Gross Yield Is Not The Investment Case

Thesis

Gross yield is useful because it is fast. It is dangerous for the same reason.

Investors like a clean number. Sellers know that. A property with a 5.8% gross yield looks better than a property with a 4.1% gross yield until the expenses, vacancy, financing, and exit market are put into the same model.

The market does not pay investors for reading the first line of a listing.

The Basic Formula

```text Annual rent / Purchase price = Gross yield ```

Example:

```text Monthly rent: JPY 180,000 Annual rent: JPY 2,160,000 Purchase price: JPY 48,000,000

Gross yield: 4.5% ```

This number ignores costs. It also ignores whether the rent is market rent, whether the tenant is stable, whether the building is financeable, and whether the property can be sold later.

The Real Questions

Gross yield does not answer:

• Is current rent above market?
• How long would vacancy last?
• What are the management fee and 修繕積立金 (repair reserve)?
• Is the repair reserve underfunded?
• Is the building old enough to create financing issues?
• Is the unit too small for broad resale demand?
• Is the property close enough to the station?
• Would a bank lend against it?

If those questions are not answered, the yield is not underwriting. It is decoration.

Net Yield Example

Take the same JPY 48,000,000 property:

```text Annual rent: JPY 2,160,000 Management fee: JPY 180,000/year Repair reserve: JPY 156,000/year Property tax estimate: JPY 130,000/year Property management: JPY 108,000/year Repairs / leasing allowance: JPY 150,000/year

Net income before debt: JPY 1,436,000 Net yield before debt: 2.99% ```

The advertised 4.5% became roughly 3.0% before loan costs and tax.

Now add debt at 2.5% on 60% leverage:

```text Loan: JPY 28,800,000 Annual interest: JPY 720,000 Cash flow before principal and tax: JPY 716,000 ```

The economics are still possible, but the decision is now real. The investor can compare cash flow, equity, amortization, tax, and exit. That is underwriting.

When Yield Becomes A Red Flag

High yield usually has a reason. Sometimes the reason is mispricing. In weaker assets, it is risk.

Common issues:

• older building with future repair exposure;
• walk distance outside the strongest demand band;
• rent above market;
• weak tenant profile;
• bad road access;
• leasehold rights;
• small unit size;
• poor seismic status;
• limited bank appetite.

The first job is not to admire the yield. The first job is to find the reason.

Kagura's View

Gross yield is the start of the conversation. Net yield is closer to reality. Cash flow after debt is closer still.

But the final decision is not only math. A property also needs legal quality, financing quality, building quality, and exit quality.

If those do not hold, the yield is not compensation. It is bait.