Rent? Or save and live rent free?

[Hyeon-In]

Hello,

I'm new here. I've recently been reading about financial management, being frugal, and early retirement. I've come to the conclusion that I've been an idiot with money over the last few years.

In my favor, I've been living somewhere that made it difficult to pile up debt. I have a credit card, but in the country I live in one has to pay off the entire balance of the credit card each month; it can't carry over. I don't have a mortgage because (luckily?) banks tend not to lend to 'foreigners' here (S. Korea). I have however been spending 80%-120% of my paycheck each month for the last 6 years. As such my only assets are my car, which I bought for $1,300 2 years ago, and the $10,000 deposit I paid to rent my current house. (Yes, deposits are expensive here. My rent is not $5,000 a month haha.)

After doing some calculations and deciding to work a bit harder, I've realised that my wife and I can actually save quite a bit of money in theory. In fact my wife hasn't really been working since we married as she was a graduate student and then gave birth to our one month old daughter. She intends to start working in a month or two. I've been kind of lazy.. I have a 'full time' job that only requires me to work about 16 hours a week, and that's what I've been doing. I intend to try and get up to 35 or 40 hours a week to double my income.

Anyway, on to my question:
In this country there is a rather unique way that one can live in a house or apartment. Monthly renting (which I do) is actually quite uncommon. Most people if they don't own property instead pay a LARGE deposit to the landlord. The landlord then lets them live rent free in the property. The theory being that the landlord will invest the money and earn more than they would from rent.. or something..

Anyway, our situation: We currently pay $900 a month in rent for a small 2 bedroom apartment. If we put down about $90,000 we could live here rent free. The only costs would be a $15 a month maintenance charge and utilities. Property taxes etc. would be the landlord's responsibility.

I think the wife and I could, if we are frugal, save $80k over the next year and I already have a $10k deposit to rent this place. So I think we could get to live here or in a similar apartment rent free after a year. But here's the conundrum:

Am I better off doing this? Would I be better off investing the 90k in stocks and shares or savings account and continuing to pay rent? Or should we try and get to this rent free situation as soon as possible? Or should we save up to buy? Buying would cost about $180k for a small apartment like ours. I think property is a bad investment here in Seoul right now though (bubble IMHO).

Thanks for any insights you kind folks might have!

[ladykemma2]

for how long could you live on the 90,000?

[Hyeon-In]

Difficult question.

As I say, our baby is 1 month old now. As time goes by I suspect her expenses will increase but I can't really estimate how much, being inexperienced in the matter!

In terms of monthly expenses, this is my planned budget:
Rent + building fee: $915 (fixed)
Food (home and out): $350
Utilities and other monthly bills: $220
Other baby things: $150
Transport: $90
Extra fun/entertainment: $200

So that's close enough to $2,000 a month. Or $24,000 a year.
I'll add $2,000 for vacations to the annual figure.

So $26,0000 a year.

That would mean we could live 3 years and about 5 months for $90k.

[MaryCarney]

I think you are deluding yourself. You are not living 'rent-free', but rather pre-paying your rent. If you leave the property, does the entire deposit come back to you?

[Hyeon-In]

I think you are deluding yourself. You are not living 'rent-free', but rather pre-paying your rent. If you leave the property, does the entire deposit come back to you?

Yes, 100%. There is no nonsense of deducting cleaning fees, maintenance fees etc. You get precisely 100% of what you deposit. This is NOT pre-paying rent. If you leave within less than 2 years you will be eligible for a real estate agent fee which will be approximately $200.

The conundrum is in what else that $90k could have been doing in the meantime. You earn no interest on this money. If you live there 10 years, you still only get $90k back. A savvy investor might be able to do well with that money in the mean time. The owner of the property may have benefited from a rising property market. This is what my original question was. Should I continue to pay rent and 'lose' a year of investing? Or should I save up and pay to live rent free? That 90k has a 0% chance of gaining, and near enough a 0% chance of being lost (barring war or global catastrophe; it's protected by the government). Inflation 'kills' the value of the deposit over the long term.

I hope my clarifications helped in helping you guys help me understand what I should/shouldn't try and do.

