Borrowing interest rates have risen to 5.25%. Two reasons why my cash flow remains completely unshaken despite this

Hello everyone!
I am Wataru Asagi, a side-hustle landlord.

“The Bank of Japan has raised interest rates again, but will my loan repayments be okay…”

“If interest rates go up, won’t my remaining rental income disappear…”

Recently, I have been hearing many voices of real anxiety regarding rising interest rates from fellow landlords and readers who operate properties with loans.

real anxiety regarding rising interest rates I have been hearing this quite often.

I understand all too well the feeling of getting a stomach ache every time I see the words “policy interest rate hike” in the news, thinking of my monthly repayment account.

In the midst of this, that “pressure-sealed postcard” from the credit union where I have my loan arrived in my mailbox the other day.

“that pressure-sealed postcard” arrived.

When I peeled it open, it was the “repayment schedule” that is sent periodically.repayment schedule that is sent periodically.

Seeing the numbers printed there, I couldn’t help but smile bitterly.

Applicable interest rate: “0.25% increase”.

Actually, because this property is old, the loan term is 15 years. The interest rate at the time of purchase was 4.5%.

Since then, along with the global trend of rising interest rates, I have received three gradual notices of increases, and with this revision, it has finally reached 5.25%.gradual notices of increases, and with this revision, it has finally reached 5.25%.

“A short 15-year term, and at a 5.25% interest rate”

Hearing that, for those who have taken out loans at low interest rates for 30 to 35 years, I think it is a level that would make you worry:

“What, over 5%!? Won’t you be unable to keep your head above water with monthly repayments…”

“Won’t your cash flow be blown away and turn into a deficit?”

I think that is the level of concern.

However, to give you the conclusion first,

there has been almost no impact on my balance or cash flow.

Why can my rental business remain calm even when faced with seemingly desperate numbers like a 15-year term and a 5.25% interest rate?

This time, as a hint for not being swayed by the world’s interest rate anxieties, I will share, while incorporating actual changes in repayment ratios,

the two major defensive walls of financial planning that neutralize interest rate hikes from the start about.

Reason 1: The property’s own intrinsic value is a thick cushion of 13% yield

The first reason is extremely clear,

because the property’s own gross yield is extremely high at 13%.

The cases where cash flow dies first due to interest rate hikes are

cases where properties with a yield of around 5% to 6% are purchased with a marginal balance.

When the yield is low, just a 0.5% to 1% increase in interest rates causes the yield gap, or the difference between the yield and the borrowing interest rate, to disappear,

and the money remaining in hand literally evaporates.

However, this property is an older building, and it securely maintains a 13% yield.

Even if the borrowing interest rate rises by 0.75% from 4.5% to 5.25%, because there is a thick cushion of overwhelming rental income of 13% yield,

the payment for the interest rate increase can be easily absorbed within the rental income.

If you use a loan with a high interest rate, target a property with an even more overwhelmingly high yield

As long as you follow this basic principle, it is structurally impossible for your business to collapse due to a few stages of interest rate hikes.

Reason 2: Investing 40% of own funds to keep the borrowed principal small

And the other decisive reason is

that I put in 40% of my own funds at the time of purchase to keep the borrowed principal small.

The damage from interest rate hikes is determined not by the interest rate percentage, but by the absolute amount of the remaining loan balance.

When I bought this property, I knew from the beginning that it would have the higher conditions of a 15-year term and a 4.5% interest rate.

That is precisely why I did not force a full loan, but instead designed the loan to be smaller from the start by putting down 40% of the funds upfront.

Because the principal is small, an interest rate hike of 0.25% results in only a negligible increase in the monthly repayment amount.

Compared to the daily rent from a fully occupied property, this is within the margin of error, and I am able to maintain a safe zone where I can sleep soundly at night.

[Actual Verification] When comparing the debt service coverage ratio, it was at a surprisingly safe level

Now, let’s look at how the debt service coverage ratio (annual repayment amount ÷ annual income at full occupancy) actually changed.

Here is the transition of the actual debt service coverage ratio calculated for a property with a gross yield of 13%, using 40% of my own funds (60% loan ratio) and a 15-year repayment period.

• Initial debt service coverage ratio (at 4.5% interest): 42.4%

• Current debt service coverage ratio (at 5.25% interest, after a 0.75% increase): 44.5%

• Increase in debt service coverage ratio: +2.1 points

In the real estate rental business, a debt service coverage ratio of 50% or less is generally considered a benchmark for sound management.

Even with seemingly strict loan conditions of a 15-year term and a 5.25% interest rate,

thanks to the combination of a 13% yield and 40% self-funding, the debt service coverage ratio remains at an extremely safe level of 44.5%.

Even though the interest rate has risen by a total of 0.75% over three rate hikes, the increase in the debt service coverage ratio is only about 2.1 points.

Because I have firmly maintained a structure where more than half (about 55%) of the rental income remains in hand, there is absolutely no hindrance to daily operations or cash flow.

The reveal: Actually, this loan is a ‘Saison Guarantee Loan’ from a Shinkin bank

Having read this far, a sharp reader might have one question.

“In the first place, why are you taking out such a high-interest loan from a Shinkin bank?”

“Shouldn’t a Shinkin bank’s own loan have a lower interest rate?”

I will reveal the secret here.

Actually, this borrowing is not a direct loan from a Shinkin bank, but rather a loan utilized through a ‘Saison Fandex-guaranteed loan’.

While loans with Saison guarantees have interest rates set higher than those of direct bank loans, in exchange, they offer:

• The ability to bring in ‘remote properties outside the area’ that would be turned away by local credit unions for direct loans

• Flexible financing even for old properties that have significantly exceeded their statutory useful life

• Lenient personal income requirements and support for borrowing under a corporate name

They possess ‘extraordinary mobility and breakthrough power’ that can easily clear thick walls that standard apartment loans absolutely cannot overcome.

This property was also a case that would have been an instant rejection if brought to a general financial institution due to being old and in a remote location.

However, by passing the Saison guarantee framework through a credit union, putting in 40% of my own funds to compress the loan principal, and operating it with a high occupancy rate of 13%—.

It was because of this structure that I was able to secure a treasure of a property cheaper than the market rate and continue to accumulate cash flow with a cool head even in a period of rising interest rates.

Learning the practical business of turning Saison guarantees into a ‘safe cash cow’

It is a fact that some investors are biased against using Saison guarantees because ‘the interest rates are high’.

However, from the perspective of a landlord who is actually buying in the field,

as long as you can set up the safety device of ‘high-yield property x control of own funds,’ there is no weapon more reliable than this.

• Realistic ways to use the four representative banks for Saison guarantee loans (Shiga Bank, Kansai Mirai Bank, au Jibun Bank, Shiba Shinkin Bank)

• Back-door routes to secure ‘special preferential interest rates’ that minimize interest burdens

• The ‘combined technique (over-loan scheme)’ to procure even incidental expenses without reducing cash on hand

• How to reverse-calculate properties and price ranges that are perfectly compatible with Saison guarantees

The realistic screening criteria for loans with Saison guarantees and the field practical know-how for safely expanding your scale while protecting your cash on hand are thoroughly explained in the following complete strategy bible.

Move from the side that fears high interest rates to the side that understands loan characteristics and retains cash.

If you are serious about targeting your next property, please keep this article at hand when you step up to the plate!

▼ [Complete Strategy] Field Practical Bible for Regional Bank/Credit Union Saison Fundex Guaranteed Loans (Special Interest Rates, Combined Techniques, Submission Procedures)