5 Billion Becoming 8 Billion... The Little One's Magic [Practical Finance]

Small Building Investment Boom... How to Invest Wisely

Targeting Old Buildings Priced Below Surrounding Market

Changing Residential Properties to Neighborhood Living Facilities

Sometimes Purchasing as Land After Demolition

Always Check the Land Use Plan Confirmation Document

[Asia Economy Reporter Kim Min-young] Due to government policies such as loan regulations, interest rate hikes, and increased holding taxes, the attractiveness of investing in residential properties has declined, leading more investors to turn their attention to small buildings. In popular areas like Gangnam in Seoul, apartment prices have risen to levels comparable to small building prices, lowering the entry barrier to the small building market. According to the Ministry of Land, Infrastructure and Transport's real transaction price disclosure system, an 84.97㎡ (exclusive area) unit in 'Acro River Park' in Banpo-dong, Seocho-gu, Seoul, recently traded at 4 billion KRW, setting a record high.

According to Building Lover Man (Bilsanam), a specialized building investment information company, as of the 28th, the total building value of small buildings brokered by the company this year reached 1 trillion KRW. Shin Jin-seon, team leader of the company, said, "For larger brokerage firms, the transaction volume is expected to be much higher," indicating the growing demand for small buildings as an alternative to residential investment.

In fact, 'small building' is not a precisely defined real estate term. Generally, it refers to commercial buildings with a total floor area of 3,000㎡ or less, around five stories, and priced under 5 billion KRW. Recently, with overall real estate prices rising, buildings priced up to 10 billion KRW are also included in the small building category.

◆ From an 1.8 Billion KRW Building to a 5 Billion KRW Property Owner = Mr. A, a man in his 40s, decided to invest in buildings earlier this year. Having only invested in apartments before, he found it difficult to continue due to tightened regulations on multi-homeowners. Interested in commercial real estate, which is relatively easier to finance, he decided to purchase an old building priced between 3 billion and 4 billion KRW, cheaper than the surrounding market. After extensive searching, Mr. A selected a three-story residential building located in Daechi-dong, Gangnam-gu, Seoul. The building's land area is 180㎡, with a total floor area of 371㎡. Small buildings in established commercial areas are usually expensive, making it difficult for ordinary investors to enter. With the help of Bilsanam, Mr. A planned to purchase the house and then change its use to a neighborhood living facility. Although it is a three-story building, he planned to remodel it by adding one floor and installing an elevator, transforming it into a four-story building.

Mr. A explained, "Daechi-dong is famous for its academy district. The purchased building is located in a quiet residential backstreet, but by adding value to the building, I plan to lease it as a study cafe or children's tutoring academy, leveraging the area's characteristics."

Team leader Shin said, "The building in Daechi-dong is expected to yield a rental return of around mid-3%." He evaluated, "If the monthly rent is estimated at 25 million KRW, the yield calculation suggests that the building could be resold later for around 8 billion KRW."

The purchase price of the building Mr. A bought in early June was 4.2 billion KRW. Including acquisition tax (4.6%), registration fees (0.2%), brokerage fees (0.9%), and other expenses, about 4.4 billion KRW was needed. Adding remodeling and construction costs of approximately 500 to 600 million KRW, the total required funds were about 5 billion KRW. However, Mr. A had only 1.8 billion KRW in seed money. The shortfall was covered by loans. First, he secured a 3 billion KRW mortgage loan on the building and took out a facility loan for remodeling costs. He also factored in that during construction, he would have to pay bank interest without rental income. The broker who mediated the purchase advised, "When planning finances, this aspect must be carefully considered." Mr. A's monthly interest burden on the 3 billion KRW loan is about 7.5 million KRW.

◆ Value-Up of Old Houses Rather Than Completed Buildings = In the past, wealthy individuals were the main investors in small buildings, but recently, as in Mr. A's case, buying old houses and adding value has become a new trend rather than purchasing completed buildings. Currently, loans are not available for houses, and acquisition tax surcharges make them difficult investment targets. However, a way to overcome this is to allow a generous 4 to 5 months for the balance payment period, during which the property can be converted to a neighborhood living facility or purchased as land after demolition before the final payment. Since the buyer purchases a neighborhood living building or land instead of a house, loan limits can be increased. This investment demand continues steadily in areas like Gangnam, Mapo, Yongsan, and Seongdong districts. These areas are considered less vulnerable to sudden issues like COVID-19 or interest rate hikes.

However, when investing this way, it is essential to check the 'Land Use Plan Confirmation Document.' This is to verify the legal possibility of remodeling the property into sales or office facilities instead of its original use. The document contains restrictions and permissions related to land use. Sometimes, the purchased building may be in a district unit planning zone, preventing standalone development, or height restrictions may limit the planned number of floors.

Team leader Shin advised, "The Land Use Plan Confirmation Document lists the zoning area and allows checking for activity restrictions. It provides various information necessary for construction activities, such as building coverage ratio, floor area ratio, number of parking spaces, septic tank capacity, and road existence."