$3,000 for a two story commercial building in Korea? Here's how two investors pulled it off...
On Saturday, Aug 1, a group of Seoul Real Estate Investing Members took an investing field trip to Sokcho, located about 2.5 hours outside of Seoul, to check out real estate investments. Sokcho is a year-round tourist destination because of its pristine beaches and proximity to Saraksan (Mt Sarak - largest mountain range in Korea). It also boasts some of the best schools in the Gangwon-do Province and a ferry that goes to Russia.
Two of the Seoul Real Estate Investing Meetup members have over 10 properties in Sokcho. During the field trip, they showed us their properties, explained the process of finding and buying deals, introduced us to their agents, and best of all, went through the detailed numbers of each purchase.
We covered A LOT of information in one day. Rather than write it all up in one post, over the next few weeks, I will be writing a series of posts detailing all that we learned.
Our day started bright and early at 5:30 am. Despite a little drizzle and a 6 HOUR drive to Sockho (note: the drive usually doesn't take this long - but we were leaving on a Saturday during the peak vacation season in Korea. The bus lists 2 hours and 20 minutes for the drive), we were all excited to learn. Later, we would return that night in the rain, giving us a total of 9 HOURS of driving in a single day. If that sounds crazy, then you haven't experienced the commitment to succeed of some of our members!
Leaving Saturday morning during peak season? Expect to see this!
After arriving and a quick lunch at an awesome 6,500 KRW buffet (with fresh vegetables growing outside the restaurant), we were off to see the first property. (Note: To convert Korean Won (KRW) to U.S. Dollars, you can simply remove the last 3 zeros. 6,500 KRW = about $6.)
Property #1 was located in the heart of Sokcho's retail district on Rodeo Drive (same name as the one in Los Angeles). Rodeo Drive features retails shops from many major brands including Adidas, Puma, and of course...
The street seems to be undergoing a transition - with older looking shops mixed in with some very nice, modern, newly redesigned looking storefronts - a little like Itaewon, a popular foreign district in Seoul. The sidewalks are broad, paved and pedestrian-friendly. According to one investor - Sokcho's Rodeo Drive is home to many big brands as the brands know the tourist traffic from across Korea is a great way to raise awareness of their products. Instead, of opening stores across Korea, open a store in a place that everyone visits.
Rodeo Drive is also home to one of Sokcho's biggest attractions - the Sokcho Fish Market.
As the busiest retail district in Sokcho, Rodeo Drive has a lot of desirable characteristics -consistent foot traffic, an always busy Starbucks, and a fish market that draws large crowds throughout the day and especially at night.
Additionally, a CGV movie theater is being build right behind the main street:
Buying a commercial building (a whole building) in this district might seem like a daunting task. But our investors were able to do it with the help of their real estate agent who held this property as a "pocket listing" - a property that hasn't been officially listed yet. Their real estate agents called them first, as the investors have a reputation for being able to close on a property.
The building they bought is a two story property zoned for both residential & retail.It's located at the beginning of Rodeo Drive. It has a rooftop with a view of the ocean.
It's a connected to the main Rodeo Drive through a walkway that leads to the main building - however, with the space zoned for both residential / commercial, there are lots of possibilities about how to maximize return on investment. Currently, it's being used as a residential space, but the consensus seems to be that renovating it into a commercial space would bring a much higher ROI (Return on Investment).
But this property's desirability lies in its location - right in the heart of Rodeo Drive.
Ocean view. Rooftop BBQ anyone?
So how much did our investors pay for this building? Here's where things get interesting.. and creative.
The initial price was listed at 35,000,000 KRW (remember: subtract 3 zeros for approximate dollar conversion) - it was a 'quick sale', meaning the owner wanted to find a buyer fast. After some negotiations, our investors got the price dropped to 33,000,000 KRW. (about $33,000 USD)
Given the location of this property, the price seemed to be a a steal. But the deal got even better. Our investors were able to market the building for a new tenant BEFORE THE SALE and found a key money tenant willing to put down 30,000,000 KRW to live in the space for two years. This money was given over to the seller.. and our investors only had to pay the remaining 3,000,000 KRW (about $3,000 USD) to take control of this property.
Note: Often in Korea, instead of paying monthly rent, a tenant will pay a large "key money" deposit. The key money deposit must be returned to the tenant when the contract ends. However, while the owner holds the key money, the owner is free to invest that to make a return. With interest rates low, many owners do not want key money deposits as they don't have a safe investment to put that the money into (remember - it has to be returned!) Instead, the owners prefer monthly rent. But many tenants prefer paying key money deposits as Koreans often pool money together to make these deposits (from family members) or the key money is paid by parents for their kids, usually after they get married and move out - Koreans are good savers. Korean tenants prefer a key money deposit instead of monthly rent since that lowers monthly disposable income.
In some areas, tenant demand for key money is so high and the supply is low. As such, tenants are willing to pay higher and higher deposits. If you find the right area to invest in, you might be able to find a tenant willing to pay 85%-95% of the PURCHASE PRICE in key money. This deposit can then be applied to the purchase price of the property - in a sense, you get a 0% interest loan from your tenant.
That means, our investors were able to take control of this 2-story commercial building in Sokcho for less than $3,000.
The easiest way to picture what has happened - imagine that the tenants gave them an interest free 'loan' to purchase the building. The investors, of course, are still responsible to repay that money to the tenants when they move out.
I know you have questions - How will the they pay the tenants back? What happens if the market turns? Why did the seller sell at such a cheap price? How did the negotiations work? - and I'll start to answer those questions as best as I can in future posts.
But what I wanted to show you with this deal is that the key to succeeding in real estate rests not with having tons of money but with KNOWLEDGE and NETWORKS. Without having knowledge of this type of investing, knowledge of the neighborhoods in Sokcho to recognize great deals, and without having strong networks such as real estate agents that are willing to send them deals first, this purchase could have never happened.
Now as for clues regarding potential exit strategies for the investors - the property value, according to their agents, has already risen over the original purchase price. Which means, should they choose, they could sell the building or ask for a higher key money deposit from their next tenants. (However, converting it to a commercial space might be the most profitable option of all.) Think about this: if they sold for a mere 40,000,000 KRW (and all signs indicate that the price would be higher than that).. and they paid back the key money to the tenants (30,000,000 KRW), paid themselves back for the original 3,000,000 KRW they spent - that would leave them with a 7,000,000 KRW profit after two years. That's more than 2x's their original investment in TWO YEARS.
Alright, I look forward to hearing feedback, comments, and questions from people. I plan to write about 10 posts about our trip, so there will be more deals to analyze and discuss.
What do you think? Do you think the investors got a good deal? What would you do with that space? Let me know!
The Sokcho Real Estate Investing series is not intended to encourage people to invest in Sokcho. Nor do I have any products for sale or investments opportunities to offer. I simply want to educate others about potential Korea Real Estate investing strategies through the experiences of some of our Meetup members.