to biggerpocketsmoney.com pine today. That's biggerpocketsmoney.com pine Please note that returns are not guaranteed and may vary based on fund performance. Last year we went on a trip to Rhode island and stayed at a hotel, but we felt like we couldn't stretch out and be comfortable. So for our next vacation we'd like to experience unique eats, but still cook a few meals of our own and.
- [13:17]
C
Have our own space.
- [13:18]
B
Since we need more than what a hotel can offer, we're planning on staying in an Airbnb.
- [13:23]
C
But while we're away, maybe we can.
- [13:25]
B
Host our own own home on Airbnb, Airbnb's co host network. It's easier than ever. You can hire a local co host to do the work for you and take care of your guests all while you're away. Find a co host@airbnb.com host all right, thanks for sticking with us.
- [13:44]
A
This Japan thing sounds pretty interesting. You just said it's not easy to move to Japan. How does one move to Japan?
- [13:50]
C
So the easy answer is get married to a Japanese person. I think that's probably the easiest way you can do it.
- [13:56]
A
Well, that might have worked for you, but Scott and I are already married to other people.
- [14:01]
C
So yeah, I don't. They should have a service though, like some sort of.
- [14:04]
A
I think that's pronounced illegal.
- [14:08]
C
Japan is notoriously, I mean, you know, since the 1800s or before is not very open to immigration. Right. It's been like that for a long time. Part of it is that, you know, it's a very unique culture and I think currently there's only about 3% non Japanese living in Japan at this time time. The problem that we have in Japan is that there is what they call, I think, the demographic cliff. So the population is getting older, people are not having babies and so the population is shrinking. And so a lot of these things I'm talking about, like health care that are so great. How is this going to survive in the future if there's not young people working and paying for it. And this is the big problem for Japan. So slowly over the last couple of years, especially since COVID a lot of things changed. I think I may have said on my first podcast visit that Japan is surprisingly analog. Everything, especially before COVID was done by paper. You have a little name seal that you have to put on any document. It's sort of a nightmare as a foreigner because you have to read everything in Japanese. When Covid happened, there was almost a digital revolution. We started having some online classes. Forms could be filled online. So a lot of change like that. And then they slowly started changing the immigration rules. So there was a number of visas that were introduced, and one of the most popular was a business manager visa. And the way that worked, I don't know all the details exactly, but with a $20,000 investment in Japan, and a lot of people did this with real estate, you could make an investment. You could put in an application that I'm going to manage real estate. This is my plan. And it wasn't too difficult to get a visa to stay here for a year or up to three years to manage your real estate or your business, whatever you were creating. And we may talk a little bit more about this, this later, but all over the world, you're starting to see a bit of a backlash, I think, against immigrants coming into a lot of countries. And Japan is no different. And I think that what really set it off here was the tourism. So tourism exploded, and so it became really visual if you live in Kyoto or Tokyo or something like that, that it's just crowded all the time, full of non Japanese. And so there was a backlash. So several months ago, there was an election where the Japan First Party won a lot of seats, and they very quickly started rolling back a lot of this, these immigration policies. So now you need a $300,000 investment or $200,000 investment to get a business manager visa. They're putting a lot of other restrictions on it. So it is difficult to come here, especially for, like, if you're fire and you just want to live here. But there are other ways. One of the best ones is to go to language school. You can get a student visa pretty easily here. Another one is if you don't mind working full time and teaching English. There are a lot of jobs out here for. For English teachers. If you're young enough, there's even something called the JET program, which is done by the. The Japanese government that can bring you out here to Teach in the public school system. And so there, there are some other ways to do it, but it definitely is not like one of these countries like Spain or Portugal that have early retiree visas and these type of things. But it is still possible.
- [17:35]
B
We talked about this earlier. You had very low housing costs paid off house, you have very low transportation costs, you have no health care costs. Eating out is cheap. This sounds like a wonderful place to retire. What do you spend your money on?
