Relationship Between Income Property Prices and Bank Appraisals｜Calculation of Asset-Based and Income-Based Prices, and Conditions for Properties Likely to Receive Financing
Many buyers of entire apartment buildings or condominiums purchase properties using financing from banks or other lenders. Therefore, how much a buyer can pay is roughly determined by the buyer’s own funds plus “how much the bank will lend for that property.”
While bank appraisals may seem unrelated directly to sellers, properties with low appraisals are harder to finance, limiting the pool of buyers and making price negotiations more likely. This article explains the two appraisal methods banks use for income properties (asset-based price and income-based price), the relationship between building age and loan terms, and factors that make financing difficult.
Why Sellers Should Understand Bank Appraisals
The amount a buyer can pay is “loan amount + own funds.” For the same property, if the bank appraisal is high and the loan amount large, buyers can offer higher prices. If the appraisal is low, only buyers who can prepare more own funds can purchase.
In other words, bank appraisals affect both the ceiling of the selling price and the number of potential buyers. Knowing how your property is likely to be appraised before selling helps with setting the listing price and deciding whether to go with brokerage or direct purchase.
Asset-Based Price: Adding Land and Building Values
The asset-based price is an appraisal method that adds the values of land and building separately. The concept is as follows:
- Land: Roadside land price (rosenka), or public land price, etc., multiplied by land area. Adjustments are made for shape and road frontage conditions.
- Building: Replacement cost (unit price per sqm for building the same building now) × total floor area × (remaining years ÷ useful life)
The unit price for replacement cost is set independently by each financial institution. Many financial institutions base the useful life on the statutory useful life for tax purposes.
| Structure | Statutory Useful Life (Residential) |
|---|---|
| Reinforced Concrete Construction (RC) / Steel Reinforced Concrete Construction (SRC) | 47 years |
| Heavy Steel Frame Construction (Steel frame thickness over 4mm) | 34 years |
| Light Steel Frame Construction (Steel frame thickness over 3mm up to 4mm) | 27 years |
| Light Steel Frame Construction (Steel frame thickness 3mm or less) | 19 years |
| Wooden Construction | 22 years |
Source: National Tax Agency “Table of Useful Lives for Major Depreciable Assets.”
Example Calculation
This is an example assuming a 20-year-old RC construction property with 150㎡ of land (roadside price 500,000 yen/㎡) and 400㎡ total floor area, with replacement cost assumed to be 200,000 yen/㎡.
- Land: 500,000 yen × 150㎡ = 75 million yen
- Building: 200,000 yen × 400㎡ × (27 years ÷ 47 years) ≒ 45.96 million yen
- Asset-based price: approximately 120.96 million yen
In actual appraisals, adjustments are made based on land shape, road access, zoning, and building condition. This is provided just as an example to understand the concept.
Income-Based Price: Appraisal Based on Rental Income
The income-based price is a method that derives property price based on income generated. The most common is the direct capitalization method, calculated as “annual net income (rental income − operating expenses) ÷ capitalization rate.”
For example, if the annual rental income is 10 million yen and operating expenses are 2 million yen, the net income is 8 million yen. Assuming a capitalization rate of 5%, the income-based price is 160 million yen. Capitalization rates vary by area, building age and structure, and even a 0.5% difference in the rate can lead to a significant price change despite the same net income. Area-specific capitalization rate guidelines based on Urbalytics listing examples are introduced in the article “Process of Selling Income Properties.”
Which is Prioritized: Asset-Based Price or Income-Based Price?
Priority depends on the financial institution, and some look at both and use the lower as the standard. In central Tokyo, where land and rents are both high, the market trading price often exceeds the asset-based price, with buyers covering the difference with own funds.
Conversely, properties with high land value where the asset-based price is close to the selling price are easier to finance, widening the buyer potential. In the previous example, there is about a 40 million yen difference between asset-based price (approx. 120 million yen) and income-based price (160 million yen), so buyers financed by institutions emphasizing asset-based price must prepare that difference as own funds.
Loan Term: Relationship Between Useful Life and Building Age
Many financial institutions set the loan term limit roughly as “statutory useful life − building age” (some use their own economic useful life). The older the building, the shorter the loan term, increasing the annual repayment burden on the buyer.
Estimated annual repayment amounts (principal and interest equal payments) for borrowing 100 million yen at 2% interest are as follows:
| Loan Term | Estimated Annual Repayment |
|---|---|
| 30 years | approx. 4.44 million yen |
| 20 years | approx. 6.07 million yen |
| 10 years | approx. 11.04 million yen |
Even for a property with annual rent of 10 million yen, if the loan term is only 10 years, repayments exceed rental income. Such properties are limited to buyers who use lenders offering longer terms or buyers paying cash.
Factors That Make Financing Difficult
- Old seismic standards: Buildings with construction confirmation before June 1, 1981.
- Missing inspection certificate: Financing may be refused if there is no certificate proving construction conforms to the building confirmation.
- Exceeding floor-area ratio or building coverage ratio: Buildings exceeding standards due to extension, i.e., illegal construction.
- Non-rebuildable or leasehold land: Properties whose land collateral value is evaluated low.
- Buildings exceeding useful life: Especially old wooden or light steel frame buildings.
Even such properties can sometimes be sold to investors paying cash or by real estate company direct purchase. For details, see “Selling Non-Rebuildable, Leasehold Rights, and Old Apartment Buildings.”
Summary
- The amount a buyer can pay is “loan amount + own funds.” Bank appraisal affects selling price and buyer pool.
- Asset-based price is the sum of land (roadside price × area) and building (replacement cost × total floor area × remaining useful life ratio).
- Income-based price is “net income ÷ capitalization rate.” In urban areas, prices often exceed asset-based price.
- Loan term is often limited to “statutory useful life − building age,” with older buildings having higher repayment burdens.
- Old seismic standards, missing inspection certificates, and illegal construction make financing difficult. Cash buyers or direct purchase are options.
About this article
- Author
- Chen Tan（Founder）Qualifications: Real Estate Transaction Specialist, Building Management Specialist, US Certified Buyer's Agent
A serial entrepreneur spanning real estate investment, fund formation, and digital strategy. At McKinsey & Company, he led organizational restructuring, DX, and new business strategy projects for financial institutions and real estate developers across Japan and Greater China. At Amazon Japan, he served as the design lead for large-scale e-commerce products. Since founding TLL, he has overseen the full cycle from acquisition, repositioning, and operation of income-producing properties to fund formation, while building a data-driven investment decision model.
View profile → - Publisher
- TLL合同会社宅地建物取引業 東京都知事(1)第108202号住宅宿泊管理業 国土交通大臣(01)第F03424号
Data in this article cite their source and as-of date. Market conditions and regulations change, so check the latest information and consult a professional before deciding. Translated from the Japanese original.
