I was having a chat with a Korean colleague earlier today and learned about jeonse (pronounced john-say), a property rental system unique to the country that also makes sense as an investment strategy.
As with most places, it is common in America to purchase a home and rent out the basement, for example, to help with the housing loan. In Singapore, while it’s less common for people to have basements, our concept of property investment is also similar, i.e. buy an apartment and rent it out to make money off the rent. In Korea, however, the jeonse concept is a very interesting one; something I find incredulous at first, but makes sense in a way.
The jeonse system is one that requires tenants to pay deposits of about 50% (sometimes up to 80%) of the market value of an apartment. This deposit is for 2 years, and during the 2-year period, you do not need to pay any additional rent. 2 years later, when you move out of the apartment, you get the full sum of it back (assuming you didn’t damage the apartment during your tenancy).
I know what you’re thinking:
Doesn’t that make my rent free of charge then?
Yes. From the perspective of the landlord or landlady (or landlordy?), it does. But think about it: 50% of the market value of a house in Seoul, where properties easily cost a million dollars, would mean $500,000 of deposit. In 2014, the average cost of jeonse was about US$300,000. And now, you’re thinking:
Who the hell has that kind of money?
That’s where bank loans come in. So, a tenant typically takes a bank loan to pay for the deposit. At an average interest rate of about 3%, a $300,000 deposit would cost about US$750 per month, which is really a regular rent amount. I’m assuming the interest is the only amount you pay since you’ll get the full sum back at the end of the lease and that can be used to cover the principal, but don’t quote me on that. Nevertheless, I would think this assumption holds true since the rent is supposed to be “free,” and for a loan of only two years, it doesn’t make good money sense to pay off the principal amount (which would make the rent inappropriately expensive). Else, that would beg the question: if you’re taking such a huge loan anyway, why not purchase one?
Now that we’ve gotten the tenant and loan situation cleared, what about the “landlordy?” How are they making money? If this Wikipedia entry is to be believed, the “landlordy” typically takes the close to half a million dollars deposit, and makes money off investing the sum. That should come with the assumption that “landlordies” are able to generate returns higher than the value of the rental market. Otherwise, it is just unnecessarily complicated steps in property investment.
While my friend did suggest some of these “landlordies” take the jeonse money to purchase more properties, my current limited understanding of it makes me wonder how this system came about and if it will work elsewhere. But as far as I’ve read, it doesn’t make enough sense to me yet.
PS: Don’t fret if you’re planning a move to Korea because there is another system known as the wolse (pronounced wall-say) for officetels, which works more like the rental system most of us know. Officetels are spaces suitable for both commercial and residential use, thus the name officetel, a combination of office and hotel. For a quick reference, officetel deposits are about $10,000 and rent is $500-600 a month. There are also options where the deposits can be much lower, but in those cases, the monthly rent will cost more. In that sense, it seems to make more sense paying higher deposits since you’ll get them back after all. But, to each their own.