What are the characteristics of apartment loans in real estate investment?

A loan made when purchasing an apartment or other rental housing is called an apartment loan.
Where is the difference between it and a mortgage?
This section provides a detailed explanation of the characteristics and objectives of apartment loans for real estate investments and the differences between them and general residential mortgage loans.

What are the characteristics and objectives of apartment loans for real estate investment?

Apartment loans to make real estate investments need to have a clear purpose.
The purpose of rental apartment loans is divided into "inheritance measures" and "asset formation," and in the case of real estate investment, the purpose is "asset formation."
Incidentally, the purpose of using apartment loans for inheritance measures is to reduce inheritance tax.
Since the valuation of inherited assets is low for apartment loan liabilities, borrowing is itself a tax-saving measure.
Regarding asset formation, which is the purpose of real estate investment, we may wonder why it becomes asset formation to form loans and borrow money.
However, apartment loans in real estate investments are investments in apartments that eventually generate money.
A mechanism that generates income rather than the amount invested as a result leads to the objective of asset formation.

What is the difference between it and ordinary mortgages?

The major difference between apartment loans and conventional mortgage loans lies in their intended use and means of repayment.
First of all, regarding the purpose of use, in the case of an apartment loan, it is a loan for operating a property by obtaining rental income, etc.
The purpose of a mortgage is to buy a house for you to live in.
Next, regarding the means of repayment, while the means of repayment of apartment loans are rental income, etc., a major difference is that the means of repayment of housing loans (mortgage) are repaid from a person's salary.
In addition, mortgage loans are also subject to examination as to whether the loan recipient is in good health.
A mortage is repaid from the person's salary and that means that they remain in good health until the end of repayment.
If a loan recipient is unable to obtain group credit life insurance, there is a possibility that the screening may not go through.
In addition, there is a "tax reduction on housing loans" for home purchases, but it is also a big difference that there is no tax reduction for apartment loans.

Criteria and Features of Apartment Loans in Real Estate Investment

Next, I will explain the screening criteria for apartment loans.
A major premise of the screening criteria for apartment loans is that the property is an asset.
This is an important screening standard because we repay loans based on rental income generated by the property and other factors.
However, in addition to the property's asset nature, the attributes of the loan recipient are also subject to examination.
Let us take a specific look at what items are subject to review.

Annual Income

The amount one can borrow for apartment loans is said to be 8-10 times the annual income of the individual.
For example, if your annual income is 5 million, a loan of ¥4000 to ¥50 million is a guide.

Repayment burden and repayment status

As with conventional mortgage loans, apartment loans are also subject to examination.
If there are other loans, the total income subtracted from annual income is subject to examination, and the repayment ratio is approximately 40% to 50%, which is based on a comprehensive assessment of the risk of vacancy and the risk of interest rate rises.

Personal Assets

Self-financing is also one of the items which are screened.
It is important to know how much of the principal can be recovered in the event that you are unable to repay the loan due to vacancy risk or rising interest rates.
As for personal funds, not only the applicant but also the financial assets of family members in the same household may be added.

Employment Information

Information on your place of work is also an important subject of examination.
Important items include the size of the company, the number of years worked, and the form of employment.
Public service employees and listed companies have a low unemployment risk, so they are highly evaluated by financial institutions.
In addition, the longer the years of service, the more advantageous it is.
This means that those with solid prospects of repayment until the loan is fully repaid are given preferential treatment, and conversely, the screening will be tightened if there is a possibility that the loan may not be repaid.

Age

Age is important for ordinary housing loans, but the same applies to apartment loans.
As mentioned earlier, there is a risk that salary income will cease when employees reach mandatory retirement age.
From the above, it can be seen that two important aspects of apartment loans are repayment plans, including rental income, and personal attributes.

What measures and features make it easier for real estate investors to review apartment loans?

Finally, I would like to tell you about measures to make it easier to go through the screening of apartment loans.

Choose properties with profitability and asset value

In general, apartment investment loans are larger compared to residential mortgage loans. This factor alone means that the hurdles are high.
The repayment plan is important for apartment loans, and the more income investment properties make, the more highly evaluated they are by financial institutions.
As a result, properties with many vacancies or poor locations may be less profitable and may be difficult to clear apartment loan reviews.

Make a larger down payment

Until recently, approximately 10% of initial payments were used to make a down payment, but now, many financial institutions ask for 30% down.
This is mainly due to the avoidance of financing risk by financial institutions and soaring land prices.
Also, in the case of a down payment of zero yen, the chances of obtaining an investment loan is nearly nil.

Ask for help from experts

For apartment loans, we need to clarify profitability and submit the proper documents.
The documents we file are referred to as the Business Revenue and Expenditure Plan Sheet, which summarizes the profitability of the property and the loan repayment plan.
Within this context, it is important to simulate earnings to show how profitable it is.
Earnings simulations are difficult for people who are not familiar with them, so it is advisable to get the help of experts.
Revenue simulation needs to be considered from various factors, such as rent setting, vacancy assumptions, repairs and advertising expenses.
When the rent is set high, rental income simply increases and profitability rises, but there is also the risk of vacancy when the rent is set too high.
It is also important to assess the risk of vacancy.
It is not realistic to assume that during a 30 year loan term, the property will be fully occupied for 30 years.
Calculations should be made taking into account the period of repairs and advertising after a tenant leaves the premises.
In addition, if it is difficult to get new tenants, it may also be necessary to reduce the rent.
In addition to repair costs after a tenant leaves, large-scale repairs such as exterior wall painting, waterproofing, and equipment replacement may also be required.
It is important to assume all of these things and simulate them, which is an important part of real estate investment.

Research the characteristics of financial institutions

Apartment loans are characterized by different screening content depending on the financial institution.
There are three major types of financial institutions: city banks, regional banks, and shinkin banks. Borrowers who use a certain financial institutions for remittance of salaries and other purposes tend to receive preferential treatment.
In addition, shinkin banks are community-based financial institutions with strong ties to local influential individuals.
If that financial institution has a relationship with your place of work, there is a high likelihood that you will receive preferential treatment.

In Conclusion

In this article, we explained the characteristics of apartment loans in real estate investment and measures to make it easier to pass the screening process.
Apartment loans and residential mortgage loans fundamentally differ in their purpose and source of repayment.
Since the screening criteria are also different, it is best to have a clear understanding of their differences and characteristics before starting your real estate investment.