All Forum Posts by: Jacob Michaels

To give a real life example, our first property we purchased in Sokcho:

1. Oct 2012: Market Value W110mil / Negotiated purchase price W95mil / Jeonse W82mil@ Feb 2013

2. 2015: End of jeonse contract. New market jeonse for that property: W98mil for 2 years. So we got W16mil cash out of the property (similar to a home equity refi loan, but at 0% interest!) Market Value W130mil

3. 2016: current market value of our property ~W140-150mil

So we have all of our invested capital out of the property, and everything moving forward is profit. Even if market conditions go horrible and we have to let the property go, we'll lose nothing.

If we sell anytime before some unpredictable future market crash, then we will make a phenomenal return on our cash.

Let's talk risk.

The risk with jeonse is that unlike weolse (a more normal monthly rent system), jeonse is heavily influenced by market interest rates. That's because traditionally landlords would accept jeonse in lieu of the monthly weolse rent because they would use the lump sum deposit and invest it in safe market investments (like CDs at the bank).

These used to return 5-10%. Now they're less than 2%.

So landlords no longer want to offer the jeonse option to tenants, they only want monthly weolse rent, which gives a return of 5-7% usually.

But many tenants don't want to pay the expensive monthly rent, they want to do a lump sum jeonse so they don't pay monthly rent.

So there's a mismatch of supply and demand.

There's a shrinking supply of available jeonse rental properties and a steady demand for them, so the jeonse prices have been increasing as the interest rates have been decreasing.

We leverage jeonse in a different way though that is very unusual for investors in Korea.

Generally speaking, we find good value properties in high potential areas with good fundamentals, negotiate down as low as possible, sign a contract with the settlement date stretched as far as possible, and market for a jeonse tenant to come into the property at a date matching our settlement date so we limit how much money we need out of pocket to close on the property.

For example, we recently closed on a property in Hongdae, which is one of the if not the #1 hot spot in Korea for the past couple years.

You would think that prices would be through the roof here.

And you'd be right.

But it doesn't mean there aren't great buys out there.

We found a 2-bd apartment in a newish building on a very popular street, with parking (rare!) and an elevator. Market value is around W250mil (~$215k). We negotiated a fast deal at W190mil within literally an hour or 2 of the seller telling the agent she wanted to sell. It never made it out onto the market.

Jeonse prices for this property are W150-170mil, depending on the month and how long we had to market. Due to the seller being unexpectedly uncooperative, we didn't have much time to market it and settled at W155mil with a tenant soon after settlement.

This effectively means we've borrowed W155mil at 0% interest from our tenant to purchase the property. Of course, there's a lien on the property and if we don't pay the tenant back W155mil in 2 years at the end of the contract, they get to own the apartment. That's the tacit agreement with every jeonse contract and the sole liability (realistically) that an investor like us faces.

We've done this well over a dozen times the past few years with great success, with each renewal bringing us higher market values for our jeonse deposits, and therefore more interest-free cash out of our properties to reinvest in other properties. We have been able to pull all of our invested cash out of the investments within 4 years, often within 2.

With this method and some successful negotiation, we have been able to get returns on our cash (IRR) on our properties of 30-50%.

That's annual return on our cash, so it's been pretty phenomenal for us.

I love the jeonse ("junsay") system here in Korea. 

My wife and I are active investors in the Korean market leveraging jeonse, investing both in Seoul and in Sokcho, which is on the East Coast of Korea surrounded by Korea's most beautiful mountain range. Over the past few years we've been able to acquire quite a number of properties, and participated in dozens of real estate transactions. We're also active in the Seoul Real Estate Investing Meetup, the #1 REI club in Korea (in English anyway!).

@Jason Boatwright

Welcome to Korea! As @Daniel Ryu mentioned I think you'd get a lot of value out of the Seoul REI Meetup. The next one is Sat Apr 23, so hope to see you there!

First, this post from @geoff bailey did a good job of explaining some of the peculiarities of the Korean market, and you'll see from my other posts why what we are doing is possible. 

Geoff Bailey:

I'm currently in Seoul and wondering if there are others as well, if so let's connect

Even for other US citizens traveling abroad, I'm curious to hear stories of your experiences you found to be new, exciting, interesting and how they are different from the US

For example, I stumbled across a term here called 전세 ( Jeonse) that is unique to S. Korea. It refers to the way apartments are leased. Rather than a monthly payment, the tenant will make a lump sum payment equal to 60-90% of the market value, depending on where you are. Overall, now that interest rates are low, they trend more on the high side

The tenant then get's to live there where their monthly expense is usually just the utilities (or monthly payment to the bank for borrowing the money for the large "deposit" or a portion of it). The landlord gets to invest the deposit money and keep all the interest earned from it. The tenant is protected by having a "lien" on the property

During these times of lower interest rate, 월세 (Wolse) is also used because the owner makes a higher return than other investments, which is like the traditional monthly rent with the deposit around 10% of market value. Then there are hybrids in between with a larger "deposit" and lower monthly payment (which for the tenant could mean a lower overall monthly payments even with a bank loan taken out for the deposit)

When asked around about why they don't just buy the apartment, people just said it was the Korean way. Others have said there's some tax implications when you own multiple properties. There was a sense that the younger generation is fearing a housing bubble as real estate prices keep rising so fast

Hey BP Community,

My wife and I live in Korea and leverage borrowed money, often hundreds of thousands of dollars worth, from our tenants at 0% interest to purchase undervalued properties. 

Sound outrageous? Read on.

[I've written extensively in another forum post on this as a response to someone's post, but I thought there'd probably be a lot of people who interested in reading if this were in a separate post :)

I'll copy & paste my and others' posts here. ]

Previous forum: https://www.biggerpockets.com/forums/76/topics/290398-international-real-estate?page=1#p1925452

@Jace Im My wife and I are active investors in the Korean market. I would say that the market here can be a separate beast to learn than in the US, depending on which strategy you use to invest. 

We leverage jeonse deposits to purchase undervalued properties. I've just written about it in detail here: 

https://www.biggerpockets.com/forums/76/topics/290...

I agree with your plan, starting locally and then branching out. I'd view Korea as being a completely a completely different chapter in your investing rather than any kind of progression....as investing here will be a whole new ball game.

@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.

@Michael Lee You and I have different ideas of risky my friend. It sounds like this strategy is not for you. 

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.