Editorial
This article explains how to set rent, vacancy and interest-rate assumptions as ranges rather than single numbers, using hypothetical figures to compare scenarios.
Contents
The result of a rental property cash-flow simulation depends heavily on the assumptions you enter. Changing a single input can turn an annual surplus into an annual shortfall. This article looks at how to set three core assumptions, namely rent, vacancy and the loan interest rate, as ranges rather than single numbers. All figures are hypothetical and are used only to illustrate the method. This is not a recommendation of any property, company or lender, and it does not predict future rents, prices or rates.
Use a range, not a single number
A common mistake in simulations is to use only the most favorable-looking inputs: the rent in the listing, no vacancy, and today’s interest rate. In practice, rent may be revisited when a tenant changes, some vacancy tends to occur over time, and the repayment amount can move if the loan has a variable rate.
It helps to set up three cases:
- Base case: a level you consider realistic, based on comparable local data.
- Cautious case: rent is lower, vacancy is higher and the interest rate is higher.
- Favorable case: somewhat better than the base case, shown for reference only.
The goal is not to guess which case will happen. It is to check in advance whether you could keep paying the loan and expenses in the cautious case.
Rent: separate asking rent from the rent actually agreed
The rent shown in a listing (the asking rent) is not always the rent at which a lease is actually signed. Rent for an older building may also differ from what it was when the building was new.
- Look at both listings and, where available, agreed rents for similar units: same area, similar layout and similar age.
- Allow for the possibility that rent is reviewed when tenants change.
- Consider how aging equipment could affect rent, together with repair costs.
There is no single correct percentage by which to lower rent. A practical approach is to try several levels, for example no change, 5% lower and 10% lower, and see how the result moves.
Vacancy: think in months per year
Vacancy is easier to picture as the number of months per year in which no rent is received. Between one tenant leaving and the next signing a lease, there is an empty period, and there may also be costs for finding a new tenant.
Suppose a unit rents for 100,000 yen a month (hypothetical). With one vacant month a year, annual rent is 1.1 million yen instead of 1.2 million yen, which is a vacancy rate of about 8%. Costs such as restoring the unit after a tenant leaves or paying advertising fees can come on top of the lost rent.
The fewer units a property has, the larger the impact of a single vacancy. A single-unit property has no rent at all while it is empty, whereas a building with many units still receives rent from the occupied ones.
Interest rate: look at the range of repayments first
How much a rate change affects your payments depends on the type of loan, such as variable or fixed, and on its terms. If the rate can change, it is useful to calculate repayments at several rates. You do not need to forecast the rate. The purpose is to check whether you could keep repaying if it reached a given level.
Suppose you borrow 20 million yen over 35 years with equal monthly payments. The approximate annual repayments are as follows (checked by hand and with a spreadsheet-style calculation).
| Interest rate (hypothetical) | Annual repayment (approx.) |
|---|---|
| 1% | about 677,000 yen |
| 2% | about 795,000 yen |
| 3% | about 924,000 yen |
A difference of two percentage points in the rate changes the annual repayment by roughly 250,000 yen. Whether rent income can absorb that difference is exactly what a range of assumptions is meant to reveal.
Keep in mind that a repayment table like this assumes a rate that stays constant. If the loan has a fixed-rate period, the repayment is steady during that period, but the rate may be reset afterwards under the loan terms. With a variable-rate loan, the payment may change more often. Reading the loan terms for how and when the rate or the payment can change is therefore part of building the assumptions.
Combining the three: a hypothetical scenario comparison
The example below combines all three assumptions. Every number is fictional: a 20 million yen loan over 35 years, a full-occupancy rent of 100,000 yen a month, and annual operating costs (management fees, repairs, property tax and so on, combined) of 240,000 yen.
| Item (hypothetical) | Favorable | Base | Cautious |
|---|---|---|---|
| Monthly rent | 100,000 yen | 95,000 yen | 90,000 yen |
| Vacancy rate | 0% | 5% | 10% |
| Interest rate | 1% | 2% | 3% |
| Annual rent received | 1,200,000 yen | 1,083,000 yen | 972,000 yen |
| Operating costs | 240,000 yen | 240,000 yen | 240,000 yen |
| Annual loan repayment | about 677,000 yen | about 795,000 yen | about 924,000 yen |
| Annual cash left | about +283,000 yen | about +48,000 yen | about -192,000 yen |
In the base case only about 48,000 yen a year remains, and in the cautious case there is a shortfall of roughly 192,000 yen a year. A plan that assumes a surplus in every case can fall apart when only a few conditions move. This example leaves out income tax, residential tax, major repairs and costs at move-out, all of which need separate consideration in a real calculation.
One way to read the table is to ask which single assumption, if it moved, would change the result the most. Here the interest rate and the vacancy rate each move the result by tens of thousands of yen a year. Seeing this helps you decide where to spend your research effort, for example on checking local rents more carefully, or on reading the loan terms more carefully.
To try your own numbers, there is a cash-flow calculator on this site (Japanese): real estate cash-flow tool (Japanese).
Points to consider and risks
Setting ranges has its own limits. Some points to keep in mind:
- The range itself is a subjective choice, and actual results can fall outside it.
- Rent, vacancy and interest rates may move together, so check combinations as well as one factor at a time.
- If the cautious case produces a shortfall, check how many months you could cover from your own cash reserves.
- The sale price and large repair or equipment replacement costs should be considered separately from annual income and expenses.
- A simulation is material for judgment. It does not guarantee any outcome.
For how we approach numbers and explanations, see our editorial policy and the disclaimer. Please make investment decisions based on your own circumstances and on the contract documents, consulting a professional where appropriate.
About this article: This is a basic guide article. Our policy is to check the content against public sources. It is not investment advice. If you notice an error, please contact us.