- [17:47]
C
I think like many people, like Mindy has talked about many times, it's hard to spend money when you've been saving it for so long. Right. So that's part of it. But what my wife and I, I think we spend our money on is things like travel and food because we're more about those experiences. We do have a paid off condo now, so our housing is even lower than it was before. It's, it's probably about $150 a month for homeowners and insurance and taxes or something like that. But I think we're also still, while we were fire in Japan, we're not quite fire in other parts of the world since we still love our jobs and have decided to continue to work for at least a while longer. We are still saving and investing at this point because we want to have optionality in retirement. And I think that's a really important thing if people do decide to geo arbitrage and kind of move to another country. Because while it can be great, you also could have, I don't know, it's not the middle class trap, but like the geo arbitrage trap, right? Like you could save and invest enough money to live great in Thailand. But what happens if you ever have to move home and then you're older and maybe don't have a way to make as much money? So in our cases, while we're double what we need or even more than that to live a great life here in Japan, we're still moving forward a little bit with our investments so that we can get to a point that we could move back to the US if that became an option for us.
- [19:21]
B
Okay, the second part of my question. I believe that the Japanese economy was pretty stagnant for a while. Right. I think I looked at the index, the Nikkei, is that how you pronounce it?
- [19:31]
C
Nikkei? Yeah.
- [19:32]
B
In 1989, it famously peaked at 35,000 and it didn't get back to 35,000 until 2024, 2023, it went down, down, down, down, down. Finally it's going back up but you've been, I imagine, investing, or at least participating to some degree in the US economy while building towards your financial independence. So has that been as helpful as it would seem to a layman in your journey or how would you describe that?
- [19:57]
C
Yeah, definitely. I mean, I think that, you know, obviously the US economy during that time period has done fantastic and I am in my index funds. I'm mostly skewed towards US equities. I do have some international and some emerging market exposure. And then also all of my real estate that I own, besides my house is in the US and you know, I talked about this, I think on my first podcast. But the Japanese real estate market is unique, you know, because of some of these demographic issues. But also culturally, Japanese people tend to prefer new and there's very few zoning laws that you have in Japan. So it's easy to build new properties. Right. And so for the most part, land can keep value and it can increase in value, especially in central Tokyo. Tokyo. But for the most part, the structure value just decreases over time. And if you own something that has rents, those rents could go down over time because people just say, well, there's a new apartment right down the street, why am I going to stay in the older one? Right? Because we can easily build it. And that's one of the reasons that it keeps costs down. So investing in U.S. property, where I'm not only getting good yields from my properties, but also the equity buildup and then having the access to do cash out refinances, which you can't do in Japan, has really helped. So, you know, there's a saying in, in Japan that Japanese people say that the ultimate life for most people is an American house, a Japanese wife and Chinese food. I think, you know, you can kind of get the best of both worlds. Even if you're not living in that American house, you can build equity that you wouldn't build here in Japan. So I have some friends that are all Japan, right. Especially if you're a non American citizen and you have more access to the market. And we'll talk about that, I guess when we talk about taxes. But they may have all their money here, they own a house here, maybe they have rental properties here, but they're not participating in that equity buildup and stuff that we had in the U.S. i think. So that's really helped me to build wealth. And now as somebody who's kind of collecting on it, I feel like I'm doing a much better than if I, I was only in the Japanese market.
- [22:11]
A
We know that you are based in Japan and I've got a friend who's currently in Portugal. I've got two more friends who are moving to Portugal in the next couple of weeks. You also mention Spain as being like Portugal and Spain being more friendly to immigrants and Japan is less friendly to immigrants. Do you have any other tips for countries that are more friendly to immigrants? Because Japan sounds awesome, but I think I'm just going to be able to come visit. I don't think I'm going to be able to live there.
- [22:43]
C
Yeah, I would say when we talk about friendly, I, I'm mainly talking about the visas.
- [22:48]
A
Yes, that's what I mean.
