The Danger of Dependence on Financial Institutions that Makes a Difference in Sapporo Real Estate Investment

Introduction

If the bank will lend me the money, I'll buy it.
If the loan is approved, I would like to purchase it.

When you're involved in real estate transactions, you hear this phrase very often. At first glance, it sounds like a rational, risk-averse, and sound decision. However, I feel that this phrase contains nuances that cannot be overlooked.

The point is that the final investment decision may be left to the financial institution.

Basing decisions on whether financing is approved means that the judgment criteria for purchasing a property will depend, in part or entirely, on the financial institution's evaluation. Of course, the financial institution's evaluation is a significant factor, and it's true that many transactions cannot be completed without financing. Therefore, this way of thinking itself is not being denied.

However, when it becomes too commonplace, I feel like I'm gradually drifting away from the essence of real estate investment.

Structural limitations of investing based on financing criteria

Investors who already own several properties likely have a feel for "what kind of terms are acceptable for financing." This criterion is extremely useful and speeds up the investment decision-making process.

However, at the same time, there are many cases where this standard has become an unconscious constraint.

In other words, this is a situation where "deals that may not receive financing" are excluded from consideration from the outset. Even properties that originally have the potential to generate revenue disappear from the candidate list the moment they pass through the financing filter.

In fact, there's a property that I was in charge of, and I had asked other real estate companies for their cooperation in selling it, and we were working to sell it.

However, we were repeatedly told by clients and real estate companies that financing wouldn't be approved for that property.

I was curious if that was really the case, so I consulted with a financial institution. As a result, I received an answer close to the full amount of the transaction and was able to close the deal.

One of the answers this result suggests is that individuals who own multiple properties or have more experience are more likely to fall into the regrettable situation of unconsciously imposing limitations based on their imagination or past achievements, thereby excluding options from consideration.

In Sapporo's real estate investment market, investment tends to concentrate in areas that are easily evaluated by financial institutions, such as along subway lines and in central districts. As a result, a structure emerges where similar properties are acquired under similar conditions, making differentiation difficult.

Properties that receive good evaluations will naturally face intense competition, and their prices will tend to converge in the market. In other words, you will continue to compete in a zone that is "stable but difficult to increase profits."

The starting point of "whether I want to buy it myself"

The reason why the phrase "I'll buy it because the bank will lend me money" feels strange is simple: it tends to omit the perspective of "whether I personally feel the property has value."

Originally, there should be a conviction that "this property is interesting" and "I can generate profits from it" first, and then use financial institutions as a means of fundraising.

Instead of choosing a property based on the bank, it's about convincing the bank about a property you've already chosen. The presence or absence of this proactivity will significantly impact the quality of your investment.

Even among real estate agents like us, there are cases where acquisitions are made solely by focusing on financial institutions' evaluations, but that is equivalent to abandoning our true job of "appraisal."

“Properties that can be transformed are the source of profit.

The financing assessment isn't great, but the location has value. By putting in some extra effort with renovations and leasing, this property can truly "transform." This is not an uncommon occurrence in the field.

Rather, many of the deals with high profits are properties that were undervalued at the time of acquisition.

Actually, at Bi-link, we procure and sell a large number of properties annually, and many of the deals with high profit margins were properties that received low or no valuation from financial institutions at the time of purchase.

For example, even in cases of low occupancy rates in older properties in Shiroishi Ward and Higashi Ward in Sapporo, it is entirely possible to increase occupancy by revising rental conditions, improving interior finishes, and adjusting management systems.

The important thing is not the "current numbers" but whether you can see "how much you can improve." Whether you can adopt this perspective is the turning point for whether you can secure profits.

How to generate revenue by converting properties into minpaku (short-term rentals)

Furthermore, when it comes to real estate investment in Sapporo, the option of minpaku (short-term rental) cannot be ignored.

Because tourist demand in Sapporo is stable, in some cases, operating a private lodging can be more profitable than renting out property, depending on the location. Properties with good subway access or those in areas that provide easy access to the city center, in particular, have this potential.

The key point here is that "properties with lower occupancy rates are more interesting."

Normally, properties with low occupancy rates tend to be avoided, but the situation changes when you consider converting them for short-term rentals. This is because a high number of vacancies makes it easier to change the property's use, allowing for a phased operational setup.

Flexible measures can be taken that wouldn't be possible with properties that are already close to full occupancy, resulting in a larger increase in revenue.

Even properties with low ratings as rentals can be viable as vacation rentals. By changing your perspective in this way, you can discover revenue opportunities that were previously unseen.

Properties with high occupancy rates also carry risks.

As I wrote in the previous section, it's true that "properties with lower occupancy rates are more interesting."

When occupancy rates are low, operating as a minpaku (short-term rental) is one option, but conversely, there are also risks associated with high occupancy rates.

It's the presence of long-term tenants. Due to the nature of real estate, it's not uncommon for tenants to stay for 10 or 20 years. Perhaps some cases are perceived as "stable" and are left as they are.

However, what I'd like you to consider here is whether the current rent market price is the same as it was 10 or 20 years ago.

In conclusion, rental market prices are fluctuating in many areas. In Sapporo, too, although there are differences depending on the area and property type, the appropriate rental level is definitely changing due to shifts in demand and supply balance.

In other words, long-term occupancy doesn't necessarily equal stability; there's a possibility that rents are fixed at below-market rates.

At first glance, this situation appears safe with no vacancy risk. However, in reality, it can be seen as a state where expected revenue is being missed. In other words, “invisible losses” are accumulating.

Furthermore, properties with long-term tenancies often have outdated facilities and interiors, and there's a risk of incurring significant costs when tenants move out. It's also undeniable that a lack of investment over a long period could lead to a decline in competitiveness.

Furthermore, if surrounding competing properties are undergoing renovations or equipment upgrades, they may appear relatively inferior. As a result, it is often observed in the field that properties struggle more than expected during the next leasing period.

In other words, even for properties with high occupancy rates, it's necessary to break down and consider "why that occupancy is being maintained." It's important not to simply evaluate that the property is full, but to look holistically at factors such as rent levels, length of tenancy, and the condition of facilities.

Seen from another perspective, properties with many long-term residents can be considered “a lump of potential for improvement” in the sense that there is "room for rent revision" and "added value can be expected through renovation."

This perspective also reveals new strategies even for properties with high occupancy rates. For example, approaches such as gradually adjusting rent in line with move-out timing or enhancing product appeal by renovating certain units.

What's important is not to think, "It's reassuring because it's fully occupied," but to question whether it's "truly in a maximized state." This deeper level of thinking will help prevent lost revenue and increase asset value.

How to interact with financial institutions

Of course, it's not realistic to ignore the evaluation of financial institutions. Cash flow is the lifeline of a business, and relationships with financial institutions are extremely important.

However, that does not mean "to depend."

While using financial institutions' evaluations as one piece of information, it's important to have your own judgment criteria.

You don't buy because you anticipate a return; you buy because you've determined it has value. Then, you arrange financing. Simply being mindful of this order will significantly improve the accuracy of your investments.

summary

To increase profits in real estate investment in Sapporo, it is essential to break away from reliance on financial institutions and adopt an attitude of judging value with your own discernment.

Some properties with low valuations offer significant potential for increased profitability with some improvements. Furthermore, by considering alternative uses such as minpaku (short-term rentals), it's possible to fundamentally change how revenue is generated.

From investing that accommodates financial institutions, to investing where you choose with your own judgment and utilize financial institutions. This shift in perspective will be a crucial turning point for advancing to the next stage.