Rent-Free for $290,000?

**Hi there! If you would like more fun posts like these, follow me on Pinterest!

Last Week, I stumbled across a very interesting article – “ItTakes $290,000 in cash to rent an apartment in Seoul” by Matt Phillips of Quartz.  The basis of the article is that under a Jeonse contract – a Korean tradition-  an individual can live rent-free!

How do they do this?  In a Jeonse contract, a strictly Korean tradition, tenants lend their landlord a significant amount of money – usually 40%-60% of the property’s value – instead of paying monthly rent.  In exchange for access to live on property for a specified period of months or years, tenants pay the landlord a lump sum of money.  This is essentially a loan, with the property as the collateral.  If the landlord were to default on it, the tenant holds the property as collateral.  If something were to go wrong with the loan, the house could be sold with more than enough money to pay the tenant back.

 Jeonse contracts can be traced back hundred of years in Korean history.  In the 1960’s and 1970’s, however, the popularity of these contracts grew.  As Korea became more industrialized their was as new need for housing in the cities and financing for economic activities.  During the 1990’s, the system boomed even more as it allowed citizens to bypass the troubled banking system.

While the whole rent-free concept is interesting, what I find even more exciting is what Jeonse contracts did to savings rates within Korean households.  During the 1960’s and 1970’s, household savings rates skyrocketed.  Why?  Because they were saving for a Jeonse contract.  $290,000 is not small amount of money, but in order to live rent-free, households started socking away significant amounts of money to make it happen. This proves that Korean households COULD save large sums of money!

Recently, though, household savings rates have plummeted and debt to income ratios have started to rise – and this blows my mind!  Individuals who do not possess enough money in savings for the Jeonse contract will go and borrow it from a bank!  Essentially, the system designed to help bypass banks is driving the Koreans back to it!

This didn’t make sense to me at first, but then I realized that the Jeonse system is clearly in the tenant’s favor!  What i don’t understand is if borrowing for the Jeonse contract still is in the tenant’s favor. I supposed that credit-worthy individuals borrow money to loan it to less credit-worthy individuals, which gives more people access to credit.  But, as far as being rent-free goes, tenants may as well have a traditional rental agreement, because their payment to the bank are essentially their rent.

Another point to consider is that as people have realized how good of a deal Jeonse contract are, and as the popularity has risen, so have the amounts.  Before, the amounts were 40% to 60% of the property’s value, but now they have risen to nearly 90%.  This leaves a much smaller buffer for the tenant if anything were to go wrong and the house needed to be sold.

Would this work in America?

In short, I am inclined to say no.  In America, even though are banking systems are overloaded and credit restrictions have been tightened, many more people have access to credit than in Korea.  Even if it was very difficult to obtain credit, most would still not consider a Jeonse-style contract, as we fear unsecured loans.  Also, many Americans could not come up with the necessary cash to finance such a contract.  In America, we have debt so deeply ingrained in our fiber it is just a normal way of life.  Payment are normal.  Never “getting ahead” is normal.

How nice would it be if Jeonse contracts were to get started in the United States?  Would it prompt Americans to save more, or would we ignore this amazing opportunity?

You May Also Like:

Getting our House Ready to Rent – Phase 1 Must-Do’s Before Listing a Rental – Guest Post How Much Money Does it Take to Retire By 40? 10 Reasons to Buy a House **UPDATED! How Much Money to Retire By 40? How To Retire by 40! – Part 3 Spent: Looking For Change – a Critical Look at US Banking System Money Talk – Should We Buy The Farm?? 4 Reasons Not To Buy A House Money Talk – Should We Buy the Farm – Your Answers!