- [22:49]
C
Of course Japanese people are, are very friendly. But yeah, the visas are difficult to go. A lot of the same anti immigrant. Anti. What's the word? Like tourism. Things are going on in Spain and Portugal. I don't know if you've seen on the news, but there's in Spain, like in Barcelona, they're like spraying tourists with water as they come into the area because they're not very happy with the rising prices and the overcrowding. So I think this is going on all over the place. So I'll kind of say two things about that. First of all, if you're looking for a place, my number one advice is first start with the culture. Because none of the money and visa stuff is going to matter if you can't fit into the culture. For example, I, I have some friends who are actually in the fi community, which you probably know, who came and visited Japan. And they are very free spirits. And when they were here, they were like, we don't really like it. You know, there's too many rules. People are telling us what to do. I'll let you guess later on who it is. It just didn't fit with them. Right. So they would never fit in here. They fit in much better in like, say, Latin America, where there's less of that. When you ask elderly people in Japan what's one of their main concerns about foreigners moving to Japan, the number one concern that you hear is they don't know how to separate their garbage correctly. So little things like this are so important. Important in Japan. And so you need to know about that culture first and then you can move on to whether there's a good visa environment. And if you know, for some people who love Japan, even though it's hard, they'll figure out a way. Probably not divorcing their current spouse and getting remarried, but they'll figure out a way to do it and there, there are a number of ways. So I would say that there are a lot of groups now like for example Choose Phi has an expat group. I know they have a, I belong to their expat group on Facebook. And so there's a lot of groups right now that are sort of helping people retire or even for part of the year in a foreign country. So you can get a lot of information and find out things but you definitely need to visit and make sure it's right for you before you go. And then one last thing I'll add. I think with a lot of the sort of anti immigrant sentiment that's going on in the world, the main thing I believe that you can do is make sure that you, you're actually integrating more into the culture. I think that's where many of the problems occur. If you're coming here and you're going to come to a country, you need to understand what the rules are. Especially in Japan, they give a lot of leeway to non Japanese people. They understand that it's a difficult culture to get into. But learning the language, learning some of the basics of the culture, trying to be polite about that I think goes a long way. So I think that that can, can really help in the long term.
- [25:49]
A
Does this bring up an ethical dilemma about moving like for geo arbitrage?
- [25:55]
C
I think it does. It's really hard when we ask sort of those big questions because you know, there's probably an ethical dilemma to almost everything we do and you know, there's a point where you just have to say listen, I'm, I'm an individual and I'm going to try to reduce my impact as much as possible. I can't solve all the world's problems. You know, if I didn't move to Japan I wouldn't have met my wife. I think I contribute quite a lot to society here. I'm a university professor, I speak the language. You know, I think you can just do the best you can do but in the end you have to make your own decisions. You know, you can't base it on some sort of big impact you're going to have on the world all the time.
- [26:35]
B
I think your philosophy and the answer to that is spot on. Love it. I love, I love everything that you just said there and completely agree with it and think that that's the right way to approach. Right. You're going to move to another culture, you should adopt that culture as much as you can very respectfully for all the people around you. It sounds like you've done a wonderful job and really applied yourself to that over the years. So awesome and Japan is lucky to have you. Thank you. This is going to be our final ad break, but you're going to sashimi in a moment when we get back after this. Finances can be messy and confusing and it's a lot of work for many of us just to get to the starting point in personal finance, which is understanding what you've got and where your money's going. That's why Virginia, my wife and I use Monarch Money as our personal financial command center for our bank accounts, credit cards, investment portfolio, and as our budgeting and spending tracker. Monarch automates everything. It's all linked and every transaction is automatically categorized into each category of spending. In just a few minutes a month, I have a complete picture of where every dollar is being spent and I have a real time net worth statement. I've recommended and personally used Monarch Money for years. I am thrilled and proud to be sponsored by and partnered with Monarch Money here at BiggerPockets Money. Bigger Pockets Money listeners get 50% off their first year, which is usually 99 bucks with the code POCKETS@monimalmoney.com that's monarchmoney.com with the code Pockets.
- [27:56]
A
You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need means you can stop struggling to get your job notice on other job sites. Indeed's sponsored Jobs helps you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored Jobs on indeed get 45% more applications than non sponsored posts. The best part? No monthly subscriptions or long term contracts. You only pay for results. And speaking of results, in the minute I've been Talking to you, 23 people just got hired through Indeed Worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed and listeners of this show will get a $75 sponsored job credit. To get your jobs more visibility@ Indeed.com BiggerPockets just go to Indeed.com BiggerPockets right now and support our show by saying you heard about Indeed on this podcast indeed.com biggerpockets terms and conditions apply. Hiring Indeed is all you need.
