Large Deposits on Apartments

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Large Deposits on Apartments

Marcus Coleman
Rockville, MD · Member since 2015 · 16 posts · 3 votes

Hey people, 

So, first of all let me say, I'm new to real estate investing and I don't work in the finance or economics fields. So please excuse my ignorance, but I wanted to know what others think about this.

Earlier today I spoke with a friend that's living in and is from S. Korea. She lives in Seoul, and the housing market is insanely expensive there. So, she recently "bought" an apartment in Seoul for $80,000 USD. How it works in S. Korea is, you don't own an apartment, but you pay for it like you own it. She pretty much paid $80,000 USD to live there for 2 years. But here's the kicker, she gets it back at the end of the 2 years!! That blew my mind.

From the sound of it, you'd get a loan from a bank(or pay out of pocket), pay the landlord the $80,000, and live there for 2 years. The landlord makes money off the interest of the $80,000.

Has anyone heard of this system being used in the US? Do you think it's a good idea? She mentioned that landlords are trying to move toward a monthly payment system because interest rates are so low. But wow, if you did more with that money, you could make a killing!

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John Van UytvenPro Member
Property Manager · Oconee, IL · Member since 2014 · 536 posts · 202 votes
11y

That is the system here. 

My apartment is $3,000 as the refundable deposit and then $250 a month.

The Korean landlords are trying to go to the monthly rent system as well.

The problem for the landlord is they might have invested that somewhere else and then the tenant wants to leave early.

@Daniel Ryu

 or @Jacob Michaels

 can explain it better than me.

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  • John Van UytvenPro Member
    Property Manager · Oconee, IL · Member since 2014 · 536 posts · 202 votes
    11y

    That is the system here. 

    My apartment is $3,000 as the refundable deposit and then $250 a month.

    The Korean landlords are trying to go to the monthly rent system as well.

    The problem for the landlord is they might have invested that somewhere else and then the tenant wants to leave early.

    @Daniel Ryu

     or @Jacob Michaels

     can explain it better than me.

    2Reply
  • Stephen Chittenden
    Rental Property Investor · Gambrills, MD · Member since 2014 · 372 posts · 88 votes
    11y
    Such a system would be illegal under current law in Maryland. Can't speak to other states.
    0Reply
  • Jacob Michaels
    Investor · DFW / Austin, TX · Member since 2013 · 188 posts · 80 votes
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    @Marcus Coleman

    I've never heard of this Korean big deposit rental system (called 'jeonse') outside of Korea. It's truly unique. This is how I've been able to leverage our savings into purchasing several investment properties in Korea---using the tenants' deposits to fund our purchases of those properties.

    @John Van Uytven

     If the tenant wants to move out before the contract is up, they can do that but only by first finding another tenant to come in at an acceptable deposit price and paying the real estate agent's fee as well. So the risk is nothing really, and in a rising market it's actually better to have them move out earlier than expected as the new jeonse deposit is often larger than previous deposit. 

    1Reply
  • Joe Fairless
    Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
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    @Marcus Coleman that is fascinating - thank you for sharing. 

    0Reply
  • Marcus Coleman
    OP
    Rockville, MD · Member since 2015 · 16 posts · 3 votes
    11y

    @Jacob Michaels

    Do you live in Korea? Or do you just invest there? My future goal is to invest internationally.

    Also, do you currently use a system where you require a large deposit, but offer a very low monthly rate? I wonder why that's not used very often in the US.

    @Joe Fairless

    I'm glad you find this interesting too.

    0Reply
  • Jacob Michaels
    Investor · DFW / Austin, TX · Member since 2013 · 188 posts · 80 votes
    11y

    @Marcus Coleman Let's just say I get around ;)

    I've also wondered the same thing--why there isn't the opportunity to require large deposits on rentals in the US. 

    But I think there are a few different reasons for this:

    1. Most Americans who rent do not have $5k or $10k ready to put down as a deposit for 1-2 yrs. 

    2. Even if they did why would they want to do that when the house down the  street is just as nice but only requires $1k down. 

    I think it's fascinating how for many, if not most, Americans we don't have much cash savings, and yet are viewed as "rich' to most of the rest of the world. Yet in some other countries that Americans don't think of as rich the people have far more usable cash saved up. 

