1. Define the scenario you are underwriting
Underwriting is not about finding the "true" value of a unit. It is about evaluating a specific scenario: purchase price, rent assumption, financing structure, holding period and exit logic. Mixing multiple scenarios into one spreadsheet is a common source of confusion.
Start by writing down, in plain language, what you are actually underwriting: "Buy a 1K near station X, hold for 7–10 years with moderate leverage, focus on stable cash flow and a clean exit to another individual investor." This one-sentence brief becomes the lens through which every assumption in the model is checked for consistency.
Clarity at this stage prevents a common mistake: optimising for the wrong objective. A model built around maximising gross yield will make different assumptions than one built around preserving capital. Neither is wrong, but conflating them produces unreliable output.
2. Anchor rent assumptions in station-level data
The most sensitive input in a condo underwriting model is often rent. Small changes here compound over the holding period. This is why using station-level rent benchmarks — for the right layout and walk-time band — is essential.
Avoid building a model on a single asking rent from a brochure. Instead, cross-check with local achieved rents and realistic vacancy expectations. A practical approach:
- Pull the median achieved rent for the same layout (e.g., 1K, 25–30 m²) at the same station, within the same walk-time band (e.g., 5–10 minutes).
- Apply a 3–5% discount to the median to arrive at a conservative base rent, reflecting the possibility that the unit is not at the top of the market.
- Model a vacancy allowance of 5–8% for well-located units, 8–12% for units beyond 10 minutes from the station or in oversupplied layouts.
The resulting effective gross income figure — rent multiplied by (1 minus vacancy rate) — is your working revenue assumption. All yield and GRM calculations should be based on this figure, not on headline rent.
3. Calculate GRM and gross yield
From your rent assumption, two numbers follow immediately:
- GRM (monthly): Purchase price ÷ Monthly rent. A ¥20,000,000 unit renting at ¥80,000/month has a GRM of 250x. Compare this to the station-level corridor for the same layout and walk-time band. If the corridor is 180x–240x, this unit is above market — worth understanding why before proceeding.
- Gross yield: Annual rent ÷ Purchase price. The same unit produces (¥80,000 × 12) ÷ ¥20,000,000 = 4.8% gross. After applying a 7% vacancy allowance, the effective gross yield drops to approximately 4.5%.
GRM is the faster filter — use it first to screen in or out. Gross yield adds context once a unit has passed the GRM screen. Neither replaces a full net yield calculation.
4. Build up to net yield before financing
From effective gross income, deduct realistic operating costs to arrive at net operating income (NOI) and net yield before financing. For a standard Tokyo residential condo, the key expense categories are:
- Property management fee: Typically 5–8% of collected rent for a standard management contract with a local agency. Higher if the manager provides full vacancy coverage guarantees (sabu-riisu arrangements).
- Fixed assets tax and city planning tax: Combined approximately 1.7% of the assessed value annually. For a central Tokyo condo with an assessed value around 60–65% of market price, this typically equates to 0.9–1.1% of the purchase price per year.
- Monthly management and repair reserve fees: These are paid to the building management association (kanri kumiai) and are not optional. For older buildings, repair reserve contributions can be substantial. Budget ¥10,000–¥30,000 per month depending on building size and age.
- Repairs and maintenance: A conservative allowance for ad-hoc repairs, cleaning between tenancies, and minor refurbishment. ¥50,000–¥100,000 per year for a compact unit is a reasonable baseline.
- Insurance: Fire and building content insurance for the unit. Typically ¥10,000–¥30,000 per year.
A well-run 1K unit in central Tokyo with effective gross income of ¥890,000/year (¥80,000/month at 7% vacancy) might carry total operating expenses of ¥200,000–¥280,000, producing an NOI of ¥610,000–¥690,000. On a ¥20,000,000 purchase, that is a net yield before financing of approximately 3.1–3.5%.
The objective is not to be ultra-precise to the last yen, but to avoid hidden optimism in your assumptions. Many first-time buyers in Japan underestimate the building association fees and the repair reserve contributions, which in older buildings can materially erode net yield.
5. Integrate financing and cash-on-cash returns
Once net yield before financing is clear, add your debt structure. For foreign investors, financing options in Japan are more limited than for residents, but they exist. The key variables are:
- Interest rate: As of early 2026, floating-rate mortgages for non-resident foreign buyers through specialised lenders range from approximately 2.5–4.5% per year depending on the lender, LTV and buyer profile. Fixed-rate products tend to be more expensive.
