All Forum Posts by: Jacob Michaels

@Michael Lee No worries! I hope my post cleared things up for you. 

FYI for those who are interested...These are not scientific numbers but we basically see our investment outcomes like this:

5%: Lose initial capital

10%: Break even

15%: Make 10%+ annual return on cash

20%: Make 15%+ annual return on cash

30%: Make 20%+ annual return on cash

20%: Make 30%+ annual return on cash

And this may even be a bit conservative, considering we don't even consider investments that don't have a very high likelihood of returning 20-30%+ return on cash. 

And the bulk of that 5% risk is really whether or not we get a bit overexcited about multiple opportunities and run the risk of a cash flow squeeze and have to forfeit a deposit. It's never happened, and we've got avenues to borrow money to avoid it, but it is one of the key (avoidable) risks for us. 

@Kevin Yoo My apologies for the delay. I don't get on BP very often these days.

To respond to your questions:

1. I'm not sure what you mean. We would rarely sell to a Jeonse tenant. Usually if we sell we are selling to some other buyer out there, and it's normally for a premium over what we bought it for. Because we are buying at well under-market prices and have that built-in equity cushion, it would be a very rare situation that we wouldn't be able to sell out and get out at least what we put into it. 

2. What I meant was that normally market conditions don't change dramatically in 1-2 years unless you're investing into a huge speculative bubble. I can't fully predict the future, but I can say with some degree of confidence that the market will most likely be like such & such for the next 1-2 years.  Beyond that, who knows. 2 years is the normal contract period for jeonse so that's why it's important. And in the recent low interest rate environment there has been an increasing lack of apartments available for jeonse renting, as landlords don't want to receive the jeonse deposit and put that into ultra low returning investments. They prefer the monthly weolse rents, where the return is much higher. Because of that, jeonse apartment supply has shrunk and jeonse prices have been going up much faster than it would otherwise. The impact of that on our investments has been that after each jeonse renewal period we have been able to increase our jeonse deposit requirements, and pull out cash, much like a home equity refi loan in the US. But it's free cash with no interest. And often we are able to pull out close to or all of our initially invested capital within the first contract renewal period. At that point, the investment becomes essentially risk-free for us as we have no money sunk into it. Any appreciation is pure profit. 

Now on the other side, In the exact situation you described, you'd be right. If the property value crashed in a drastically short period of time within the first 2yr tenancy contract period (HIGHLY UNLIKELY that we wouldn't see the signs but you never know 100%), then yes, we'd potentially lose some or all of the initial capital we put into the property. The good news is that with this jeonse strategy the initial capital is relatively small (usually ~$10-50k depending on the property and location) and so the potential loss (very unlikely) vs the very likely gain is nominal. 

3. Yes, there are WAY more deals than we can handle here. We spot them pretty much weekly, but because until now we have entirely self-funded our acquisitions we are limited in what we can do. Generally we are only able to work on 1 investment at a time, close it out, then work on the next one. The reason is that most properties are not in the perfectly ideal situation. Existing tenant contracts complicate the timing of cashflows, and we always need to be prepared to fully fund the entire purchase price first all cash, and then put a new jeonse tenant in at higher market prices at some point shortly thereafter. 

So in an ideal world we'd be able to borrow cash at reasonable rates (6-8%) whenever we needed for short term funding needs. 

I'm not sure if this is in line with what you're thinking, but it'd probably be worthwhile for us to chat about it

@Ayodeji Kuponiyi Does that all make sense? 

@Fernando Guerra Wow, I'd never heard of any other country that has this large deposit-in-lieu of rent system! If it is the same system as here in Korea, then I think there would be opportunities to do the same thing. 

I should say that depending on how someone executes this strategy it could either raise or lower the risk level.

Haha, DFTBA @John Van Uytven. Nice!

Hi @Alex Krejci Welcome to BP and welcome to Korea!

There's a great Meetup in Seoul called the Seoul Real Estate Investing Meetup where you can meet a lot of like-minded people. The next meeting is Sat Apr 23, maybe I'll see you there!

@Kevin Yoo

Yes, that's right. Unlike a monthly rental strategy this is purely an appreciation play.

Now, I know what you're thinking. Investing for appreciation and not cashflow is speculation and therefore risky and not good, and you'd be rightwrong. That's my new word.

You'd be right if you were investing because of market euphoria and you're trying to get in and out and make your money before the market collapses. The Greater Fool Theory. You're a fool yes, but hopefully you'll sell out to a bigger fool before the market gives. Someone's going to get stomped there at some point.

