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This time, it was distributed on CONSPIRIT's official channel on YOUTUBE.Episode 51: Boost your quality of life with real estate management!I would like to send you the contents.

Dear Real Estate Investors,
For those of you who are aspiring to become real estate managers,
Terms you will surely come across:
"Yield gap."

"Yield" translates to "yield rate" in Japanese, and "Gap" means difference, so the literal translation of yield gap simply means "difference in yields."

Generally, it is often explained as "property's gross yield - borrowing interest rate."

For example, if there is a property with a surface yield of 8% and it is purchased with a loan at an interest rate of 3%, then the yield gap is considered to be 5%.

It seems that most people believe that if the difference here is large, there will be a profit, but strictly speaking, it is incorrect to think that this "nominal yield - borrowing interest rate" is the yield gap.

To give the conclusion first,
"There's no point in comparing things that are measured by different standards."
It is that.

First of all, if the focus is on whether or not a profit will remain, one of the measures that needs to be taken is the investment return for a single year.

Therefore, FCR (Free & Clearly Return) is an appropriate rate to use for comparison.

FCR is also known as the "true yield," but because it takes into account vacancy losses, unreceived losses, and various expenses at the time of purchase, it is a rate that is closer to reality than the effective yield.

The method for calculating FCR is as follows:

NOI ÷ total investment amount × 100

The calculation formula is as follows.
The total investment amount here is
Purchase price of property + purchase expenses + initial repair costs
The calculation will include up to this amount.

Let's assume the example above, and calculate the provisional FCR for a property with a surface yield of 8%.

The property price is 50 million yen, and the expected annual rent when fully occupied is 4 million yen.
Let's say you buy a property with a yield of 8%.

However, if viewed over a single year, vacancy losses would be 10% of the expected rent if the property was fully occupied, and operating expenses would be 20%.

Then, NOI (net operating income) is:

Estimated annual rent at full occupancy: 4 million yen
▲ Vacancy loss: 400,000 yen (10%)
▲Operating expenses: 800,000 yen (20%)
= 2.8 million yen (NOI)

That's what it means.

In addition, the total investment amount is
The property price is 50 million yen,
3.5 million yen for purchase expenses,
If the initial repair work cost 1 million yen,
Total: 54.5 million yen.

In other words, FCR is
2.8 million yen ÷ 54.5 million yen × 100 = 5.14%
have become.

Now, to find today's topic, the yield gap, we need to find the other rate to compare with the FCR.

As mentioned at the beginning, if you are measuring the investment return over a single year, "K% (loan constant)" is appropriate in order to align it with FCR.

Even if we simply compare "loan interest rates," the element of repayment period (= time) is left out, so the measuring stick for FCR is not consistent.

The loan constant (K%) is an indicator determined by the borrowing interest rate and repayment period, and can be considered the "procurement cost" when managing real estate.
It can also be said to be the "yield" from the perspective of the financial institution providing the loan.

K% is
Annual repayment amount (ADS) ÷ total loan amount × 100
It can be calculated using the following formula.

In this case, the borrowing interest rate was 3%, but let's add a few more loan conditions and consider them.

Let's say you borrow 45 million yen, which is 90% of the property price of 50 million yen, at an interest rate of 3% and a repayment period of 30 years.

The monthly repayment amount is 189,720 yen.
The annual repayment amount (ADS) will be 2,276,640 yen.
If we assume that the total loan amount for the first year of purchase is 45 million yen,
2,276,640 yen - 45 million yen x 100 = 5.06%,
This will be K% of this investment.

Now we finally have some numbers to compare.

FCR: 5.14% - K%: 5.06% = 0.08%

The yield gap ended up at a rather unreliable figure of 0.08%.
The calculation is "gross yield - borrowing interest rate"
8% - 3% = 5%
That should have been the case, but if we use the same measuring stick and look closer to reality, the yield gap is revised downward to this extent.

Furthermore, for K%, the borrowing amount = remaining balance decreases every year, so if there is no change in the repayment amount using the equal principal and interest method, it will tend to increase.

However, like other indicators, it is not possible to say with absolute certainty that the yield gap is "above a certain percentage so that it is safe."

In real estate management, the numbers are always fluctuating, and of course there are some people whose investment strategy involves making a large down payment, reducing the amount borrowed, and shortening the repayment period.

However, I think what's important is to know the definitions and calculation methods of these indicators, and to be able to use them as a basis for deciding whether or not to invest.

Even if a sales representative tells you, "It's fine because the yield gap is big! You'll make a profit!", we recommend that you do not just believe them, but rather train yourself to be able to make your own judgments.

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