- [28:57]
B
When I evaluate debt funds, I look for things like first position loans, personal guarantees, deep experience by the fund operator, low fund leverage F liquidity and consistent returns. These are some of the reasons why I'm excited to partner with Pine Financial Group. Their Fund 6 offers investors exposure to real estate credit, largely for construction and rehab, largely here in Colorado, with loans originated by an experienced originator. With over $1 billion in origination volume, 75% of their borrowers have been repeat customers over 17 years. They offer investors an 8% preferred return paid monthly and a 7030 the LP GP split of everything over 10% paid annually. The lockup period is nine months with liquidity available within 90 days. After that nine month commitment, the fund is open to accredited investors only. The fund's minimum investment is typically $100,000, but Pine Financial is able to reduce that minimum for some investors and have agreed to do so for Biggerpockets Money listeners to a minimum of $25,000. Full disclosure I am personally invested in this fund through my self directed ira and of course Pine Financial is sponsoring this message and our podcast. If you'd like to invest or check out their Prospectus, go to biggerpocketsmoney.com pine today, that's biggerpocketsmoney.com pine please note that returns are not guaranteed and may vary based on fund performance. Last fall we booked an incredible Airbnb in Scottsdale, Arizona so that we could get a little escape from the Colorado winter. We had a wonderful time taking our two year old to see some of the highlights of Phoenix, trying out some new restaurants, and we even used the beautiful heated pool every day of the trip. I'll never forget it. This trip made me think while we were looking for a little break, someone else was likely looking for that authentic Colorado winter experience and they could have enjoyed our home to do so while we were away if we hosted it on Airbnb. And even though we would be hosting others while on vacation ourselves, it'd be totally doable with Airbnb's co host network. Now you can hire a local co host to be on the ground and to help take care of your guests. It's so great they do the work for you and you could earn a little extra money. Co hosts can create your listing, manage reservations, provide on site support and message guests. They really help make it so easy. It definitely could be a great opportunity for you. Find a co host@airbnb.com host I'm Christian McCaffrey, pro running back and Abercrombie is an official fashion partner of the NFL. I'm not kidding when I say NFL by Abercrombie broke the Internet last year.
- [31:27]
C
And I think this season's lineup is.
- [31:28]
B
Even cooler and so does my wife, who keeps stealing all my hoodies, stay.
- [31:33]
C
Fit for the season?
- [31:34]
B
And Abercrombie's newest arrivals shop NFL by Abercrombie in the app online and in store.
- [31:48]
A
Foreign let's jump back in.
- [31:51]
B
Let's talk taxes here. I think that there's some really interesting games, if I recall correctly from our last conversation, that you can play with respect to taxes. As a expat in Japan investing in US real estate, could you give us an overview? Crash course in this.
- [32:04]
C
I'll get into the real estate in a second. But basically one of the problems is that there's a little bit of a double whammy with living in Japan as a UX expat. And and I'll start with the US side of it. If you open the back of your passport, a lot of people don't know this, but right in the back it no matter where you live in the world, you must file your taxes. If you're required to file taxes in the U.S. most countries are not like that. If you live in the UK and you move to Japan, you go to the tax office and you say I'm moving, and they take you off the nhs, they take you off everything. And you don't need to continue filing taxes until you move back. So this creates some opportunities and it also creates challenges. The biggest challenge you have is first of all filing those taxes and the amount of money it costs. I'm at a point where I have a US CPA and I have a Japanese CPA and I pay up to $8,000 a year for my two filings with all my properties and everything like that, you know, combined. So there's a big cost at this point. It's worth it to me. But when I first moved here and I still had to pay $500 for a CPA to file those taxes to make sure they got right. That was a lot of money at the time. So that's one thing is that you do have to file these taxes. Japan on the other side, and most countries are not like this. Once you've lived here for five of the last 10 years, you're considered a tax resident. And after that they tax worldwide income and assets. So there is a Japanese US tax agreement that make sure you don't get double tax, but you end up always paying the higher tax in Japan. One example is I can't 1031 exchange. I can 1031 exchange in the US but Japan doesn't recognize it. So Japan will just tax me the entire amount. Capital gains, it will tax me for my recapture. Everything. And you have to report everything. Your US Properties, the Japanese government, who know who my tenants are and see the lease agreements. You know, this is part of the system. One of the advantages that I talked about in the last podcast is a loophole that unfortunately has been closed, but there's still some room here. And what that loophole was was you could depreciate your real estate anywhere in the world against your earned salary. And they did this unique depreciation system. And this is partly because Japanese real estate is not worth as much in the as the US So it doesn't really affect Japanese real estate because after 20 years you have almost no value in the structure, but in the US you do. So they were allowing you to do a depreciation of 25% of the structure value against your earned income every year. So for about a decade I paid no income taxes, very low taxes in terms of insurance. And they have something called the citizens Tax tax. All of this was really low. Rightly so they closed the loophole a couple years ago because there's no benefit to Japan to allow them to do it. And this is why a lot of Japanese were buying properties like say in Hawaii, right? If you could buy a wood structure over 20 years old, you could get these incredible deductions. Those deductions still exist for business. So if you own a business here in Japan, let's say you have a English school in Japan, you have an llc. There's a different sort of structure here that's set up. You can make a subsidiary LLC in the US that buys the properties, and you can use those deductions against your your business income. So those still exist, but not for the individual anymore. But those are kind of the basics of some of the things, I guess. One more thing I'll add on the US Side, while we all complain, saying expats all complain about having to pay our taxes every year, the good point is that we can still get loans in the US for properties which if you're from a country that doesn't file taxes every year is probably going to be impossible. So I'm still able to get the same loans that you guys get for conventional mortgages for my rental properties. And I can use my Japanese income for those loans and there's no problem because they have my tax returns.
