FI Faster by Making More and Spending Less Using "Geo-Arbitrage"

23:20For example, 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.

24:01So little things like this are so 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, 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 are a number of ways. So I would say that there are a lot of groups now, like, for example, Choose Fi 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.

24:42So 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'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.

25:32So I think that that can really help in the long term.

25:35Mindy Jensen:Does this bring up an ethical dilemma about moving, like for geo arbitrage? 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 of 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.

26:14But 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. I think your philosophy and the answer to that is spot on. Love it. 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.

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28:25Mindy Jensen:Let's jump back in. Let's talk taxes here. I think that there are 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 U.S. real estate. Could you give us an overview, Crash Course in this? 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 U.S. expat. And I'll start with the U.S. 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 says no matter where you live in the world, you must file your taxes if you're required to file taxes in the U.S.

29:03Most countries are not like that. If you live in the U.K. 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 U.S. 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.

29:41So 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 U.S. tax agreement that makes sure you don't get double tax, but you end up always paying the higher tax in Japan.

30:24One example is I can't 1031 exchange. I can 1031 exchange in the U.S., 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.

31:06And they did this unique depreciation system. And this is partly because Japanese real estate is not worth as much as the U.S. So it doesn't really affect Japanese real estate because after 20 years, you have almost no value in the structure. But in the U.S., you do. So they were allowing you to do a depreciation of 25 percent 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 citizen's tax. All of this was really low. Rightly so. They closed the loophole a couple of years ago because there's no benefit to Japan to allow them to do it.

31:51And 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 business income. So those still exist, but not for the individual anymore. But those are kind of the basics of some of the things.

32:31I guess one more thing I'll add on the U.S. 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 U.S. 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.

33:05Mindy Jensen:Oh, that's interesting. It sounds like you began deleveraging your portfolio in the recent past. And that's looked like letting some loans amortized and some you're just prepaying outright. I 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've begun doing in your rental property portfolio in the last few years?

33:35I 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, you know, to a certain extent, because you can see just on paper, mathematically, it's the right decision to make. But I wanted to reduce those headaches and give myself optionality. I really like my job, but, you know, 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.

34:23And 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 cashflow 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?

35:15So 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 little 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 and invest.

35:56Now it's about 140 to 150 yen per dollar. So you've lost, what, 30 % or more 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 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.

36:41So 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. I think there's a lot of 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.

37:20And so there's a little bit of feel and macroeconomic geopolitical analysis going on, I think, in your portfolio, in addition to where you're at from a portfolio perspective. And I think it's really smart what you're doing. Yeah. Thank you.

37:33Mindy Jensen: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? I'll break down sort of how what my structure looks like now. I actually have a blog post about it. So if people 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.

38:09My wife has something that's like the Roth IRA. It's called NISA. This is one of the problems as an American. I cannot invest in that because it's Japanese mutual funds and there is 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 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.

38:52So 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 an 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.

39:30But I have a taxable account in the US. 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 things going on in both countries that are completely separated, but also have some connection.

40:04When you complete your portfolio, is there any tax ramification for transferring money from one account to the other? Or is that pretty seamless here? 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? 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.

40:41And I always have to pay the difference. So if there's 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 ban in either country, but still we can make it work, right?

41:21I 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 the NISA, which is the tax advantage account here in Japan. But you can still do it. You just might have to use a different strategy.

41:45Mindy Jensen: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 five 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? No, never. 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 Fight Expats group.

42:21And 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 BiggerPockets podcast? You're gonna have to hope to meet somebody who's figured this out. And if you've got something interesting, like a particular type of business, you're going to 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.

42:47It's just amazing what he gets relative to what you can get in the US. Yeah. 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, 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.

43:20And 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 cost for those three months or six months if they're in another country for their overall, you know, five numbers. So 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.

43:50Mindy Jensen:Do you think you're going to continue to live in Japan forever? Do you see yourself coming back to America anytime? 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 we sell our house and we move out to the U.S. But I think in the future, you know, once we retire, we do want to spend more time in the U.S. 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 going to be more of a 50-50 situation in the future.

44:25For right now, though, we love it here. So and definitely come out and visit. I know a lot of people are visiting.

44:30Mindy Jensen:I am now even more excited to visit Japan at some time in the future. I still have 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. 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 fantastic following that. Thank you for all you do for the BiggerPocketsMoney 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.

45:00Great. 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.

45:08Mindy Jensen:Daniel, where can people find you online? Well, I have a website called thephiprof.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. The Phi, P-R-O-F, prof, like professor, thephiprof.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.

45:47Mindy Jensen:Scott, what did you think about his little peek into Japanese expat life? I love it. It sounds wonderful what he set up. He teaches at a university. He has a bunch of great benefits there. They have great rugby, really important. He's got very low housing costs, low healthcare costs, low travel expenses. He doesn't 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.

46:20He's clearly an expert on the subject and he gives back to our community. It's just wonderful, wonderful to see his journey and to see him thriving.

46:26Mindy Jensen: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 slash groups slash BP money and join in our chat. All right, Scott, should we get out of here? Let's do it. 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.