Is Now the Time for Real Estate Investment as Interest Rates Rise?

Japan has experienced low interest rates for a long time. In real estate investment, it was possible to aim for high returns on equity by leveraging low borrowing rates.

However, that premise has already changed.

The Bank of Japan ended its negative interest rate policy in March 2024 and has since raised the policy interest rate in stages. Multiple rate hikes have occurred in 2026, and further increases are expected from the end of the year through 2027.

It is unclear how much further interest rates will rise.

What happens to real estate investment if interest rates rise by 1%?

First, let’s consider the impact of rising interest rates with concrete numbers.

Assume a newly built apartment priced at 100 million yen with a gross yield of 6%. The annual rental income is 6 million yen. We assume a full loan purchase with an initial borrowing rate of 2.5%.

If we set the expense ratio against the full-occupancy annual rental income at 10% and the vacancy rate at 5%, the expenses are 600,000 yen. The profit before loan repayment is 5.4 million yen. Here, we will calculate based on a 35-year equal principal and interest repayment.

Just a 1% rise in interest rates almost eliminates the remaining cash. There is almost no margin even before considering taxes or unexpected repair costs. You can see how vulnerable investment that relies on full-loan leverage is to rising interest rates.

Conventional investment methods will no longer yield profits

In the low-interest-rate environment to date, it was easy to establish investments that utilized leverage by taking advantage of the gap between property yields and borrowing rates. However, if interest rates rise, that premise collapses.

Even for a property with a 6% yield, if interest rates rise to 3% or 3.5%, the remaining cash after considering expenses and principal repayment will shrink rapidly. As a result, investors who would have purchased in the past will likely pass on the purchase. If bank loan screening becomes stricter, the number of people who cannot buy even if they want to will also increase.

In other words, due to rising interest rates, there is a possibility that both the number of people who can buy real estate and the number of people who can make a profit even if they buy will decrease. It will become difficult to purchase at the same price, same yield, and same loan conditions as before.

If the number of buyers decreases, the seller’s circumstances will also change

It is not just those who are about to purchase who are affected by rising interest rates. Owners who already hold properties may also see their repayment burdens increase due to refinancing or rising variable interest rates.

If the remaining cash decreases, it will also become difficult to prepare for repair costs and vacancies. People who were considering additional investments may be forced to prioritize cash flow. Furthermore, if there is anxiety that interest rates may continue to rise in the future, hesitation will arise regarding continuing long-term ownership.

That is precisely why there is an opportunity

If interest rates rise, real estate investment becomes difficult for everyone. However, precisely because it becomes difficult, investment projects that were previously viable may no longer be so, the number of buyers may decrease, and the seller’s circumstances may change. For investors with sufficient funds and borrowing capacity, a phase may arrive where competition eases and price negotiations become effective.

Of course, there is no guarantee that financial institutions will continue to offer full loans or 35-year financing. It is also possible that their lending stance itself will become stricter. That is precisely why it is worth engaging in dialogue with financial institutions now to confirm loan conditions.

While rising interest rates may be an increased burden for existing owners, they can also be a factor that creates future buying opportunities for investors looking to purchase. The important thing is not to buy in a panic just because interest rates are rising, nor to be afraid and withdraw from the market.

When traditional investment methods no longer work, that is the time to update your investment criteria and prepare for the next opportunity.

Instead of panicking after the market changes, secure your funds, keep watching properties, and decide on your buying conditions. A phase of rising interest rates is a headwind for all investors. However, if that headwind changes the competitive environment of the market, it can also become an opportunity for investors who are prepared.

Perhaps now is not the time to force a purchase, but rather a time to become the kind of investor who can buy good properties next.