While the selection of quality properties and proper management and operation are essential for successful real estate investment, equally or even more important is the establishment of good relationships with financial institutions. Since many investors purchase properties using loans from financial institutions in addition to their own funds, financial institutions are not merely lenders of funds, but are important partners that determine the success or failure of the business. In this article, INA&Associates, Inc. explains from an expert's perspective the importance of building relationships with financial institutions in real estate investment, specific strategies, and points to be evaluated in loan reviews.
Why is it important to build relationships with financial institutions?
A strong relationship of trust with financial institutions brings various benefits to real estate investment. Not only does it make it easier to obtain financing, but it also provides the power to extract more favorable terms and encourage sustainable growth of your business.
Obtaining Favorable Financing Terms
As your relationship of trust with financial institutions deepens, you can expect to obtain more favorable financing terms, such aslower interest rates,longer loan terms, and higher loan amounts. Interest rates, in particular, have a significant impact on the total amount of repayment over the long term, so small differences can greatly affect the ultimate return on investment. In addition, a longer loan term will reduce the monthly repayment burden and stabilize cash flow.
Quick Financing
In the real estate market, it is not uncommon for prime properties to attract buyers soon after being put on the market. If a relationship with financial institutions has been established, loan screening and procedures will proceed smoothly, enabling quick financing. This will greatly increase your chances of securing attractive properties ahead of other investors.
Introduction of new projects
Financial institutions have a deep understanding of the business conditions and asset backgrounds of their loan recipients. For investors who trust them, financial institutions, through their own networks, may introduce them to quality real estate information that is not available to the general public, as well as deals for sale from other investors. This is a significant advantage that only investors with whom we have established good relationships can enjoy.
Ongoing Support for Business Expansion
Real estate investment does not end with the purchase of the first building. Many investors seek to expand the scale of their business to include a second or third building, thereby accelerating asset building. A good relationship with a financial institution does not end with a one-time transaction. By sharing business plans from a long-term perspective and receiving ongoing financing and consulting for business expansion, you will have strong backup for sustainable growth.
Types and Characteristics of Financial Institutions
There is a wide range of financial institutions that handle real estate investment loans. Each has different characteristics and screening trends, so it is important to select the most suitable partner according to your own investment strategy and property characteristics. Below is a summary of the main types of financial institutions and their characteristics.
| Types of Financial Institutions | Main Characteristics | Advantages | Disadvantages |
|---|---|---|---|
| Megabanks | Major city banks with a nationwide network of branches. Backed by abundant financial resources, they are strong in large-scale projects and high-value properties in central Tokyo. | ・Rates tend to be low. High social credibility ・ Capable of handling large-scale loans |
Strict criteria for screening Focuses on personal attributes (annual income, employer, etc.) May be reluctant to lend to small-scale projects in rural areas |
| Regional banks | Banks with business activities rooted in a specific region. Focus on contributing to the local economy and are familiar with local real estate information. | ・Community-based and strong in local property evaluation Flexible screening compared to megabanks ・Easy to build a close relationship with the person in charge |
Interest rates tend to be slightly higher than those of megabanks ・May not be able to handle properties outside of their business areas Loan amount limits are relatively low. |
| Shinkin banks and credit unions | Shinkin banks and credit unions are cooperative financial institutions that serve small and medium-sized businesses and local residents. They are more community oriented with the aim of developing local communities. | ・More community oriented than regional banks They are more community oriented than regional banks. Tend to evaluate business potential and future prospects |
Relatively high interest rates Loan amounts are small. Need to become a member or cooperative member |
| Japan Finance Corporation | Government-affiliated financial institution. Aiming to support small and medium-sized enterprises and sole proprietorships, the real estate rental business is also eligible for loans. | Also available to those who have difficulty in obtaining loans from private financial institutions. Long-term fixed interest rates are available. ・Financial support for business startups and loans for women and youth are available. |
Loan limits are low. Tends to take a long time for screening Focus on business plan rather than collateral evaluation of properties |
| Non-banks | Financial institutions that do not engage in deposit business but specialize in lending. They have their own screening criteria and can respond to a variety of needs. | Speedy screening They may be able to handle projects that are difficult for banks to handle. Flexibility in terms of personal attributes and diversity of properties |
Interest rates are very high Loan periods tend to be short. ・ Fees and other costs may be high |
Five steps to build a relationship of trust
A relationship of trust with financial institutions cannot be built overnight. It is essential to be sincere and build up a track record step by step. Here we explain five concrete steps to win their trust.
Step 1: Formulate and submit an elaborate business plan
What financial institutions place the greatest emphasis on is whether or not the loaned funds can be recovered without fail. To this end, a compelling business plan is essential. Include not only a simulation of the property's income, but also a rationale for setting rents based on market research, estimates of vacancy risk and repair costs, and a detailed, specific repayment plan. The first step in gaining trust is to give the impression that the investor has objectively analyzed the business, understands the risks, and has a solid plan.
Step 2: Provide regular information and reports on business conditions
Even after receiving a loan, do not discontinue communication with the financial institution. We recommend that you voluntarily submit quarterly or semi-annual reports on the occupancy status of your holdings, income and expenditure reports, and copies of tax returns. This will demonstrate transparency in management and keep those in charge informed of your business status. Promptly reporting and consulting with them not only when things are going well, but also when problems arise, will enhance your reputation as a faithful partner.
Step 3: Build a good personal relationship with the person in charge
Transactions with financial institutions are ultimately "people-to-people" relationships. There are many situations in which the decision of the person in charge will have an impact on whether or not a loan is granted and on negotiations on terms and conditions. By visiting the branch regularly and exchanging information face to face with the person in charge, you will change your perception of them from simply one of your customers to a "trusted partner. Talking about your passion for your own business, your vision for the future, and conveying your human appeal are also effective means of building a good relationship.
