Korea Real Estate - Would you pay $10,000 for an apartment with Oceanviews?
Welcome to Part 2 of our Series on investing in Sokcho, Korea. If you missed Part 1, click here. The series follows a group of Seoul Real Estate Investing Members whirlwind 19 hour day as we traveled to Sokcho (located near Mt Saraksan) to check out the properties of two of our investors and explore unique Korea-focused real estate buying strategies using Key Money deposits.
One thing is apparent from our conversations with the Sokcho Investors: their search for "desirability."
What is desirability? A quality of the real estate property that people will always be attracted to. Some common desirable factors might be:
* Proximity to a great school
* Beautiful ocean views
* Beautiful mountain views
In fact the investors' choice of Sokcho to invest is in large part driven by what they see as Sokcho’s inherent desirability as a location (ex: proximity to Mt. Sarkasan, beautiful oceans, and more - we’ll discuss that more in the next email).
As we drive to Property #2, we can see right away that one of its big desirability factor is its clear, unobstructed ocean views.
From the rooftop of Property #2. Prices may go up or down, but ocean views will never change.
Of course, finding a desirable property is only part of the process. There are countless, beautiful, desirable properties located throughout Korea and the world. As a real estate entrepreneur, you need to go one step further - buy these desirable properties at a discount to what their 'worth.'
You saw with Property #1 how our Sokcho Investors were able to turn KRW 3,000,000 into KRW 16,000,000 (or KRW 13,000,000 in profit) right from the outset of their purchase.
(note: Subtract three 0's from the KRW for a back of the envelope approximation of the dollar value)
A property is only valuable to a real estate investor if it’s selling at the right price. A really nice home selling for an exorbitant amount might be fine for the homeowner who’s blinded by thoughts of raising kids there and showing off a new bbq grill. But of for a real estate entrepreneur, whose goal is to make money, and more importantly, not lose money, price is ALL IMPORTANT.
The difference between what you PAY FOR A PROPERTY and what a PROPERTY IS WORTH is what Warren Buffett would call - "your margin of safety."
Every investment you buy should come with an adequate "margin of safety" that takes into consideration:
* Potential upside (how much you can make)
* Amount of effort needed
* Risk (usually measured in 'how much you are paying')
The higher the risk and effort, the more 'margin of safety' you'd like built into the deal.
RULE OF INTELLIGENT INVESTING
1. Do no speculate in real estate and hope for prices to go up. Buy at a price that guarantees a profit.
How is this done?
By searching out mispriced assets - Assets (property) that is being sold for less than what it's worth.
Let's take a look at how our Sokcho Investors apply Intelligent Investing rules to Property #2.
Original Asking Price: KRW 150,000,000
After Negotiations: KRW 100,000,000 + 10,000,000 for all the furniture
Key Money deposit from new tenant: KRW 100,000,000
Out of Pocket Price for our investor: KRW 10,000,000
For KRW 10,000,000 our investors were able to get a room full of very nice furniture (in fact, one regret they had was leaving the nice furniture in there and not replacing it with sturdier, furniture) and control of an apartment in this building:
Here's an important point to consider: The negotiation down to KRW 110,000,000 wasn't simply an arbitrary number to 'buy low' - but it was based on understanding the market and knowing what the current key money rate for the apartment was. By knowing that information ahead of time, they could make a calculated purchase based on Risk vs Reward. By having this knowledge ahead of time, they could negotiate and explain their reasoning while also knowing how much margin of safety they were comfortable with purchasing at.
KRW 150,000,000 represented a fair price for the property
But at KRW 110,000,000 (plus furniture) our investors were severely limiting their downside risk.
They tenant would provide most of the upfront cost. And in the worst case scenario, they could sell their property for KRW 110,000,000 rather easily and have a net profit of a room full of nice furniture!
Sound easy? In theory, it is. But in practice, it takes a lot of research, a lot of study, and an understanding of the market and risk.
What do you think? Do you think they got a good deal? I'd love to hear your feedback.
The Sokcho, Korea Real Estate Investing series is not intended to encourage people to invest in Sokcho. Nor does the Seoul Real Estate Investing Meetup have any products for sale or investments opportunities to offer. We simply want to help educate others about potential Korea Real Estate investing strategies through the experiences of some of our members. All feedback is welcome.