Aim for 500,000 yen per month in rental income! Strategies for earning passive income through real estate investment even during rising interest rates
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“Interest rates are rising now, so real estate investment feels a bit risky.”
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“If repayment amounts increase, I’m a bit worried about cash flow…”
Many of you might be thinking this way, right?
When interest rates are raised, loan repayment amounts increase, making real estate investment seem disadvantageous.
However, there are investors who continue to make profits even in this situation.
How are those investors succeeding? What are they looking at?
To give you the answer, what you should look at is not “low interest rates” but “profit margins.”
If you can buy high-yield properties with long loan terms, you may still have profits even if interest rates rise.
On the other hand, properties without profit margins have a higher probability of falling into the red if interest rates rise.
Therefore, in this article, I will explain the following three points while incorporating realistic income and expenditure simulations.
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3 NG mindsets that lead to losses during periods of rising interest rates
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Why the monthly profit gap between a 40 million yen property in the city center and a 20 million yen property in the suburbs can be up to 7 times
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Why, when interest rates rise to 4.4%, one building in the city center might be in the red while two in the suburbs remain in the black
For those who want to succeed in real estate investment and “create a state where money comes in without having to work,” but are hesitant to take the first step due to anxiety over rising interest rates, this will serve as a basis for making decisions on your future policy, so please be sure to read until the end.
3 NG mindsets that lead to losses during periods of rising interest rates
First, let’s look at three ways of thinking that make it easy to lose money during periods of rising interest rates, and lower your chances of failure.
NG mindset 1: Borrowing just because it’s easy to borrow
Around 2017 to 2019, it was a period when loans for apartments were very easy to obtain.
However, I did not invest much in real estate during this period. That is because yields had bottomed out.
During periods when loans are easy to obtain, loans are also granted for properties that are not profitable (where yields have bottomed out).
Many people are advised that they should borrow as much as they can while they are still able to, and end up buying properties with low yields.
However, when interest rates rise and repayment amounts increase, if the original yield is low, your profits will vanish in an instant.
NG Thinking #2: Buying properties in the city center is safe
Do you have the fixed idea that “when it comes to real estate investment, it has to be Tokyo (the city center)”?
However, as long as you are buying a property with a loan, the higher the price of the property, the heavier the monthly repayment burden will be, making your balance sheet difficult.
It is often thought that “it’s safe because it’s easier to find tenants in the city center,” but you can easily acquire the know-how for finding tenants for suburban properties as well.
It is just a matter of reviewing the recruitment conditions once or twice a year.
Choosing a property with a low yield and borrowing tens of millions of yen extra just to avoid that effort does not pay off as an investment.
▼ Click here for hidden gem areas in the suburbs
NG Thinking #3: You lose if the value doesn’t go up when you sell
“I bought an apartment for 50 million yen, and 20 years later it sold for 48 million yen. So that’s a 2 million yen loss.”
Are you thinking like that?
Please try changing your perspective a little. Over those 20 years, the loan repayment has progressed steadily, and the loan has been paid off.
If you bought it with a full loan, you have hardly used any of your own capital.
Since the full 48 million yen comes into your hands at the time of sale, even if the price is lower than when you bought it, it is a great success as an investment.
Whether you win or lose in real estate investment is not determined by whether the value has increased at the time of sale.
The person who obtained the largest return with the smallest investment amount can be said to have succeeded as an investor.
The oversight common to the three NG thoughts
What the three NG thoughts have in common is that the perspective of looking at profitability—how much is left over each month—is missing.
If you buy a property where the ratio of repayments to rental income is too high, nothing will remain in your hands after paying for repayments and expenses from the rent.
If interest rates rise and hit you directly, your repayments will increase, and you could suddenly fall into the red.
Focusing only on low interest rates and choosing properties with yields that are too low.
This is the pitfall.
Even if the interest rate is as low as 2%, if the yield is only 3%, you will barely make any profit.