Step 4: Deal with multiple financial institutions and diversify risk
It is very important from a risk management perspective to build a track record of transactions with multiple financial institutions rather than relying on a specific financial institution. Even if one financial institution changes its financing policy, having other options will help maintain business continuity. Also, by receiving loan proposals from multiple financial institutions, it is possible to compare interest rates and terms, and let the principle of competition come into play. This creates a foundation for negotiations that will always elicit the most favorable terms for your company.
Step 5: Complement your credit by working with professionals.
Expertise in accounting, tax, and legal matters is essential for real estate investment. By concluding an advisory contract with a reputable tax accountant or real estate consultant and having your business plan and financial situation checked from an expert's perspective, you can complement your creditworthiness with financial institutions. In particular, business plans and financial statements prepared by professionals are evaluated as highly objective and reliable, and can be expected to work to your advantage during the loan approval process.
Points to be Evaluated in Loan Screening
When financial institutions make loan decisions, they evaluate the applicant's ability to repay the loan and the security of the business from various angles. It is important to understand the key points that are particularly important during the screening process and to take measures in advance.
| Evaluation Items | Major Screening Contents | Countermeasures and key points |
|---|---|---|
| Personal Attributes | Annual income, place of employment, length of employment, position, assets held, status of existing loans, etc. | Prepare a stable income and sufficient personal funds. Avoid credit card delinquencies and other activities that may damage credit information. The process of building personal funds (savings history) is also considered important. |
| Property Evaluation | The property's profitability (yield), collateral value (value added, capitalization value), location, age, condition of the building, etc. | Select properties with high profitability and low asset value. Understand the valuation method (cost-plus value or capitalization value) that financial institutions value. Prepare a third-party building inspection report or other documentation to demonstrate objective evaluation. |
| Feasibility of business plan | Feasibility of income/expenses plan, preparation for vacancy risk and interest rate rise risk, safety of repayment plan, etc. | Establish a realistic income/expenditure plan based on a detailed survey of the surrounding rent market and market trends. Present a simulation assuming stress scenarios (vacancy rate increase, interest rate increase). Highly evaluated when specific exit strategies (sale plan) are mentioned. |
| Track record of transactions with financial institutions | Past transaction history, such as salary transfers, utility bill debits, time deposits, purchases of investment trusts, etc. | ∙ Transferring the main bank to the financial institution where the loan is desired and increasing the number of daily transactions Establish a track record of time deposits, etc., even if they are small amounts. Establish a good relationship with the loan officer and have him/her deepen his/her understanding of your business. |
Conclusion: Toward sustainable real estate investment
Financial institutions in real estate investment are not just a source of funds, but a partner with whom you aim to grow your business. Building a good relationship is the lifeline for obtaining loans with favorable terms, obtaining good information, and expanding the business in a stable manner. Building up trust through elaborate business planning, transparent information disclosure, and honest communication is of the utmost importance.
We at INA & Associates, Inc. provide a full range of services, from planning the optimal financing strategy for each client's situation, to introducing financial institutions and supporting negotiations. If you have any questions or concerns about real estate investment, please feel free to contact us. We will do our best to support your asset building with our expert knowledge.
Frequently Asked Questions
Q1. How much personal funds do I need?
A1. It is difficult to say, but generally speaking, 10-30% of the property price is a good guideline. However, depending on the financial institution, personal attributes, and valuation of the property, it may be possible to obtain a "full loan" with less personal funds. The more funds you have on hand, the more credit you will receive from financial institutions, and this will certainly give you an advantage in the screening process.
Q2: Is it possible to apply for financing from multiple financial institutions at the same time?
A2. Yes, it is possible. Rather, the general approach is to approach multiple financial institutions and select the one with the best terms. However, when applying, it is important to be honest in informing other financial institutions that you are also consulting with them. Since the status of your application is shared through credit bureaus, it is not advisable to hide it. A sincere response will lead to trust.
Q3. What should I do if I am turned down for a loan?
A3. First, it is important to confirm with the financial institution the reason for the refusal to the extent possible. Analyze where the problem was in terms of personal attributes, evaluation of the property, business plan, etc., and develop a plan for improvement. For example, measures may include increasing personal funds, looking for a more profitable property, or creating a more detailed business plan. Even if you are turned down by one financial institution, there is a good chance that you will be approved by another financial institution, so it is important to keep approaching them without giving up.
Q4. How often should I contact the person in charge at the financial institution?
A4. After receiving a loan, we recommend that you contact them at least once a quarter to report on the income and expenses of your property holdings. The important thing is to maintain a good relationship through regular communication, rather than contacting them only when you have something to do. When the person in charge of the property transfers, politely ask for a handover to his/her successor, and build a relationship with the new person in charge as soon as possible.
Q5. Is the relationship between the real estate company and the financial institution important?
A5. It is very important. A real estate company that has a strong track record and is trusted by financial institutions will consult with you about financing through their own channels and help make it easier for you to pass the screening process. Financial institutions can proceed with the screening process with confidence if the project is introduced by a real estate company they trust. When selecting a real estate company, not only its ability to introduce properties, but also its network with financial institutions is an important criterion.
Daisuke Inazawa
Representative Director of INA&Associates Inc. Based in Osaka, Tokyo, and Kanagawa, he is engaged in real estate sales, leasing, and management. He provides services based on his extensive experience in the real estate industry. Based on the philosophy that “human resources are a company's most important asset,” he places great importance on human resource development. He continues to take on the challenge of creating sustainable corporate value.
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