An increase in consumption tax presents a big concern for many people, not just real estate investors. If the cost of living increases it will put a burden on the household budget. For real estate investors, the consumption tax increase is something they cannot ignore. Let’s consider how the consumption tax increase will affect them.
When will the increase in consumption tax begin?
The consumption tax rate in Japan will be raised on October 1, 2019. It will increase from 8% to 10%, which is expected to have a considerable impact on Japanese consumption.
What is the impact of the consumption tax increase on real estate investment?
The impact of higher consumption tax on daily life will be a concern for many people. The reason for this is that it directly affects the cost of living, with price rises on everything from daily necessities in the supermarket to cars.
So what impact will a consumption tax increase have on real estate investors? It is premature to think that because consumption tax does not apply to rental income that the increase will not affect real estate investment.
Real estate investors make their money by purchasing property and earning rental income or selling for a profit. Consumption tax is imposed on the cost of purchasing a property, so the cost of purchasing a property will increase under the new tax system, greatly affecting the return on investment.
How does this affect rental income?
The consumption tax increase affects not only the cost of purchasing a property but also the rental income.
Consumption tax is not imposed on the rent itself, but on the expenses involved in property ownership. For the long-term operation of an investment property, landlords must spend money on repairs and management commission fees, both of which will be subject to the higher tax rates, thus reducing profit.
Landlords may need to increase the rental price to make a profit, because if they reduce the running costs, the attractiveness of the property may decrease.
As you can see, for real estate investors, raising the consumption tax presents a new challenge.
Invest before the tax increase or after?
Given the above, if you’re looking to buy an investment property, you might be wondering whether to make your purchase before or after the tax increase.
In the run-up to the consumption tax increase, if you are considering buying an investment property, I recommend you buy well before the tax increase.
There is expected to be last-minute demand before the tax increase.
Given that the cost of acquiring a building is subject to the consumption tax, it is expected that more investors will decide to purchase before the tax increase. Due to the spike in demand, there are concerns that construction costs will rise and the quality of the property will decline or available building materials and personnel will become scarce.
After the tax increase, the construction cost will be higher.
As mentioned above, there is a possibility that the cost of building property will rise after the consumption tax increase. It depends on the size of the property, but even if the tax rate is different by 2%, the difference can be several million yen.
For real estate investors, raising the consumption tax is likely to have a big impact on rental income and property acquisition costs, causing a decrease in yield. If you are currently considering buying an investment property, I recommend you to do so as soon as possible before the tax increase.
As with all business, you need to accurately understand the environment in which you are trading. At the very least, try to keep up with information on the tax system, real estate market conditions, and interest rates.