“There’s a property with a 10% gross yield! That’s a great deal, right?”
I have seen many beginners dig their own graves with this one sentence in my time at Kamakura Appraisal.
It’s the same as a medical checkup that only measures blood pressure
Rinko: “I hear about real estate investment a lot, but basically it just means ‘buying a house, renting it out, and getting rent,’ right?”
Otodo-sensei: “Roughly speaking, yes. But what separates success from failure is how you read the numbers. Buying based only on gross yield is the same as declaring ‘You are healthy!’ after a medical checkup that only measures blood pressure. There are many more indicators you should be looking at.”
Rinko: “Oh no… then what should I look at?”
The “4 Lenses” for evaluating real estate investment
When evaluating a property, Otodo-sensei always switches between 4 lenses.
🔭 Lens 1: Profitability – The earning power of the property itself
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Gross Yield: Annual Rent ÷ Property Price
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NOI Yield (Cap Rate): Net Operating Income after expenses ÷ Property Price
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FCR (Free and Clear Return): Net Operating Income relative to total invested capital including fees
→ People who only look at the surface are out of the game right here.
💎 Lens 2: Equity Recovery – How hard your money is working
🏦 Lens 3: Loan Safety – Will you be crushed by your mortgage?
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LTV (Loan to Value): Loan Amount ÷ Property Price
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DCR (Debt Coverage Ratio): NOI ÷ Debt Service
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BER (Break Even Ratio): (Operating Expenses + Debt Service) ÷ Rent
📈 Lens 4: Long-term Comprehensive Profitability – Evaluation including time
To avoid being deceived by a “10% gross yield”
Rinko: “Is there a set ‘passing grade’ for each of these lenses?”
Otodo-sensei: “There are rough general guidelines──
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Gross Yield: 5% or more for urban condos, 8% or more for suburban apartment buildings
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NOI Yield: A level 2-4% lower than the gross yield
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CCR: 5% or more (over 10% is excellent)
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DCR: 1.2x or more (1.3x or more is the safe zone)
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LTV: 70-80% or less
However, these are not absolute ‘passing grades’. These are merely ‘general guidelines for property evaluation,’ and whether they pass or fail based on your investment goals is a different matter.”
What is truly important is to ‘grasp the indicators correctly and then compare them with your goals.’
Rinko: “Oh, so that doesn’t mean I shouldn’t buy a property with a CCR of 5% or less?”
Otodo-sensei: “Not at all. The four lenses are ‘lenses that accurately reflect the true nature of a property’, not ‘a test to determine pass or fail’. For example──
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Even with a negative CCR, it is often not a problem if the goal is inheritance planning.
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Even with a BTCF deficit, it is as designed if the goal is to replace future pension income.
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Even with a DCR barely at 1.0, it may not be a problem if it can be covered by other properties.
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Even with a low IRR, it may turn positive when inheritance tax reduction is included.
Accurately grasp that ‘this property has such-and-such a revenue structure’ and judge whether it ‘matches your investment goals.’ That is the true eye of a professional.”
Even for the same property, whether one ‘should buy’ differs from person to person
Suppose the same property A is right in front of you—
・① Inheritance planning (60s and older): Ability to secure a long-term loan (= debt deduction is effective for a long time) / Almost anything is OK (don’t worry about the compression rate)
・② Wanting CF immediately (40s salaryman, aiming for side income): Is monthly BTCF positive? / Vacancy resistance / High-yield used, regional single-building
・③ Pension substitute after retirement (50s, want to establish CF in 15-20 years): Loan payoff coincides with retirement age / Regardless of building age (assuming deficit can be covered while still working)
・④ Tax savings + capital gains (high-income earners): Depreciation speed / Capital gains after 5-7 years / Old wooden building fully depreciated in 4 years
・⑤ Asset succession (leaving to children): Building useful life / Long-term maintenance plan / New RC building
→ The same property is the optimal solution for one person, but inappropriate for another. Even if it passes the 4 lenses, you should not buy it if it does not meet your objectives.
“Asset management” also varies by objective
Rinko: “Even if you say ‘asset management’ in one word…”
Otodo-sensei: “Broadly speaking, there are two. ‘I want cash now‘ and ‘I want cash in the future‘. The properties you choose and the strategies you use will change completely based on this.”