- [36:30]
A
Oh, that's interesting.
- [36:31]
B
It sounds like you began deleveraging your portfolio in the recent past, and that's looked like letting some loans amortize and some you're just prepaying outright. I would imagine a part of that has to do with the closure of this loophole. Right. If that was still there, you'd probably be buying more properties so you could depreciate it against your income and continue to pay the tax situation. But I imagine another part of it is also just a different position in life and general goals. Can you walk me through how close that hypothesis is and what specifically you you've begun doing in your rental property portfolio in the last few years?
- [36:59]
C
I think you're pretty spot on. Part of it is getting older. I'm close to 50 and I started to think what do I want my portfolio to look like in retirement? What headaches do I want to remove from my life? That was a big part of it. I've always been a big fan of leverage to a certain extent because you can see just on paper mathematically it's the right decision to make. But. But I wanted to reduce those headaches and give myself optionality. I really liked my job. But things can change overnight depending on what's going on in your work or a situation in a country. And so I think my wife and I sort of reached a point where we'd spent the last almost 20 years building these portfolios and everything and we wanted to start enjoying it and worrying less about everything. And it really has been less of a worry. We have so much more cash flow coming in that when something goes wrong at a property, we don't worry about it that much anymore because the cash flow usually covers most expenses that we have. And so I think that was a big part of it. The change in the law was another part of it. I'm not fully done, but I think I look at it almost like cycles. We're at a cycle right now where we're sort of taking a step back and deleveraging the portfolio, seeing how everything goes. We're sort of test running what retirement might look like because we can see what sort of cash flow is coming in. We're still reinvesting all of our money basically that's coming in because our expenses here are so low and we still have full time jobs. Right. So we're able to cover those expenses. But what I'm looking at, I think in the future what we would like to do is to expand our real estate portfolio a bit more. We'd love to have a few more properties probably bought in cash, especially with these high interest rates. And something that I've never done is looking into buying a few cash flowing rentals here in Japan. And the reason is, is that we love the idea of having almost like two economies going on. When I first came to Japan, the currency was great for an earner in Japan. It was 75 yen per dollar. Even though I had a low salary, I was able to earn quite well and send that money home invest. Now it's about 140 to 150 yen per dollar. So you've lost what, 30% or more of your, of your power. And so many of my friends that don't invest and don't have money back in their home country, they're really struggling to even take a vacation home because it's so expensive for them. But we don't have that problem. We just got back from almost a month in the US and we never brought any money from Japan. We just lived off of our, our cash flow from our rentals during that time. So creating that peace of mind has been really big and we'd love to in the future. While I don't think it's the best strategy to build wealth, I like the idea of having a couple of paid off rentals here in Japan as well that at least cover our expenses. So no matter which way the currency goes in the future, we can change countries at will and we never have to worry about where we're bringing money.
- [40:14]
B
I think there's a lot of really, really good stuff in there. And I think that there's both a strategy and I imagine you'd agree, a luck component to the journey here where you've benefited so greatly from exactly that. Earning in Japanese yen and investing in US assets that have been appreciating for a long time now. Those ratios are very high in the other way. I would imagine there's a little fear or optimism that things might at least come back a little bit in the other direction where you're going to see the Japanese yen appreciate relative to the dollar perhaps or some of those assets. And so there's a little bit of, of feel and macroeconomic geopolitical analysis going on I think in your portfolio in addition to where you're at with a, from a portfolio perspective. And I think it's, it's really smart what you're doing.
