Comparing Cash Purchase vs. Financing for a Small Property

Nine years ago I paid 6.4 million yen in cash for a compact one-room apartment near a regional train station, and eighteen months later I financed a similar unit with a 25-year loan at 1.9 percent interest. Both purchases turned into solid rentals, but the experience of getting there was almost nothing alike.

After running both models across all nine of my properties, I have a pretty clear picture of when paying cash makes sense and when financing is the smarter move, especially for a property under 10 million yen.

The Cash Purchase u2014 Fast, Simple, and Expensive Up Front

Buying with cash meant the whole transaction closed in about three weeks, since there was no bank appraisal to wait on and no loan underwriting to satisfy. I wired 6.4 million yen, signed at the judicial scrivener’s office, and had the keys within a month. From day one, the 68,000 yen monthly rent went straight into my account with zero debt service, so my net yield after management fees and property tax worked out to roughly 9.1 percent annually.

The catch was obvious the moment I looked at my savings balance afterward: 6.4 million yen was gone, and it stayed locked in that one building for almost four years before I refinanced part of the equity out. During that stretch I could not use the money for another purchase, and when a water heater failed and needed a 180,000 yen replacement, I paid that out of pocket too, since there was no lender relationship to lean on for extra credit.

The Financed Purchase u2014 Smaller Check, Bigger Math

The financed property cost 8.0 million yen, and the bank asked for 20 percent down, so I put in 1.6 million yen and borrowed the remaining 6.4 million yen over 25 years at 1.9 percent. My monthly payment, principal and interest combined, came to about 27,500 yen. Rent on that unit is 72,000 yen a month, which leaves roughly 44,500 yen before management fees and tax u2014 a smaller monthly cushion than the cash deal, but nowhere near the same cash outlay.

The real difference showed up over the following five years, when I used the 4.8 million yen I had not spent on that one property to put down payments on two more units. Each of those added another 60,000-plus yen a month in gross rent. Cash-on-cash, the leveraged approach returned closer to 21 percent on the 1.6 million yen I actually put in, once you count all three properties that same capital eventually touched.

Comparing the Real Numbers Side by Side

When I lay the two deals next to each other, the trade-offs get easier to see:

• Cash: about 9.1% net yield, zero monthly debt payment, but 6.4 million yen tied up for years
• Financing: 27,500 yen monthly payment, 20% down (1.6 million yen), and leverage for 2 additional properties within 5 years
• Cash: closing took about 3 weeks with no bank appraisal step
• Financing: closing took roughly 6 weeks including appraisal and loan approval
• Cash: full repair costs, like a 180,000 yen water heater, paid directly from savings
• Financing: the existing bank relationship made a later 2 million yen renovation loan much easier to arrange

Neither column is universally better. It depends on whether your bottleneck is monthly cash flow or available capital.

Vacancy Risk Looks Different With a Mortgage Attached

A cash property with no rent coming in for two months is just an inconvenience. A financed property with the same two-month vacancy means you are still covering that 27,500 yen payment out of your own pocket. I built a reserve fund of about 165,000 yen per financed unit specifically for that scenario, and I have needed to dip into it twice in nine years, both times for vacancies lasting five to seven weeks between tenants.

Which Route Fits Which Landlord

If you already have 6 to 8 million yen sitting in savings earning next to nothing, and you want one property with the highest possible net yield and zero ongoing debt worry, cash is hard to beat, especially past age 55 when banks get stricter about loan terms anyway. If you are earlier in building a portfolio and have steady income to qualify, financing at today’s rates of roughly 1.5 to 2.5 percent lets the same amount of capital control two or three properties instead of one. That is basically how I went from a single unit to nine properties over fifteen years.

My very first property was a cash deal because I did not yet trust myself to manage debt on a rental, but almost every property since has been financed. That mix u2014 one cash purchase early on, financing for the rest u2014 is the approach I use across all 9 of my properties today.

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