And this is how actually a lot of "investors" are here in different areas that I've seen. Big booms and busts based on fantasy and dreams.

If you're saying it's speculation you'd be wrong in the sense that we're making purchases based on good market fundamentals (population consistency/growth, increasing development of the area, planned development like parks, etc)

And within those fundamentally attractive areas, we try to find attractive properties that we negotiate great prices on. When I say attractive, I mean things like ability to turn commercial, in the direct pathway of gentrification, having unique qualities or amenities, etc. And we negotiate much harder than is customary, so the agents think we're crazy.

So we have a built-in equity cushion in a strong fundamentally attractive area, with (using the FREE jeonse deposit from the tenant) we use a minimal amount of capital to purchase.

This means on the very day we sign for the property, we know we've made money. Often tens of thousands of dollars. When we sign we know that we've made that money already. It's not a hope or a dream. It's a fact.

And based on good fundamentals that investment (with built in equity) is very highly likely to continue to go up.

It's like you negotiating an apartment today in Greenwich Village for $500k that you know out on the open market is actually worth $600k and really based on the direction of the neighborhood will almost definitely be at $700k within the next couple years. And you do it with only $50k out of pocket and borrow the remainder from the tenant for FREE with 0% interest.

Is that risky?

Can you say that because you don't get rent in your pocket you're not making money?

If you can make a deal like that, it's not speculation my friend, it's printing money. And printing it the moral, ethical, legal way.

That's what we do here.

Our strategy is about taking full advantage of asymmetric risk / reward situations. I'm a strong believer in going after opportunities that have a small element of risk but an uncharacteristically high reward. The great billionaire market trader Paul Tudor Jones talks about a 5:1 risk/reward ratio. He only puts his money in places where he knows he's risking $1 to make $5. This is one of those types of opportunities.

Most investors risk (yes, everyone risks) $1 to make $1.20, or maybe $3 over 30 years. So be it.

To me, that's a risk I can't handle. But exploiting (legally and ethically) safe opportunities in the market to turn $1 into $5 within 3-5 years is my idea of a smart decision.

It probably doesn't make a whole lot of sense if you're not living in Korea, as jeonse is an entirely different type of market than anything you'd be used to.

We only invest in areas with strong underlying fundamentals which work to drive up the value of the investments long-term. And within these areas we look for undervalued properties that serve to give us a built-in equity cushion that greatly reduces the risk involved and lowering the capital needs (which further reduces our risk).

The risk level is actually nominal in comparison with the reasonably expected returns.

Asymmetric risk/reward. I'd recommend it. 

Someone asked me about exit strategies so I thought I'd post that here.

There are a couple different exit strategies, the primary one being reselling. Because we negotiate usually far lower than the agents think is possible, it gives us an equity cushion and reduced cash needs that most investors wouldn't get from this strategy. This also means we get cashed out faster than someone would normally, and in the worst case scenario we have less at risk than someone would normally. When we resell and calculate the annual IRR it's usually pretty phenomenal.

The other (safer but not so sexy) exit strategy is that as the value of the property increases, we could change the strategy to a fixed income weolse by getting a loan from the bank that is based on the new higher valuation and would allow us to repay the jeonse tenant and get a weolse tenant in there. Generally in the beginning of funding a new purchase the banks don't loan nearly as much as a jeonse tenant would give us, so we need too much capital out of pocket to purchase. But the numbers make a little more sense after the valuation increases later on. But I've done up the numbers and usually after paying for financing costs, the numbers just don't make that option so desirable at the moment. But I could see someone who is more risk averse look more seriously into that.

@kevin yoo posted:

I am having trouble following you.

1. If you agree to a purchase price of W95mil from the seller and then Jeonse to tenant for W82mil then you need to put in your own money of W13mil at time of closing.
2. And since there are no monthly payments, you earn 0% on your W13mil.

Am I not getting it right?

This is just an example of what is possible leveraging the jeonse system here in Korea. And let me tell you that this is NOT the normal way of doing things, so I'm giving you our secret sauce here to help anyone reading understand how to do it.

Anyone else besides me love secret sauce???

Agents will tell you you're crazy and you can't do things this way or that way or negotiate that much off of a property, etc etc.

But it is all possible and we are doing several deals each year like this.

If you want to learn more and are in Seoul, shoot me a message and buy me a fancy cavier with gold flakes lunch

(kidding. just the gold flakes will do!)

or just come see us at the Seoul Real Estate Investing Meetup, run by a couple great guys @Daniel Ryu @Jean-Luc Leese . We're pretty regular fixtures there and have presented on our strategy a couple times to the group.