- [40:56]
C
Yeah, thank you.
- [40:57]
A
You said that you were visiting America and you never brought money over from Japan. Do you have two different banks? Like your American money stays in your American bank account and your Japanese money stays in your Japanese bank account.
- [41:11]
C
I'll break down sort of how what my structure looks like now. I actually have a blog post about it. So if people to want, want extra information, you can see. But here in Japan we have bank accounts. You know, they don't earn any interest in Japan. It's like a 0.005% interest that you earn in Japanese bank accounts. But it's still, I think, important to have some money here because we need it to access for emergencies. My wife has something that's like the Roth ira. It's called a nisa. This is one of the problems. As an American, I cannot invest in that because it's Japanese mutual funds. And there's a punitive tax against what they call PFICs, passive foreign income companies. Other countries, you're from the UK, you can invest. US person can't really invest. There's some little loopholes, but my wife does that. I have a, like a 401k for my work that I can invest in. It's called a DC plan. And then I have a taxable brokerage here in Japan that is Interactive Brokers that allows you to invest in US domiciled ETFs. So that's okay for US investors to do do. So we keep all the money that comes in from our salaries that is left over, goes into Japan. We don't move it around. We used to, but not anymore, especially with the current currency. And then in the US I have a Vanguard taxable brokerage account. If you're living abroad, this is one problem. You don't have really access to a 401k unless you're working for American company abroad. And unless you have earned income, not real estate income, earned income in the US you can't do things like a Roth ira. So you're limited on your access to a lot of these retirement accounts, especially as an American living abroad. But I have a taxable account in the U.S. i have bank accounts, I use ally and then USAA for those needs. And basically everything runs through that. So we do have them connected in certain ways. So I can send money back and forth if I need to. And of course with credit cards you can spend in different countries and it will pull of course the monthly payment from your bank in that country. So we kind of have, as I said, almost like two economies. I don't know if that's the right way to say it, but two, two things going on in both countries that are completely separated but also have some.
- [43:28]
B
Connection when you complete your portfolio. Is there any tax ramification for transferring money from one account to the other or is that pretty seamless here? Like do you pay taxes? No matter what on the income earned in the currency in that given year for whatever's going on in those businesses?
- [43:43]
C
Yeah, so it depends on your tax residency status in Japan before those first five years. You're not a tax resident, so they don't tax anything worldwide. And you would only get taxed on money that you bring into Japan. So there is a tax. But for me as a permanent resident, someone who's lived here almost 20 years, I have to report all of that anyway in Japan and I always have to pay the difference. So, you know, if there's a, a 15% dividend tax in the US and 20% in Japan, I'll pay my 15% in the US and then Japan will tax me that extra 5%. They make up for it anywhere that it goes. So, you know, tax strategies are really hard, especially with the Japan side. Not all countries are like that. So we're basically reporting everything on both tax documents. So in the US there's a reporting of all your foreign accounts. In Japan there's a reporting of all your foreign accounts. So everybody knows what's going on. There's no escaping the tax man in either country. But still we can make it work, right? I mean, I've still built a $2 million net worth even without these tax advantaged accounts. I think that says something too because a lot of people worry about that, especially when they live abroad. I meet a lot of Americans that say, oh, I don't invest because I can't access, you know, the nisa, which is the tax advantaged account here in Japan, can, but you can still do it. You just might have to use a different strategy.
- [45:10]
A
I just popped on Facebook to look up this expats group. It's one of the choose five groups that I am not part of and there's 17,000 members. I think that I am going to send our listeners to. It's just called Choose Phi Expats. If you're looking for information about different countries to live in, obviously this episode is very Japanese heavy because we're speaking to someone who lives in Japan. What do you know about living in Portugal? Probably not much. Have you ever lived there?
- [45:36]
C
No, never.
- [45:37]
A
So this one is the Japanese episode. But if you're interested in learning more about the expat process, definitely go check out the Choose Fi expats group.
- [45:46]
B
And I think that this is a small but growing population and I think the problems are going to be relatively unique. Like how are we possibly going to be able to cover the intricacies of US Japan tax code here on the Bigger Pockets podcast, you're going to have to hope to meet somebody who's figured this out out. And if you've got something interesting like a particular type of business, you're gonna have to go and figure that out on your own. And that's going to be one of the challenges of being an expat. But the benefits are there as well. I mean, you heard it in the overall cost structure of Daniel's life. It's just amazing what he gets relative to what you can get in the U.S. yeah.
