Bali is a popular destination among tourists and therefore makes it an appealing place to own a rental property. Its stunning beaches, lush greenery, vibrant culture, and friendly locals make it an ideal place to live or invest in property. However, before investing in Bali’s properties, it’s essential to understand the difference between freehold and leasehold properties, especially if you are an investor from outside Indonesia who wants to ensure they have thought of everything before making a large and important investment.
As a leading property manager in Bali, we discuss and partner with property legal experts to stay informed about the changing regulations. I recently sat down and interviewed with Florent, a branch manager and legal consultants from Emerhub to discuss the process of freehold vs leasehold and other legal property concerns.
What are Freehold Properties?
A freehold property refers to land that is owned outright by an individual or entity without any time limit attached to its ownership. In other words, once you purchase a freehold property in Bali (or anywhere else), you own it indefinitely until you decide to sell it or pass it down as inheritance.
Pros:
- Complete control over your property (and your investment)
- No restrictions on usage
- Can be passed down through generations
Cons:
- Higher initial cost in comparison to leaseholds
- Responsibility for maintenance falls solely on the owner
This type of ownership is considered more secure since the property cannot be repossessed or taken away by anyone else. However, due to this high level of ownership security, freehold properties generally come with a higher cost upfront, making them a more substantial financial commitment. Moreover, in some countries, including in the region of Bali in Indonesia, regulations on foreign property ownership have historically made obtaining a freehold property more challenging for non-citizens, which further limits their accessibility. Despite these potential barriers, investors could find that the long-term security and potential return on investment of a freehold property might outweigh the initial costs and challenges.
What are Leasehold Properties?
“Leasehold” refers to properties where individuals have purchased rights from another party (usually the government) for a specific period of time. These typically last 25 years, but can go up to 99 years. After this period they revert to the original ownership completely unless it’s renewed at additional costs.
Pros:
- Lower upfront costs than buying freeholds.
- Can be less responsibility for maintenance costs
- Easier exit strategy if you need to terminate the contract
Cons:
- Restrictions apply regarding the use of and modifications to the property
- Potential risk associated with renewing leases upon expiration
The Right To Cultivate And Rights Of Use In Indonesia
Indonesia has two types of rights that can be granted for the use of land: The right to cultivate (Hak Guna Usaha) and the right of use (Hak Pakai). These rights allow individuals or entities to utilize lands owned by others for specific purposes such as farming or building homes, respectively, without owning them outright.
How Does This Affect Foreigners’ Ability To Buy Property?
As mentioned earlier, foreigners cannot buy freehold properties directly in Bali. However, there are some approaches foreigners can use in order to make it easier to invest. One common approach is setting up a local PT PMA Company with 100% foreign ownership which then purchases property on behalf of its foreign owners. Another option involves leasing out properties from locals under long-term contracts while the locals still technically own the property, but you arrange a contract so you can use the property for rentals and pay an agreed-upon fee to the actual owner.
Investing in real estate within Bali requires careful consideration regardless of whether you choose a freehold or leasehold. Before making any decision, it’s vitally important to also understand how laws governing these investments work so that you aren’t breaking any laws, taking advantage of the native citizens, or paying less in taxes to the Indonesian government than you owe. While there are regulations and considerations for foreigners investing in Bali, once you have this part set up, you can move on to the real fun – making money from your investments. For more information on how to navigate investing in property in Bali, or managing that Bali property, you can contact an experienced professional at Bukit Vista.