[monkeywrangler71]

If it is as you say it is, you have a return of $900 a month (the rental charge) on a $90 000 investment, with relatively no risk. Where would you invest it that you think would do better?

I'm not sure why any landlord would do this, there is no benefit to them. They'd make way more collecting rent. There has to be something more to it.

[Greebo]

If you put $90k down, for how long would you be able to live "rent free"?

[Greebo]

And how do you *KNOW* you'll get the $90 grand back??? I mean - is the money put in escrow? What if the landlord loses money on his investments and can't repay you?

[monkeywrangler71]

And how do you *KNOW* you'll get the $90 grand back??? I mean - is the money put in escrow? What if the landlord loses money on his investments and can't repay you?

He says it's protected by the government.

[mek42]

This is a really interesting system (see what I did there, "interesting"?). Would you be able to sustain the savings / put the $900 "rent" into your own private investments?

[Greebo]

He says it's protected by the government.

Oh, like our FDIC kind of thing? Interesting...

[Hyeon-In]

If it is as you say it is, you have a return of $900 a month (the rental charge) on a $90 000 investment, with relatively no risk. Where would you invest it that you think would do better?

I'm not sure why any landlord would do this, there is no benefit to them. They'd make way more collecting rent. There has to be something more to it.

Yeah that's how I did the math, but I thought I was missing something. I might be able to answer a couple of your questions though:

First the background: This is the way it has been done for years; so there is momentum. Secondly, Koreans HATE paying rent. They see it as wasted money. They all want the large deposit, no rent deal. Thus it is very hard for a landlord to rent a place out for monthly rent. It only really happens in areas where foreigners live. My current landlady basically didn't believe I would pay rent, and wanted a $30,000 deposit to rent this small 2 bedroom apartment, but the real estate agent talked her down to $10k.

Apart from a local market reluctant to rent, there is also the problem that most property owners here who've let their property in the past for no rent but a deposit of 60k, 100k, 500k etc. DO NOT have the money any more. They lent it to their kids, or it's tied up in another property etc. As such they can only replace one tenant with another who is also willing to pay a massive deposit and no rent. They do not have the reserves to switch from a 90k/0 rent to a 2k/1k a month rent deal. I'm sure they'd like to if they could.

Anyway, I'm feeling the consensus is towards me saving up and going this way instead of paying rent. I'm wary of buying due to property taxes and a stagnant real estate market.

[Greebo]

Oh so if the landlord doesn't have the money to repay the deposit, then the Gov't steps in, pays you, and, what, goes after the landlord?

So if you paid $90k you'd never ever have to pay rent again and you could stay there as long as you wanted???

[Hyeon-In]

If it is as you say it is, you have a return of $900 a month (the rental charge) on a $90 000 investment, with relatively no risk. Where would you invest it that you think would do better?

I'm not sure why any landlord would do this, there is no benefit to them. They'd make way more collecting rent. There has to be something more to it.

Well, I was thinking it'd make me feel sad to save up money very hard for 90k and then end up with a 0 balance bank account after doing so! Perhaps I should rethink this thought.

Landlords do it because they have no choice. They got 90k from the previous tenant and now have it invested in somewhere or other. They need a new tenant with 90k to replace the old one. I'm sure they'd love to rent it for monthly if they thought they could, but they can't.

You're probably wondering how one get's one's deposit back if the landlord "can't" pay it. Here's how it works:

(1) The landlord tries to rent it out for the same massive deposit. This is what happens 99.9% of the time, so you get your money back.
(2) They go bankrupt. Luckily, you, as the person with the massive deposit, are FIRST in line among the creditors (this would be the government protection part). As your deposit is generally only about 1/2 the value of the property, you are going to get your money back. In a city of 11million people I do not fear a situation where the property value would fall by more than 50% AND the landlord would have NO other assets that could be claimed. These deposits are safe.

[monkeywrangler71]

"Jeonse" is the term, I just read a bit about it, can't post link because I'm on mobile. Apparently it is a fixed length contract, usually 2-3 years. Common because people can't afford full price, mortgages are rare. Less common during low interest rate periods (because owner makes no money), getting difficult to find affordable ones right now due to increasing prop values.

What is the interest rate in S Korea right now? And what percentage of the market value is this deposit?