[Real Estate Investment] Incheon Villa Purchased for 8 Million KRW, Annual Yield 30% 'Profitable'

Seoul villa neighborhood view. / Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Ryu Tae-min] Mr. A, a worker in his 40s, decided to invest in a villa early last year. As apartment prices soared, raising the entry barrier, he sought a new investment destination. Through an auction, he successfully bid 98.7 million KRW for a 13-pyeong (approximately 43 square meters) old villa located in Hwagok-dong, Gangseo-gu, Seoul. Adding transfer fees of 1.76 million KRW and repair costs of 850,000 KRW, his total expenditure was 101.31 million KRW. After taking out a 72.6 million KRW auction balance loan and receiving a 5 million KRW deposit from the tenant, Mr. A’s final investment amounted to only 23.71 million KRW. With a monthly rent of 500,000 KRW and monthly loan interest expenses of 170,000 KRW, Mr. A’s monthly profit is 330,000 KRW, totaling 3.96 million KRW annually. This translates to an annual return on investment of 16.7%.

Mr. B, a young professional, jumped into the Incheon villa auction market, attracted by its high returns. Due to the extremely high competition for apartment subscription, making homeownership difficult, he decided to increase his assets through financial investment. Mr. B’s investment was a 16-pyeong semi-basement villa in Mansu-dong, Namdong-gu, Incheon. Although not near a subway station, it is a ‘bus station zone (Bus + Station zone)’ villa served by village buses. His total expenditure was 40.18 million KRW (winning bid 37.22 million KRW, transfer fees 880,000 KRW, repair costs 2.71 million KRW). After taking out a 29.7 million KRW loan and receiving a 3 million KRW deposit, his final investment was 8.11 million KRW. With a monthly rent of 330,000 KRW and loan interest of 120,000 KRW, he earns 2.4 million KRW annually. While working, he invested only about 8 million KRW and achieved a high annual return of 29.6%.

As apartment prices have skyrocketed and winning apartment subscriptions has become nearly impossible, more investors are turning to villa investments instead of buying homes. Recently, as in the cases of Mr. A and Mr. B, purchasing old villas through relatively cheaper court auctions rather than direct sales has become a new trend to generate monthly rental income. Especially in the auction market, prices are considered relatively lower than in the sales market, which could maximize future returns and capital gains.

Experts explain that old villas are considered valuable long-term investment products because they can be purchased cheaply. Renting out old houses and waiting for opportunities such as redevelopment or transportation improvements, a so-called financial investment strategy, is becoming popular. The industry analyzes that demand to invest in expected redevelopment areas has increased due to rising expectations for the easing of redevelopment regulations.

In particular, the advantage of being able to invest with small amounts is highlighted even in the Seoul and Incheon metropolitan areas. According to Gigi Auction, a court auction specialist company, the villa winning bid rate in Seoul last month was 96.4%, marking seven consecutive months above 90%. Although last year’s apartment boom recorded an average monthly winning bid rate of 87.6%, the popularity of villas has increased amid a cooling apartment market this year, intensifying competition. Additionally, demand to invest in expected redevelopment areas appears to have increased due to expectations of easing redevelopment regulations.

The winning bid rate for Incheon villas is also on the rise. A year ago, in June last year, the Incheon villa winning bid rate was only 76.73%, but it has steadily increased to 92.0% last month. This is the highest figure in 12 years and 8 months since October 2009. In fact, on the 17th of last month, a 3rd-floor villa unit (exclusive area 36㎡) in Mansu-dong, Namdong-gu, attracted 34 bidders and was sold at 127.31 million KRW, 20.1% higher than the appraised value.