Holding costs for real estate investment are now shaking the very foundation of profitability. As rising interest rates, higher construction costs, and falling contract rents converge, industry practitioners have begun to speak openly about a situation in which the spread left in hand could fall below 2% even with full occupancy. "Do you really want to do this in a world without profit?" That question is now being exchanged quietly among professionals in the real estate industry.
In this article, we organize with numbers the reality of the "surge in holding costs" that now defines the real estate investment environment, and we explain the points owners should review immediately, along with the mindset required to survive over the long term.
Key points of this article - With yields in the 4% range and interest rates at 2%, the effective spread is only 2%, creating a risk that even a single vacancy or repair can push cash flow into the red - Major repair costs have risen by about 30%, from 20 million yen to around 28 million yen, due to higher construction material prices and labor costs - The gap between asking rents and contracted rents has widened to 1.7 to 1.8 times, creating a major disconnect between apparent yield and actual profitability - More owners are selling in response to rising interest rates, with net selling by affluent Chinese investors standing out in particular - For individual owners to remain viable, it is urgent to understand their financial resilience and recalculate cash flow
What are "holding costs" in real estate investment?
Holding costs in real estate investment are the collective term for all ongoing costs incurred in owning and operating a property. Loan repayment (principal + interest), management fees, fixed asset tax and city planning tax, fire insurance premiums, and repair reserve funds are the main components. While a property generates income, these costs also continue to consume cash at all times.
In the former era of deflation and near-zero interest rates, properties with yields of 7% to 8% existed in the market, and in combination with interest rates in the 0.5% to 1% range, owners could secure an effective spread of 5% to 7%. That structural advantage was the reason real estate investment came to be called a "golden age." Today, however, that assumption is changing from the ground up.
Accurately understanding holding costs is the first obligation in real estate investment. What I strongly feel in speaking with owners is the reality that many still look only at the "gross yield." Gross yield is nothing more than the annual rental income assuming full occupancy divided by the purchase price, and it does not reflect holding costs. As I explain in detail in Five strategies for optimizing real estate management costs, thinking in terms of net yield is the starting point for sound investment decisions.
Why are holding costs in real estate investment rising so sharply now?
From 2024 through 2026, multiple factors pushing up holding costs in real estate investment are emerging at the same time. This compound shift is the essence of the quiet sense of crisis spreading within the industry.
Yields in the 4% range, interest rates at 2% - the effective spread is only 2%
Many income-producing properties in urban areas are currently trading at gross yields of around 4% to 5%. At the same time, interest rates on real estate investment loans, even for floating-rate loans, have risen to around 2%. On a simple calculation, the effective spread at full occupancy is only about 2%.
Once management fees (5% to 10% of rent), fixed asset tax and city planning tax, fire insurance premiums, and other expenses are deducted, it is no longer unusual for the net cash flow remaining in hand to fall below 1% of the purchase price. Income plans designed on the assumption of the low-interest-rate era after the bubble collapsed generally do not hold up in today's interest-rate environment.
When I first began studying real estate investment, a veteran mentor told me, "Real estate works as a business only as long as the yield stays above the interest rate. Once that spread disappears, you should think of it as a different business." Those words are now standing before many owners as a tangible reality.
Major repair costs rise from 20 million yen to 28 million yen - the reality of a 30% increase
Another issue that cannot be overlooked when discussing the sharp rise in holding costs is the escalation in major repair costs. Major repairs for reinforced concrete apartment buildings are typically carried out every 12 to 15 years, but on the ground today there are reports of projects once budgeted at 20 million yen reaching the 28 million yen level because of higher construction material prices and labor costs. That is an increase of roughly 30%.
The Ministry of Land, Infrastructure, Transport and Tourism's "construction cost deflator" also shows a notable upward trend in recent years, and there is no clear prospect that this trend will reverse in the short term. If your repair reserve plan was created 10 to 15 years ago, it needs to be reviewed now. In The power of networks to reduce major repair costs by 30%, we introduce practical approaches to cost management. Any shortfall in major repair costs will need to be covered temporarily with borrowing, which in turn increases interest burdens further and creates a negative cycle.
If you would like to confirm whether your repair cost plan needs to be revised, please make use of INA&Associates' free consultation. We will review the repair plan for your property and its financial impact together.
A 1.7 to 1.8 times gap between asking rents and contracted rents
Another reality that must not be overlooked is the gap between the "appearance" and the "actual situation" in the rental market. Asking rents seen on portal sites and in property listings do not fall easily. However, the rents that are actually contracted are increasingly coming in well below the asking level. According to industry practitioners, the gap between asking rents and contracted rents can reach 1.7 to 1.8 times.
In other words, the rental income used in yield calculations based on assumed full occupancy may not actually be achievable. The "yield x%" figure investors see on websites falls meaningfully when recalculated on a contracted-rent basis. Reworking cash flow plans on a realistic basis is an immediate task.
Why are more owners becoming sellers?
In response to the surge in holding costs, the number of sellers in the real estate market is clearly increasing. Particularly notable is the behavior of affluent Chinese investors. Those who purchased Japanese real estate around 2010 to 2015 are moving to realize gains through sales, benefiting from the weak yen and price appreciation. Meanwhile, some who bought at elevated prices in 2020 to 2022 are beginning to be forced into loss-cutting sales under the double pressure of rising interest rates and falling rents.
Domestic individual owners face a similar situation. As repayments on floating-rate loans rise and total holding costs begin to exceed original projections, more owners are deciding to sell on the judgment that "cash flow will not hold if they continue to keep the property."