- LTV: Most lenders offering products to non-residents cap LTV at 60–70%. Some require a larger deposit or a Japanese guarantor.
- Amortisation period: Typically 20–35 years for residential condos. Shorter periods increase annual debt service but reduce total interest paid.
The annual debt service (interest plus principal) is subtracted from NOI to produce pre-tax cash flow. Cash-on-cash return is this figure divided by total equity deployed (purchase price plus acquisition costs minus mortgage amount). A deal with a 3.2% net yield but 4.0% mortgage cost is cash-flow negative before tax — a common scenario that requires explicit modelling rather than assumption.
For yield-focused investors, the rule of thumb is simple: financing makes sense when the net yield before financing meaningfully exceeds the all-in borrowing cost. In the current environment, this threshold is harder to clear than it was in 2020–2022, when floating rates sat near zero.
6. Model conservative, base and upside cases
A robust underwriting template includes at least three cases. The purpose is not to predict the future but to understand how the deal behaves under plausible variation.
- Conservative case: Rent 5–8% below base assumption, vacancy at upper bound (10–12%), capex allowance increased by 50%, exit GRM 10% above base (meaning the buyer at exit pays a lower yield, which reduces your exit price).
- Base case: Median rent for layout and walk-time band, 7% vacancy, normal capex, exit at current station-level GRM.
- Upside case: Rent at the 65th percentile for comparable units, 5% vacancy, minimal capex, exit GRM 10% below base (meaning the buyer at exit accepts a lower yield, which increases your exit price).
The conservative case is the most important. If the deal still makes sense — meaning equity is preserved and the holding period return is acceptable — under the conservative scenario, you have a defensible investment. If the conservative case produces an unacceptable outcome, the deal is only attractive if you are confident the upside materialises. That is a different risk posture, and it should be explicit.
7. Exit modelling
The exit assumption is the single most speculative input in any underwriting model. In Tokyo, residential condos are typically valued by reference to GRM (or its inverse, yield) relative to achieved rents at the time of sale. This means exit value depends on:
- The rent level at exit (which may differ from the rent at entry).
- The GRM corridor at the station at the time of sale.
- The buyer pool available at that price point and location.
For holding periods of 5–10 years, a conservative approach is to assume exit GRM is roughly flat to today's corridor — implying no appreciation in the multiple, only whatever rent growth materialises. Under this assumption, price appreciation tracks rent growth, which in central Tokyo has been modestly positive in real terms over the past decade. More optimistic scenarios can model GRM compression (multiple expansion), but this should be treated as upside, not base case.
Acquisition and disposal costs must also be modelled. In Japan, round-trip transaction costs (brokerage, taxes, legal fees) typically total 6–8% of the transaction value. These must be incorporated into the equity return calculation; deals that look attractive on yield can be marginal or negative in total return if holding periods are short.
8. Summarise in a one-page investment memo
Numbers are necessary, but they are not the whole story. A concise underwriting memo summarising the asset, the thesis, key risks and the main numbers makes decisions much cleaner. A useful format includes:
- Asset description: station, layout, age, walk-time, asking price.
- Investment thesis in one or two sentences.
- Base case: GRM, gross yield, net yield, cash-on-cash (if leveraged), exit IRR.
- Key risks: the two or three things most likely to cause the deal to underperform.
- Decision: proceed to due diligence, pass, or monitor.
This one-page discipline also allows you to revisit the deal later and see whether reality tracked the original thesis — which is invaluable feedback for improving your underwriting over time.
9. Where this template fits in your broader process
This underwriting structure is a natural extension of the screening playbook. The deal screening playbook helps you reduce raw deal flow to a focused shortlist. Underwriting takes you from shortlist to a structured go/no-go decision on individual assets. Due diligence then verifies the assumptions embedded in the underwriting model against the actual property documentation.
If you are working through an active shortlist of Tokyo deals and want a structured review of your underwriting assumptions against station-level benchmarks, Tokyo Insights can provide this as part of its advisory service.
Related reading
- Tokyo Deal Screening Playbook — the upstream filter that produces the shortlist you underwrite.
- Red Flags in Tokyo Residential Deals — the disqualifying signals worth catching before you underwrite.
- GRM Benchmarks by Layout — the reference ranges you compare an underwriting GRM against.
- How to Use GRM and Yield Together in Japan — the metric stack underwriting builds on.
- Distance to Station Rent Premium — the walk-time elasticity that should drive your rent assumption.