Those who want CF now
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Positive CF is an absolute requirement
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Emphasis on CCR (annual return on self-funded capital)
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High-yield used, regional single-building properties are candidates
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Pitfall: With old buildings, remaining cash flow drops drastically due to repair costs and vacancies after 10 years
Those who want a pension substitute for the future
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If anything, current CF can even be negative
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During your working years, cover it by filling the deficit from your salary
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The essence is designing it so that CF starts when you need it (after retirement)
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Not tied to new or nearly new buildings: Even with old buildings, it is OK if CF starts at the timing of loan payoff or reduced repayment amounts
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In short, everything is about aligning the ‘timing of CF startup’ with the ‘time you need CF’
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Pitfall: If your take-home pay decreases too much due to deficit coverage during your working years, your life may collapse
Rinko: “So it doesn’t have to be a nearly new building?”
Otodo-sensei: “Absolutely not. A design where you buy an old building cheaply, save on taxes through depreciation until the remaining useful life is almost up, and then turn the rent NOI into a full pension after the loan is paid off is also perfectly viable. What is important is the alignment of ‘when you want CF’ and ‘when CF starts’.”
Inheritance planning group
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Ignoring cash flow is acceptable
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Being able to secure a long-term loan is the most important factor (= debt deduction is effective for a long time = taxable value can be compressed over a long period)
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Property type and compression rate hardly matter
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Otodo-sensei’s practical sense: Inheritance tax compression works with any real estate (whether it’s a city center RC or an old wooden building, it will always work to varying degrees)
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Having a large remaining loan balance until the start of inheritance has a greater tax-saving effect than a “compression rate of X%”
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Pitfalls: Risk of denial for purchases made just before inheritance, and financial institution lending stance (it is difficult to get long-term loans as you get older)
Rinko: “Does any real estate work for inheritance tax planning?”
Otodo-sensei: “There are differences in compression rates, but in most cases, holding assets as real estate results in a lower valuation than holding them as cash. (Conversely, properties that do not decrease in value are likely to be treasure properties because they can be evaluated based on cost.) Therefore, when choosing a property for inheritance planning, it is meaningless to compare properties based on compression rates. Conversely, properties introduced with the pitch ‘How about this for inheritance planning?’ are likely to be junk properties with no other selling points.”
Conclusion – Deciding based solely on gross yield is “absolutely” dangerous
Most failures in real estate investment stem from just two causes.
Cause 1: Judging a property solely on gross yield
→ Making a decision without correctly grasping the true nature of the property (NOI/CCR/DCR/after-tax CF/inheritance tax effect, etc.)
Cause 2: Judging without referring to your own investment objectives
→ Judging based on a general ‘passing line’ and losing sight of the optimal solution for yourself
Correct decision-making flow
Step 1: Clarify your investment objectives (Inheritance planning / Current CF / Pension / Tax saving / Asset succession – any combination)
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Step 2: ‘Correctly grasp’ candidate properties using the 4 lenses (not pass/fail, but fully mapping the property’s true nature with numbers)
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Step 3: Judge whether the grasped true nature matches your investment objectives (judge by ‘suitability for your own objectives’, not a general ‘passing line’)
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Step 4: Match → Purchase / No match → Pass
Do not confuse Step 2 and 3. Many failures arise from judging by other people’s standards, such as ‘I bought it because it’s considered a good property in general’ or ‘I passed on it because it fell below the general passing line.’
Rinko: “So, a professional’s eye means ‘being able to read numbers correctly’ + ‘being able to cross-reference with your own objectives'”
Otodo-sensei: “Exactly. People who stop thinking at a 10% gross yield haven’t even properly completed Step 2. And people who blindly believe books that say ‘don’t buy if CCR is under 5%’ are skipping Step 3. Only by doing both can you make a professional decision.”
Just as you wouldn’t judge your health based solely on blood pressure, please judge properties by ‘correctly grasping the true nature through multiple indicators’ x ‘cross-referencing with your own investment objectives’. In this 12-part series, we will dig deep into the meaning, calculation formulas, actual examples, and pitfalls of each indicator in order, using concrete simulations.
Next time is ‘🏠 GPI, EGI, NOI – Breaking down the logic of rental income’. I will talk about why an apartment with an annual full-occupancy rent of 1.44 million yen actually only leaves 1.17 million yen in hand.
🏷 Related tool: kamakan-pro simulator — Calculate all indicators in this article with one click
🏷 Author: Kamakura Kantei Co., Ltd. / Professor Otodo
