For expatriates moving to Japan and South Korea for the first time, the term “key money” is always confusing. Both countries have a unique rental system that many incoming expats will struggle with in their home searching process. Although the two countries are close geographically, the term “key money” has very different meanings under the two systems.
“Key money” in Japanese is called “Reikin 礼金”. “Rei礼” means gift and “kin金” means money. It is a payment from the tenant to the landlord in addition to rent, deposit, and agent’s fee. It is non-refundable just like a gift to the landlord. Usually, it equals to 1- or 2-months’ rent.
“Key money” is a traditional practice in Japanese society and specially preferred by older landlords. In the past, properties in Japan were so limited that it was especially difficult to find a property for rent. Tenants expressed their gratefulness towards landlords by paying “key money” when they were able to rent a property.
Nowadays, some landlords see “key money” as proof of a tenant’s stable financial status. If tenants are willing to pay “key money,” they are more likely to pay rent on time. In Japan, it is difficult for landlords to evict problematic tenants. For example, if a tenant stops paying rent, it will take at least a few months under the legal process until the landlord can evict the tenant.
On the other hand, it is very easy for tenants to terminate a lease in Japan. It typically only requires 1- to 2-months' notice in advance with no additional fee for early termination. However, landlords must pay a cleaning fee after a tenant moves out and an agent’s fee to search for new tenants. Landlords may see “key money” as insurance to cover the cost of early termination.
The practice of requiring "key money" for properties is decreasing in Japan. Specifically, many young landlords do not ask for “key money” or are open to negotiation. Also, for the high-end rental market such as large sized properties in the city center, “key money” is often not required.
However, for many older Japanese landlords, “key money” is still an important part of traditional culture. The rental market in Tokyo is competitive with very limited supply and many locals are willing to pay key money for their ideal properties. For expats who are concerned about paying key money in advance, agents may negotiate with landlords to transfer key money into part of the monthly rent. This way, landlords can accept expat tenants without charging them the large upfront expense.
“Key money” or “jeonse 전세” is a unique rental system in South Korea that is the opposite of monthly rent. Government statistics show that 41% of properties are currently rented with key money in Seoul.
Tenants will pay a lump sum deposit to landlords at anywhere from 50% to 80% of the market value instead of paying for monthly rent. The deposit will be refunded to tenants after the end of the lease, which usually lasts for two years.
Many tenants consider this option as living “rent-free” since they will retrieve the lump sum deposit when the lease ends. For those who cannot afford to own their properties yet, it is a way for them to “rent” a property without paying monthly rent. In recent years, the housing market in South Korea has seen a decline due to rising interest rates. Many people are hesitant to purchase property now, fearing that property values may continue to fall, leading to a potential loss. In this situation, renting a property by paying key money offers a safer alternative, as tenants can get their key money back once the lease ends.
Additionally, key money loans are widely available in South Korea, similar to mortgages. If you wish to purchase a property, you typically need a down payment and a mortgage. However, when renting with a key money loan, no down payment is required. Once the loan is approved, the bank transfers the key money directly to the landlord, who returns it to the bank at the end of the lease. The tenant is only responsible for paying the loan interest each month. If the monthly interest is lower than the cost of rent, the tenant benefits financially.
At the same time, landlords that receive the lump sum deposit can invest in other capitals and take the interest as income. The higher interest rates are, the more desirable “key money” is for landlords.
For a key money loan, only eligible citizens under the government policy can apply without a down payment. Otherwise, the upper limit of the loan will be 80% of key money, which means 20% of a down payment is needed. However, the down payment of a key money loan is much lower than down payment of a mortgage and therefore it is more affordable compared to buying a property.
When a key money loan is issued, it is common for the bank to transfer the key money directly to landlord and for the tenant only to pay for the loan interest every month. However, it is also possible for tenant to pay for both the principal and the interest every month. In that case, the tenants can receive the key money by the end of the lease.
“Key money” is not a normal practice for expats in South Korea. It is risky to pay such a large amount in advance but only able to retrieve it two years later.
Most of the time it is unlikely that landlords asking for “key money” will accept monthly rent. When landlords receive the lump sum deposit, they will invest the money to earn interest. It could be fixed-term deposits, the stock market, or start-up investments, etc. It can take more than 2 years until the landlord can retrieve their invested money. When the lease ends after 2 years, landlords may not be able to return the lump sum deposit to tenant. Landlords have to either renew the “key money” contract or search for a new tenant and return the deposit to the previous tenant by collecting a deposit from the new tenant.