When looking at properties on real estate portals, the first thing that catches your eye is a number like “10% gross yield.”
It is easy to compare and easy to dream about. However, that number alone does not tell you how much money will remain in your pocket, the profitability after repairs, or the price at which it can be sold in a few years.
What I want to emphasize in real estate investment is not the height of the gross yield, but rather whether assets and cash flow will remain even under unfavorable conditions.
In this article, assuming mainly used detached houses and entire buildings in Tokyo, I will organize a method to evaluate land, rent, NOI, total investment amount, and exit strategy in five stages. Finally, I will also include a primary screening table for when you open property information.
※This article reflects general analysis methods as of August 29, 2026, and is not a recommendation to purchase specific properties or a guarantee of profit. For actual investments, please conduct on-site surveys, confirm contract, legal, tax, and financing conditions, and consult with experts as necessary.
Gross yield is the “entry number”
Gross yield is generally calculated using the following formula:
Annual projected rent ÷ Property price × 100
If the annual rent is 1.2 million yen and the property price is 12 million yen, it is 10%.
However, this calculation does not sufficiently reflect the following costs:
-
Vacancies and rent declines
-
Management fees, repair costs, insurance premiums, and fixed asset taxes
-
Acquisition costs such as brokerage fees, registration, and acquisition taxes
-
Renovations required immediately after purchase
-
Costs at the time of sale
Gross yield is useful as a filter for finding candidates. Decision-making is done with the subsequent numbers.
Criterion 1: Is it land that a third party would want even if it were vacant?
This is the question I want to pose first.
Even if there were no building, would a third party want this land?
Buildings get old and require repairs. They are important devices for generating rent, but their physical value tends to decrease over time. On the other hand, land has the potential to retain value depending on its location, road access, shape, usage, and surrounding demand.
It is not just the road rating or official land price that you should check.
-
Nearby closed transactions and active listings
-
Nearest station, convenience of daily life, and rental demand
-
Road access, frontage, shape, and elevation differences
-
Zoning, building coverage ratio, and floor area ratio
-
Feasibility of reconstruction and setbacks
-
Disaster risk, retaining walls, and boundaries
Official prices are just one benchmark. The actual selling price varies based on individual conditions and buyer demand. Cross-reference multiple methods.
Criterion 2: Do not take rent at ‘full occupancy/current status’ for granted
The projected rent provided by the seller or brokerage materials is just the starting point for analysis.
If you assume that vacancies will be filled, current high rents will continue, and no leasing costs will be incurred, the numbers will look too optimistic.
Therefore, compare nearby listings, floor area, building age, distance to the station, and facilities, and adjust to the rent that can be expected under normal conditions. Here, we call this ‘normalized rent’.
Furthermore, account for vacancy rates and rent declines.
For example, even if the annual full-occupancy rent is 1.2 million yen, if you account for 5% for vacancies, rent arrears, and leasing periods, the effective gross income is 1.14 million yen. For older properties or areas with weak demand, you may need to set stricter assumptions.
The important thing is not to copy the best past performance into the future.
Criterion 3: Evaluate the property’s earning power using NOI
NOI (Net Operating Income) is the net profit derived from the operation of the property.
NOI = Effective Gross Income – Operating Expenses
Operating expenses include management, repairs, insurance, property taxes, and common area expenses. Loan repayments and income taxes are handled differently depending on the purpose.
What is important is not to set repair costs to zero just because there happened to be no repairs in the past year. Look at future expenditures such as roofs, exterior walls, plumbing, water heaters, and interior equipment by averaging them out annually.
Even if the gross yield is the same 10%, properties with heavy management and maintenance costs will have a smaller NOI.
Instead of asking “how much is the rent,” look at “how much the property retains after normal operations.”
Criterion 4: Divide by All-in Cost, not property price
The investment capital is not just the property price.
All-in Cost = Property Price + Acquisition Costs + Initial Renovations + Costs until Operation
Even if the property price is 12 million yen, if acquisition costs and renovations cost 2.5 million yen, the actual investment amount is 14.5 million yen.
If the NOI is 900,000 yen, the adjusted net yield against the All-in Cost is approximately 6.2%.
900,000 yen ÷ 14.5 million yen × 100 ≒ 6.2%
When using financing, also consider repayments, interest rate hikes, and refinancing conditions from this point. Even if the return on equity looks high, if the borrowing is large, the margin for error during a downturn will be small.
Criterion 5: Write down the 5-year and 10-year exit strategy before buying
An exit strategy is not something you think about when you want to sell.
At the time of purchase, set up three cases for 5 and 10 years later: Bear, Base, and Bull.
-
How will the rent change?
-
How many years older will the building be?
-
Which repairs will have been completed?
-
How much is the remaining debt?
-
Who could be a potential buyer?
-
What value—vacant land, actual demand, or investment use—will provide support?
-
What will be the impact of sales costs and taxes?
Especially in the Bear case, there is a big difference between “it will sell if I lower the price” and “there are extremely few buyers due to legal or physical reasons.”
Sometimes, a high yield is simply compensation for low liquidity.
For reference: 5-stage property screening
Once you see property information, summarize it on one page in the following order.
1. Land
-
Land area and estimated land value
-
Road access, shape, zoning, and rebuildability
-
Major risks such as disasters, boundaries, and retaining walls
-
Whether there are buyers who would want it even as vacant land
2. Income
-
Assumed rent at full occupancy
-
Rent adjusted based on neighborhood market rates
-
Effective gross income after deducting vacancies, arrears, and rent declines
3. NOI
-
Operating expenses such as management, taxes, insurance, and repairs
-
Normal-case NOI
-
Bear-case NOI
4. Total Investment Amount
5. Exit
-
Remaining debt after 5 or 10 years
-
Price based on three perspectives: land, earnings, and comparable sales
-
Net proceeds from sale in Bear, Base, and Bull scenarios
-
Targeting the next buyer
Finally, I will write this in one sentence.
The profit from this property is generated by __, and the biggest downside factor is __. The value that remains even in a Bear case is __.
If you cannot write this sentence, you may be looking at gross yield rather than actual appeal.
Do not start by thinking about “buying a building”
With pre-owned properties, it is easy to be drawn to obvious attractions like the interior or full occupancy.
I would rather perceive it as acquiring valuable land, with the structure on top generating cash flow.
When you separate the profitability of the building from the underlying support of the land, you no longer have just one exit. You can confirm whether it is truly legally and economically feasible to continue renting, sell for owner-occupancy, sell as land, or rebuild.
Gross yield is just the entry point for finding a property.
Land, normalized rent, NOI, All-in Cost, and exit. Only by going through these five can you make an investment decision that you can justify even when prices fall.
Before considering whether you will make money in a good scenario, consider what will remain in a bad scenario.
Real estate involves large sums of money and cannot be easily resold. That is precisely why it is worth carefully creating a one-page summary before buying.
Conclusion
Save this 5-step screening process, and use it once before and once after looking at the gross yield the next time you find a property that interests you.