On the other hand, successful investors firmly hold properties with high rental income (high yields).
They create a situation where profit remains even after paying repayments and expenses, and they can easily maintain a surplus even if interest rates or repayment amounts increase.
Comparing the balance of a 40 million yen property in the city center versus a 20 million yen property in the suburbs
Let’s look at the numbers to see how much of a difference in mindset affects monthly profits.
Expenses are calculated at 20% of rental income for both.
Balance when interest rates are in the 2% range
First, let’s look at a used apartment in the city center.
The price is 40 million yen, the yield is 7%, the loan term is 25 years, and the interest rate is 2%.
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Rental income: Approximately 230,000 yen per month (40 million yen × 7% ÷ 12 months)
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Repayment: Approximately 170,000 yen per month
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Expenses: Approximately 46,000 yen per month
The profit remaining in hand is 14,000 yen per month.
Next is a used apartment in the suburbs.
The price is 20 million yen, the yield is 11%, the loan term is 25 years, and the interest rate is 2.4%.
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Rental income: Approximately 180,000 yen per month (20 million yen × 11% ÷ 12 months)
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Repayment: Approximately 90,000 yen per month
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Expenses: Approximately 36,000 yen per month
The profit remaining in hand is 54,000 yen per month.
Even though interest rates are 0.4% higher in the suburbs, the profit was 3.8 times greater.
Furthermore, for those who can utilize a 40 million yen loan limit, it is possible to purchase ‘two’ suburban properties worth 20 million yen each.
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Rental income: approx. 360,000 yen per month
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Repayment: approx. 180,000 yen per month
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Expenses: approx. 72,000 yen per month
The profit remaining in hand is 108,000 yen per month, which is about 7.7 times that of one city-center building.
Balance when interest rates rise to 4.4%
Now, let’s assume interest rates rise from the 2% range to 4.4%.
In the case of a used apartment building in the city center, the 40 million yen repayment increases from 170,000 yen to 220,000 yen per month.
Subtracting the repayment of approx. 220,000 yen and expenses of approx. 46,000 yen from the rental income of approx. 230,000 yen results in a deficit of approx. 36,000 yen per month.
Even in the case of two used apartment buildings in the suburbs, the total repayment increased from 178,000 yen to 220,000 yen per month.
Even after subtracting the repayment of approx. 220,000 yen and expenses of approx. 72,000 yen from the rental income of approx. 360,000 yen, a profit of approx. 68,000 yen remains per month.
Despite facing the same interest rate hike, the one city-center building fell into a deficit, while the two suburban buildings remained profitable.
What created this difference was not the interest rate figure, but whether or not ‘a sufficient profit margin was secured from the start’.
Summary: Look at the ‘profit margin’ before interest rates
‘Profit margin’ refers to the thickness of the cash remaining in hand after subtracting repayments and expenses from rental income.
It is only this ‘profit margin’ that can absorb the damage of future interest rate hikes and stabilize rental management.
Therefore, rather than worrying about low interest rates, focus on buying properties with high yields over long loan terms.
When considering a property, please check the following four points as criteria for your decision.
・How much remains each month after deducting repayments and expenses from rental income
・Will that profit remain even if interest rates rise by 2%?
・Is there an option to buy multiple lower-priced properties within the same loan limit?
・Do you know of financial institutions that can offer longer loan terms?
Next time you look at property documents, why not calculate “how much will remain each month” beneath the yield figures?
Thank you for reading until the end!
The income and expenditure in this article are just one estimate. Results will vary depending on yields, loan conditions, vacancies, and repairs. Since loan conditions also change based on financial institutions, timing, and personal attributes, please proceed while confirming individual circumstances with experts.
In real estate investment, it is important not only to think about how to create profit margins but also to be aware of the pitfalls hidden in high-yield properties.
I also explain the characteristics of old apartments you should avoid and how to evaluate properties in a YouTube video, so please check it out here👇