An increase in sellers can, in theory, create opportunities for buyers. However, when considering a new purchase in an environment where the cost structure has changed, due diligence at a completely different level from the past is required. Earnings simulations based on current interest rates, repair costs, and actual rent-closing rates are indispensable. I also recommend reviewing The impact of the FY2026 tax reform on real estate investment.
An era in which individual owners are screened out - the limits of holding without financial strength
"It has become an era in which individual owners will be screened out unless they have financial strength" - I feel this is a precise description of the reality of the industry.
To deal simultaneously with the three cost pressures of rising interest rates, higher repair costs, and falling rents, a certain cash buffer is necessary. Negotiating power with financial institutions, purchasing power in repair contracting, and the financial endurance to withstand prolonged vacancies - corporations and large-scale owners with scale and balance-sheet strength hold an overwhelming advantage in all of these areas.
By contrast, individual owners who entered the market with salary income or limited self-funding, using full loans and high leverage, are in an extremely vulnerable position against unexpected expenses and declines in rental income. If there is no room to build up reserves for holding costs, there is a real risk of a cash shortfall when major repairs become necessary.
That is precisely why I believe it is the mission of INA&Associates to provide information grounded in trust and honesty. The diagnostic ability to identify accurately which properties should be retained and which should be let go early is the service most needed in this era.
What actions should owners take now?
Given the current reality of surging holding costs, I would like to raise three actions that owners should take immediately.
1. Recalculate cash flow on a realistic basis Please prepare a cash flow calculation that fully incorporates current interest rates, contract-based rents, and the rate of increase in repair costs. The key is not to rely on an optimistic scenario, but to calculate on the assumption that "current market conditions continue for five years."
2. Review repair plans and reserve funds In light of the reality that major repair costs have risen by 30%, please redesign your repair reserve plan. If a shortfall is expected, you need either to increase reserve contributions now or to reconsider whether the property should continue to be held.
3. Clarify your criteria for selling vs. holding It is important to establish clear selling criteria, such as "take profits while unrealized gains remain" or "let go before holding costs exceed rental income." Continuing to hold emotionally is a risk in this environment.
If you are considering a review of your asset strategy, please use INA&Associates' individual consultation service. We can provide a property-by-property income diagnosis and propose an exit strategy.
INA's perspective - toward sustainable real estate management even in a "world without profit"
I do not necessarily view the fact that the "golden age has ended" pessimistically. Rather, I see it as a process in which a style of real estate investment that depended on excessive leverage and optimistic income assumptions is being restored to sounder footing.
In a world where the spread is 2%, the precision of rental management, relationship-building with tenants, and proper control of repair costs directly affect profitability. Differences in management capability that were hard to see in an era when simply buying could generate returns become strikingly visible in the current environment. For owners who combine financial strength with management capability, this environment is also an opportunity to acquire high-quality properties at appropriate prices.
At INA&Associates, we focus on protecting owners' long-term asset value from the perspective of comprehensive asset management that includes real estate investment holding costs. As a "talent investment company," we value investment in people and human capital. Because of that, through long-term relationships of trust with owners, we can support sustainable real estate management even in an era when profits are harder to generate.
Now that the profit structure of real estate has changed, it is more important than ever to understand the full picture of holding costs accurately and rebuild strategy with a long-term perspective.
Author: Daisuke Inazawa (Representative Director, INA&Associates Co., Ltd.) Last updated: April 2026
Frequently Asked Questions (FAQ)
Q1. How large should the gap between real estate yield and interest rates be to be considered safe?
A. As a guideline, the difference between net yield and the interest rate (the spread) should be at least 3%. The calculation should be based on net yield after deducting expenses, management fees, and repair reserve contributions. Assuming variable interest rates of around 2% in today's financial market, a gross yield of 7% to 8% or more is required. Because many urban properties today are in the 4% to 5% range, holding risk has risen materially from the past.
Q2. If major repair costs are rising, how should repair reserve funds be reviewed?
A. First, review your current repair reserve plan and calculate the gap against the latest repair cost estimates. If a shortfall is likely, you will need to discuss either increasing monthly reserve contributions or collecting a one-time payment. For individual owners, it is urgent to recalculate personal cash flow plans with the increase in repair costs (up 30%) reflected.
Q3. Is this the right time to sell real estate?
A. It is not something that can be judged uniformly as "sell or do not sell." Profitability by property, unrealized gains or losses, outstanding loan balances, and market liquidity all need to be evaluated comprehensively. In a rising interest rate environment, holding costs will continue to increase, so it is important to set a clear selling standard such as "before cash flow turns negative." If you are unsure, I recommend requesting an individual assessment from a specialist.
Q4. How should owners respond when the gap between asking rents and contracted rents is large?
A. The first priority is to recalculate cash flow using actual contracted rents and establish a realistic earnings outlook. It may also be necessary to bring asking rents closer to actual market levels in order to improve the lease closing rate. The longer vacancies persist, the larger the opportunity loss becomes, so please review rent-setting with your property management company.
Related Reading
- The power of networks to reduce major repair costs by 30%
- The impact of the FY2026 tax reform on real estate investment
Citations and References
- Bank of Japan "Outlook for Economic Activity and Prices (Outlook Report)"
- Ministry of Land, Infrastructure, Transport and Tourism "Construction Cost Deflator" https://www.mlit.go.jp/sogoseisaku/const/sosei_const_tk2_000003.html
- Ministry of Land, Infrastructure, Transport and Tourism "Real Estate Market Trend Survey" https://www.mlit.go.jp/totikensangyo/totikensangyo_tk4_000176.html
