Generally I believe it is possible to make money investing in real estate in any country, but some offer better returns than others. A lot of this has to do with demographics and per capita income trends. Ideally you want your property to be in a country where the population is growing, the birth rate is high, there are many young people relative to old people, wages are rising, average wealth stably increases over time, and urbanization is rising. You also want to be buying in countries where there’s rule of law — you don’t want to be buying property in a totalitarian state where the state can confiscate your property at will.
For this reason, I would consider the U.S. to be a better place to buy property in than, let’s say Japan. Indeed, property prices in the U.S. have increased steadily over the long term, and only occasionally go down temporarily. According to the U.S. Census Bureau, average home prices in the U.S. increased by 280% between 1985 and today. And even during the 2008-09 GFC, whose proximate cause was the creation of a housing bubble, home prices only dropped 20% and recovered to pre GFC levels within a few years. Prices increase over the long term because of a growing population combined with rising GDP per capita. Having purchased a number of detached homes in the U.S., I am reasonably confident that they will be worth considerably more in 10 or 20 years.
By contrast, detached home prices in Japan are barely up 20-30% since 1985, and prices are down 50% since the Japanese property bubble peaked in 1990. So the IRR on real estate in Japan has been pretty awful over the long term, and that’s primarily due to a declining population and lack of wage growth in what is a deflationary economy. So the conclusion here is that if I were to buy property in Japan today, it wouldn’t be for potential price appreciation in the future.
However, I am nevertheless open to buying in Japan too. In fact I own a couple of properties in the country. Remember that returns can be generated from several sources: price appreciation, monthly rent income from tenants, and tax benefits. Tough luck with the first item, but the other two can be powerful generators of returns too. Historically low interest rates in Japan help drive higher net yields. It’s not unheard of for real estate investors to get 30-year loans from banks at a 1% interest rate and at a 100% LTV ratio. I don’t know any other country where you could get terms like that! In addition, depending on how old the property is, you would be able to depreciate the building value over a short number of years (e.g., wooden structures older than 22 years old can be depreciated over 4 years). That depreciation can offset ordinary income from salary and other sources, thus lowering your personal income tax bill.
To sum it up, while I generally would like to have demographic and socioeconomic trends as tailwinds, I still think one can make money in places where these tailwinds are absent.