    @Joe Fairless I like your podcast

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  • Daniel Ryu
    Investor · Suwanee, GA · Member since 2014 · 579 posts · 347 votes
    11y

    @Marcus Coleman

    For some of the nicer, apartments in desirable neighborhoods, there are Koreans who will put up to 450,000,000 KRW down - that's about $450,000. And I'm not even talking in Gangnam or Daechi - where the afterschool education programs which are the most desirable have driven up real estate prices even more. 

    And that's just so you can live rent free. You still have to pay management fees (I guess you could consider them utilities + HOA) which could cost about another $200-$400 a month.

    I think most people in the US with that kind of money or access to it through a bank would probably just buy something, instead of using this system, or would try to invest it for a better return.

    I'm investing from abroad - I have a SFR in Jacksonville, Florida which I own as part of a JV with 3 others who are also on BP.

    If you're interested in learning more about Investing in Korea or internationally, check out our meetup group which I posted on in the marketplace:

    http://www.biggerpockets.com/forums/521/topics/190...

    Although the meetup is in Korea, we do send out email updates and our discussion board also has info to check out. Or you can send a question to a member.

    Or feel free to PM me anytime.

    @Joe Fairless

    Nice interview with @J Scott. I like how he broke things down.

    1Reply
  • Joe Fairless
    Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    @jacob 

    @Jacob Michaels and @Daniel Ryu thank you so much for letting know you. It's so nice to hear that. 

    0Reply
  • Maxwell Lee
    Real Estate Investor · Miami, FL · Member since 2013 · 474 posts · 214 votes
    11y

    And we haven't even started talking about renting commercial property....

    0Reply
  • Account Closed
    Homeowner · Signal Hill, CA · Member since 2015 · 521 posts · 70 votes
    11y

    Over in NY and here in CA landlords are required to hold a security deposit essentially in trust for the tenant, which means we can't comingle/use/invest it as if it were 'our' money, although we can 'hold' it in our personal checking account or similar in trust for our tenant(s).

    ITS NOT A LOAN.

    do correct me if i'm wrong.

    0Reply
  • Dominic Jones
    York, PA · Member since 2015 · 199 posts · 58 votes
    11y

    Very interesting conversation going on here. I was not aware of this system either; however, it makes me really question the benefit of investing in South Korea. I may have misunderstood something so please correct me if I'm wrong.

    I'm a landlord who owns the apartment of @Marcus Coleman's friend. She pays me an $80k down payment for 2 years. At the end of the 2 years, she gets to own the apartment herself? Is this how it works? Or she just gets her $80k back.

    This seems like it would have a dramatic affect on purchasing in South Korea and being an owner, in regards to purchase price. Can anyone here provide further information on buying in South Korea? @Jacob Michaelsor  @Daniel Ryu

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  • Daniel Ryu
    Investor · Suwanee, GA · Member since 2014 · 579 posts · 347 votes
    11y

    @Dominic Jones

    She just gets here money back. 

    @Account Closed

    As far as what the landlord can do with the money, I'm not sure. But the person who pays the key money registers the transaction with a district office. This is to ensure you can make a claim against the landlord in case of non repayment. 

    It's also common for the person having to "wait" for a new tenant to move in before the landlord will release payment of the key money deposit. 

    0Reply
  • Fred Heller
    Real Estate Agent/Property Management · Houston, TX · Member since 2014 · 1k+ posts · 827 votes
    11y

    If I understand you correctly, that system would be illegal in pretty much every state in the US. A deposit must be held, untouched, in a trust account. That money is the tenant's, not the landlord's. Now I'm sure there's some way you can get around it by calling it something else, but a deposit cannot be used for any purpose by the landlord.

    1Reply
  • Daniel Ryu
    Investor · Suwanee, GA · Member since 2014 · 579 posts · 347 votes
    11y

    @Fred Heller

    Yeah.. The system heavily favors the landlord in Korea. I had to pay to replace a thermostat while living in an apt and a lot of maintenance items are the tenants responsibility. Not to mention, there are great tax advantages as well  

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  • Dominic Jones
    York, PA · Member since 2015 · 199 posts · 58 votes
    11y
    Originally posted by @Daniel Ryu:

    @Fred Heller

    Yeah.. The system heavily favors the landlord in Korea. I had to pay to replace a thermostat while living in an apt and a lot of maintenance items are the tenants responsibility. Not to mention, there are great tax advantages as well  

     "Not to mention, there are great tax advantages as well" for the Landlord, correct?

    So my main question remains... what is the buying process like for property in South Korea? Or maybe... more specifically I should ask, how is the buying process in South Korea different from the States?