- [46:16]
C
And I think one thing that's important to note is that you don't need to do this full time to get the benefits in retirement. Especially if you live in say a high cost of living area and you can't make it work, work or it's going to be a tight squeeze to be there year round. You know, you could do a six month time in another country and a lot of times that's even easier because you don't have to worry about some of the visa issues in Japan. You can come here for three months as a tourist. There'd be no restriction on that. And I do have some friends also. Five friends that do this almost year round. They travel the world, they have kids and they do it with them. They just go to different countries. They spent three months in Japan and they can really reduce the costs for those three months or six months if they're in another country for their overall, you know, phi number. So I, I think that's also a great strategy. You don't have to think about doing this as a full time gig where you're moving to another country and living there full time. You can do it part time.
- [47:15]
A
Do you think you're going to continue to live in Japan forever? Do you see yourself coming back to America anytime?
- [47:20]
C
You know, in my case because I'm married to a Japanese woman with a Japanese passport which she doesn't want to give up. We're always going to be really connected to Japan. So I don't see a point where sell our house and we move out to the us But I think in the future, you know, once we retire, we do want to spend more time in the US and maybe split our time kind of like I'm, I'm talking about as well as some other countries. So I think it's, it's going to be more of a 5050 situation in the future. For right now though, we, we love it here, so and definitely come out and visit. I know a lot of people are Visiting.
- [47:54]
A
I am now even more excited to visit Japan at some time in the future. I still have a. A sophomore in high school, so it'll be a little bit. But Japan has always been on my list. I just think it's really, really beautiful.
- [48:06]
B
Well, Daniel, thank you so much for coming back on, being so open and transparent about your numbers, the shift in your strategy. Well played. Your overall investment approach here. It's been, it's been fantastic following that. Thank you for all you do for the BiggerPockets money community and for giving back here on the show today. It's really, really a pleasure to know you and look forward to meeting you in person soon.
- [48:24]
C
Great. Well, thank you so much. Yeah, this was a great opportunity. I really like talking to you guys, so I hope I can continue to add value to the community in the future.
- [48:33]
A
Daniel, where can people find you online?
- [48:35]
C
Well, I have a website called thefi Prof.com it is specifically for US expats in Japan because as you heard from our conversation, there's a lot of difficulties of navigating that process. But I think it would be educational for anybody who's interested in doing the geo arbitrage strategy energy the Phi P.
- [48:56]
A
R o f Prof. Prof. Like professor the5prof.com awesome. Daniel, again, thank you so much for your time today and we'll talk to you soon. All right, Scott, that was Daniel Mills. And if his name sounds familiar, it's because he's all over our Facebook group. Scott, what did you think about his little peek into Japanese expat life?
- [49:16]
B
I love it. It's. It sounds wonderful what he set up. He teaches at a university. He has a bunch of great benefits. Benefits there. They have great rugby. Really important. He's got very low housing costs, low health care costs, low travel expenses. His own a car. I mean, what a wonderful situation he's got here. $45,000 in rental income, two salaries, big stock and bond portfolio that can spit off another $36,000 a year. This guy, I mean, he played the hand here really, really well in, I think, life in general and investing across all of these things. He's clearly an expert on the subject and he gives back to our community. Community. It's just wonderful, wonderful to see his journey and to see him thriving.
- [49:51]
A
Yeah. I am super excited to continue talking to him in our Facebook group. He always has some really interesting insights and really great conversations. So if you are not a member of our Facebook group, change that by going to facebook.com groups,/bpmoney and join in our chat all right, Scott, should we get out of here?
- [50:12]
B
Let's do it.
- [50:12]
A
That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen. Saying swish, swish. Jellyfish. I practiced that a lot because that was hard.
- [50:25]
B
Martha listens to her favorite band all the time. In the car, gym, even sleeping. So when they finally went on tour.
- [50:34]
C
Martha bundled her flight and hotel on.
- [50:36]
B
Expedia to see them live.
- [50:37]
C
She saved so much, she got a seat close enough to actually see and hear them.
- [50:43]
B
Sort of you and the made to scream from the front row. We were made to quietly save you. More Expedia made to travel Savings vary and subject to availability.
- [50:52]
C
Flight inclusive packages are atoll protected.