If interest rates rise, how much will your studio apartment be worth? | A free simulator you can try with 4 numbers

When interest rates rise, how much of a monthly deficit will your studio apartment incur, and how much will you have left if you sell it? I have created a free tool that allows you to estimate this simply by entering four numbers from your bank’s repayment schedule and rent statement. In this article, I will explain how to use the tool and, from the perspective of someone who has evaluated properties on the fund side, how to interpret the results and what decisions to make.

▶ Interest Rate Hike Simulator (Free, No Registration Required)
https://cre-crossborder.github.io/rate-sim/

Why I created this tool

In my previous article, I wrote about how interest rate hikes affect real estate prices. Among the feedback I received, a common question was, “I understand the theory. But what will happen to my property?”

Owners of individual studio apartments, in particular, tend to struggle with these concerns.

• I have a variable-rate loan and feel anxious every time I receive an interest rate notification.

• I have a small monthly out-of-pocket expense, but I don’t know if this is a “loss.”

• I don’t have the information needed to decide whether I should sell or keep holding onto it.

If you ask a real estate company, they tend to say either “you should keep it” or “now is the time to sell,” neither of which is neutral. Therefore, I created a tool that allows you to verify it yourself using your own numbers.

How to use: Just enter 4 items

On the initial screen, you only need to enter the following four items:

1. Remaining loan balance (from the “Loan Balance” on your repayment schedule)

2. Current interest rate (from your interest rate change notice)

3. Monthly rent (from your management company’s remittance statement)

4. Management fees and repair reserve funds (from your management association’s invoice)

With just this, you can see whether your monthly balance is in the black or the red, and at what interest rate percentage you will fall into the red. If you know the appraised value, please enter it in “Estimated selling price.” You can compare how much you will have left in your pocket if you sell now, in 5 years, or in 10 years.

Detailed conditions such as the remaining loan term and vacancy rate can be changed via “Enter details.” Blank items are calculated using example values, and a list is displayed showing which items were calculated using those example values.

The information you enter is not sent to a server; all calculations are completed within your browser.

Let’s look at an example: A studio apartment with a 24 million yen remaining balance and a 2% interest rate

Let’s try a calculation using the tool’s default values.

• Loan balance 24 million yen, interest rate 2%, remaining term 30 years

• Rent 90,000 yen, management fee/repair reserve fund 12,000 yen

• Fixed asset tax 60,000 yen/year, vacancy rate 5%

The result is a monthly out-of-pocket expense of 20,200 yen. The interest rate at which the balance breaks even is 0.18%, which is a level far from the current 2%.

At this point, many people think, “It’s a failure because it’s in the red every month.” However, these need to be considered separately.

“Monthly deficit” and “loss when selling” are different stories

Of the 88,700 yen monthly loan repayment, 49,200 yen is the principal, meaning money that reduces the loan balance. Only 39,500 yen disappears as interest.

Even if you are paying 20,000 yen out of pocket each month, the balance is decreasing by about 50,000 yen every month. If the property price does not change, it is effectively the same as saving about 30,000 yen per month.

However, this is only if the price does not change. The question you should really be asking is the following:

Combining the money paid out of pocket and the money returned when selling, how much will be left in the end?

The tool displays this as the “final amount remaining on hand.” The calculation formula is as follows:

Final amount on hand = (Selling price – Selling costs – Loan balance) + Total balance from today onwards

When to sell: The “peak year” is surprisingly early

We will add the following conditions to the previous example: “Current estimated selling price 25 million yen,” “Selling price drops 1% every year,” and “Interest rate rises 0.25% per year (cap +2%).”

• Sell now: Final amount on hand 0 yen (benchmark for comparison)

• 3 years later: 190,000 yen (+190,000 yen compared to selling now)

• 5 years later: 130,000 yen (+130,000 yen compared to selling now)

• 10 years later: -530,000 yen (-530,000 yen compared to selling now)

Under these conditions, the most you will have left is in 3 years, and holding it for 10 years results in 530,000 yen less than selling now.

The reason is simple. For the first few years, the effect of principal repayment outweighs the out-of-pocket expenses. On the other hand, as interest rates rise, out-of-pocket expenses swell, reaching 42,500 yen per month after 10 years. When a drop in price is added to that, it reverses at some point.

“If you keep holding it, it will pay off someday” is not necessarily true, and there is an end to the favorable period. I believe that being able to see this in numbers is the greatest value of this tool.

Of course, if you assume the selling price will rise, the result will change. That is precisely why you should enter and compare the three patterns of optimistic, neutral, and pessimistic yourself.

Professionals look at selling prices based on “yield”

Funds and institutional investors think of property prices as “rent remaining on hand ÷ yield.” When interest rates rise, the yield sought by buyers also tends to rise. Even if the rent is the same, if the yield rises, the selling price falls.

The tool includes a comparison table for when the yield at the time of sale increases. Looking at the previous example of selling after 10 years, it looks like this.

A difference of over 3 million yen with just a 0.5% movement in yield. The price of a studio apartment is influenced more by this movement in yield than by the level of interest rates themselves.

If you switch “how to determine the future selling price” to “calculate from the yield at the time of sale,” you can estimate all years using this approach.

I also added a comparison between variable and fixed-rate mortgages

On the second tab, you can compare variable and full-term fixed-rate mortgages.

In the example of a 40 million yen loan over 35 years, with a variable rate of 0.9% and a fixed rate of 2%, the results are as follows.

• The initial monthly payment is 111,100 yen for variable and 132,500 yen for fixed (fixed is 21,400 yen higher per month)

• If the variable rate rises by 0.25% per year (up to a cap of +2%), the total repayment amount is 60.16 million yen for variable and 55.65 million yen for fixed

• If the variable interest rate continues to rise at a pace of 0.1% or more per year, the total repayment amount for fixed will be lower

You can also toggle the “5-year/125% rule” on and off, and it will display any unpaid interest to be paid at the end. The idea of viewing a fixed interest rate as “insurance premiums to prepare for future interest rate hikes” is written in detail in the previous article.

3 things to judge with this tool

Finally, I will summarize how to read the results into three points.

① How much leeway is there until the interest rate turns into a deficit

Even if you are in the black, if a further 0.5% increase would put you in the red, you are effectively facing a yellow light. If you have a variable interest rate, be sure to understand this margin of safety.

② Is the “year with the highest net proceeds” near or far?

If the peak year is 1 to 3 years away, you are already in the latter half of the favorable period. This is a sufficient reason to consider selling.

③ Can you withstand it if the yield demanded by buyers increases?

If your final net proceeds would turn negative with just a 0.5% increase in yield, you will be unable to move if exit conditions worsen.

The strength of studio apartment investment is the leverage you can borrow based on your annual income. On the other hand, it only becomes an investment once you think about when and how to close out that loan. I hope this tool serves as material for that decision.

▶ Interest Rate Rise Simulator
https://cre-crossborder.github.io/rate-sim/

*This tool and article are for calculation and informational purposes only and do not constitute investment advice. Income tax, taxes at the time of sale, insurance premiums, and one-time repair costs are not considered. Please make actual decisions based on your own conditions and after consulting with a professional.