    Does the realtor you have in the South Korea REIA you started, have a BiggerPockets account? Can he/she join in on this conversation to help give the rest of us some insight?

    Like, I imagine in the larger cities of South Korea, that you can purchase individual apartments in a high rise like in New York, become the owner of that particular apartment and rent it out using the South Korean jeonse method. If this is wrong, please correct me.

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  • Daniel Ryu
    Investor · Suwanee, GA · Member since 2014 · 579 posts · 347 votes
    11y

    @Dominic Jones

    I've never purchased or thought about investing in Korea, so I'm not sure.. @Jacob Michaels has and he's part of our meetup. I know a few others have as well.

    The real estate agent - Jeff Yu - probably best to contact him through our meetup site. 

    You can, however, to answer your question, buy a place, and rent it out, and get key money from the new renter. That's what a lot of investors do. 

    You can also 'buy' a place by putting down ernest money, market the place for key money, find a new tenant, use his key money to help pay the owner the money you owe, and make up the difference out of pocket. It's a creative way to get into a property.. but something you'd have to talk to other investors about because I don't know all the ins and outs.

    In Korea, the landlords want rent nowadays because sticking the key money in bank isn't returning a lot of returns because interest rates are low. For renters, they'd rather put down the key money because they don't want to pay monthly rent.

    Anyways, these are just strategies that I've heard about and I'm no expert. ^^

    But I've heard from different Koreans that this is "not unusual" among investors.

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  • Dominic Jones
    York, PA · Member since 2015 · 199 posts · 58 votes
    11y
    Originally posted by @Daniel Ryu:

    @Dominic Jones

    I've never purchased or thought about investing in Korea, so I'm not sure.. @Jacob Michaels has and he's part of our meetup. I know a few others have as well.

    The real estate agent - Jeff Yu - probably best to contact him through our meetup site. 

    You can, however, to answer your question, buy a place, and rent it out, and get key money from the new renter. That's what a lot of investors do. 

    You can also 'buy' a place by putting down ernest money, market the place for key money, find a new tenant, use his key money to help pay the owner the money you owe, and make up the difference out of pocket. It's a creative way to get into a property.. but something you'd have to talk to other investors about because I don't know all the ins and outs.

    In Korea, the landlords want rent nowadays because sticking the key money in bank isn't returning a lot of returns because interest rates are low. For renters, they'd rather put down the key money because they don't want to pay monthly rent.

    Anyways, these are just strategies that I've heard about and I'm no expert. ^^

    But I've heard from different Koreans that this is "not unusual" among investors.

    Great to know. I'll look into it further and see if I can learn more from Jeff Yu. Thanks as always. Haven't forgotten about the e-mail, just haven't had a change to respond to it. You wrote me a solid chapter of a book ;-)

    Talk to you soon Dan.

    1Reply
  • Account Closed
    Homeowner · Signal Hill, CA · Member since 2015 · 521 posts · 70 votes
    11y

    Well said, Fred! 

    So, requiring large deposits on apartments makes the property more 'secure' while rented, but avails not a penny of the security deposit amount to the landlord in most all of USA. Most states require the landlord to provide a security deposit receipt that lists the name and address of the particular bank the deposit will be held at (it can't be spent). 

    Many states impose severe penalties, like if the tenant goes to bank with receipt to make sure the full amount is still in deposit, if it is not the tenant is entitled by law to recover via court order, double or triple the full amount plus attorney and court fees! Of course, this varies from state to state. 

    Plus, USA's most densely populated state - NJ - requires all landlords to deliver the interest generated from the security deposit either as credit toward the amount of rent due, or at least annual delivery of the interest money directly back to the tenant. NJ landlords can skip paying at least annual interest only if they occupy the building and it has 2 or less units, other than the landlord's unit, but even in those small owner-occupied rental buildings, tenants must be paid interest at least annually by simply asking for it.

    NY also has somewhat similar rules.

    It does seem that in most states, landlords can't even use some of the deposit to make repairs or just debit late rent while the tenant still occupies; it requires notice to quit or and other such formal paperwork before landlord can even touch the deposit even though the landlord is holding it 'in good faith', until the moment tenant moves out and even then repairs and deficits must be itemized via written notice. It's all complicated but the long and short of it is that apparently unlike in S Korea, landlords cannot use security deposit for anything until tenant moves out and only with proper notification and itemization of repairs/arrears.

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