When investing in Japanese real estate, understanding loan evaluation criteria is as important as selecting the property itself. One of the most important metrics used by lenders is DSCR. Unlike headline yield, it measures practical repayment safety. This article explains DSCR and how it affects investment decisions.

1. What Is DSCR

DSCR stands for Debt Service Coverage Ratio and represents annual repayment capacity. It is calculated as

Annual net income divided by annual loan repayment

A ratio below 1.0 means income is insufficient to cover debt service.

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2. Typical Lender Thresholds

Many lenders look for a DSCR of 1.2 or higher. This indicates cash flow equal to 120 percent of annual repayments. Depending on loan terms and property risk, some institutions require 1.3.

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3. Difference from Yield

Yield compares rent to purchase price, while DSCR focuses on net cash flow. Because expenses such as management fees and property tax are deducted, two properties with the same yield can have very different DSCR values.

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4. Simple Case Example

With annual rental income of ¥3,000,000 and expenses of ¥900,000, net income is ¥2,100,000. If annual loan repayment is ¥1,750,000, the DSCR is 1.20, which generally meets standard lending criteria.

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5. Practical Use in Investment Decisions

Focusing on DSCR helps investors avoid excessive leverage. Especially in rising interest rate environments, confirming repayment resilience through numbers is critical. Calculating DSCR before purchase supports long term stability.

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6. Takeaway

DSCR is a core safety metric in real estate investment. Rather than chasing high yields alone, confirming a repayable structure enables more reliable loan approval and sustainable property operations.