Thinking About Expanding Scale with Whole-Building Investment｜How to Increase Purchases, Interest Rate Hikes, and Risks of Excessive Borrowing
When the first income property gets on track, more investors want to increase purchases with a second and third property, expanding the scale of their rental business. The approach of using rental income for the down payment on the next property and increasing assets using financing is the path many investors who have expanded their scale as "landlords" in Japan have followed.
On the other hand, the more you borrow, the greater the impact of interest rate hikes and vacancies. This article explains the basic approach to expanding scale through whole-building investment and points where you are likely to stumble. It does not promise profits but is intended as material to support your decisions.
Basic Approach to Expanding Scale
Expanding scale generally progresses through the following cycle.
- Buy a property with good income and expenses under borrowing conditions that are not overly burdensome
- Increase occupancy rate, reduce operating costs, and stabilize the cash flow—the money remaining on hand
- Save down payments and reserves for the next property from rental income and your main source of income
- Show the financial institutions the performance of existing properties and obtain the next loan
- When market conditions are good, sell some properties to realize profits and reinvest
The key point is that the income and expenses of each building are self-sufficient. If loan repayments and operating expenses can be covered by rental income, financial institutions are more likely to evaluate it as "a viable business."
What Financial Institutions Look at in the Next Loan
- Income and expenses of existing properties: Can repayments and expenses be covered by rental income? This will be checked by tax return documents and income/expense statements for each property.
- Total borrowings and repayment burden: Whether the borrowings have not become too large relative to annual income or assets.
- Cash on hand: Whether cash and deposits are sufficient relative to the borrowing scale.
- Financial statements: If owned by a corporation, whether ordinary profit is positive and the company is not insolvent.
When your properties increase, incorporating (forming a corporation) also becomes an option. Differences in tax rates and methods are explained in "Incorporation of Apartment Management."
Common Pitfalls
Excessive Increase in Borrowing
If you increase borrowings with almost no down payment, even a small vacancy or interest rate rise can make repayments difficult. It is important not to raise the loan-to-price ratio excessively and to keep reserve funds on hand after purchase.
Interest Rate Rise
The Bank of Japan ended its negative interest rate policy in March 2024 and has continued to gradually raise policy interest rates since. If you borrow with a variable interest rate, the impact of rising rates increases with higher borrowing.
| Total Borrowing (30 years, Equal Principal and Interest) | Annual Repayment at 2% Interest | Annual Repayment at 3% Interest | Increase Amount |
|---|---|---|---|
| 100 million yen | Approx. 4.44 million yen | Approx. 5.06 million yen | Approx. 620 thousand yen |
| 300 million yen | Approx. 13.31 million yen | Approx. 15.18 million yen | Approx. 1.87 million yen |
If you borrow 300 million yen, an interest rate rise of just 1% adds about 1.87 million yen annually to repayments. Before buying, calculate whether your income and expenses will remain viable even if interest rates rise.
Vacancies and Repairs
The more properties you have, the higher the chance that vacancies or large-scale repairs will occur at some point. Understand the timing of repairs for each property and plan to set aside the necessary funds regularly.
Quality and Location of Properties
If you rush to expand scale by choosing properties solely based on yield numbers, you may face issues such as vacancies not filling or being unable to sell when desired. Selecting areas with a sustainable population and rental demand is a prerequisite for holding properties long-term.
How to Allocate Time and Effort
As properties increase, tasks related to tenant relations, arranging repairs, and managing income and expenses also increase. Many who expand scale while continuing their main job delegate daily management to property management companies and spend their time on property selection and financial planning. For a comparison between self-management and outsourcing, see "Differences between Self-Management and Property Management Outsourcing."
Selling Properties as a Means to Expand Scale
Among owned properties, you can sell those whose prices have risen or those requiring major repairs in the near future, and use the profits or funds for the next property. If the ownership period exceeds five years, capital gains tax rates decrease, so consider the timing of sales including tax impacts. The sales process is explained in "Income Property Sales Process."
Summary
- Scaling up is a cycle of “buy → stabilize operations → save funds → buy next.” Each building’s income and expenses must be self-sufficient.
- Financial institutions look at existing properties’ income and expenses, total borrowings, cash on hand, and financial statements for next loans.
- Common pitfalls include excessive borrowing, rising interest rates, vacancies and repairs, and property quality.
- Calculate repayment amounts in advance assuming interest rate rises relative to total borrowing.
- Delegate management and spend time on property selection and financial planning. Selling properties can be a source of funds for the next investment.
Header image: Photo by charlesdeluvio on Unsplash (image)
About this article
- Author
- Xiao Li（Asset Management）Qualifications: Real Estate Transaction Specialist, Building Management Specialist
The operational lead for real estate sales and property management. At NTT Communications, he spent more than eight years managing DX projects for major enterprises, overseeing the full process from requirements definition through delivery and operations. At TLL, he handles the entire deal management cycle for income-producing properties, including sales strategy planning, investor sourcing, contract execution, settlement, and handover, providing well-matched opportunities and smooth transaction execution for domestic and international investors and operators.
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.
