All Forum Posts by: Jacob Michaels

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.

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 @Account Closed  . We're pretty regular fixtures there and have presented on our strategy a couple times to the group. 

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.

@Eric Gabriel@Alex Franks @Kevin Yoo @Daniel Ryu @Geoff Bailey @John Van Uytven

Thanks for giving me a heads up on this forum Dan & John. 

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!).

To comment on Eric's system, I think it's a brilliant way to invest here, for the reasons he mentioned. The thought of doing it his way had crossed my mind before, and it's an excellent one, but I hadn't done it and it's interesting to hear it's paying off for him. 

@Jay Hinrichs

You've got tons more REI experience than I do Jay, and I'm pretty surprised you think this way. If I were a buyer and thought a wholesaler was doing a piss poor job and way overpricing their deals, even if I knew I could get around them and was tempted to, I'd still view doing that as unethical. Better to simply walk away from the deal, or if desired, make a backup offer to the seller IF the wholesaler's deal falls through.

I've had buyers that one of my partners found off of Craigslist who immediately tried to screw us and go around us trying to tell the seller that "it's just business" and "this is how the real estate business is". 

That's not true. That's just an unethical way to do business IMHO and I don't stand for that. 

 Sorry Jay, but I have to disagree with you on this. It's not just business when you tie up a wholesaler's property with a contract to buy, but secretly trying to screw them into losing the deal so you can steal it out from under them. Maybe some people operate this way, but I guarantee you no wholesaler who hears about it will ever do business with you again. 

This business is based fundamentally on trust. There are all kinds of ways to screw people, especially if you're only thinking short term. But I think those who are able to build successful businesses more often than not stick with the "my word is my bond" philosophy. I know I do. 

@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

@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.