Rental vs Leasehold in Bali
When buying property in Bali is something that is not quite possible (or desired) the option for many individuals and companies comes down to leasing or renting. While both have similarities, getting access to an asset for a limited period, there are significant differences as well.
Many will argue that a Long-Term Rental property is the same as a Leasehold property and in some way they are until you sign the contracts. In Bali, there are many property titles which a foreigner can acquire, such as Freehold (Hak Milik), Leasehold (Hak Sewa), Right of Use (Hak Pakai), Right to Build (HGB) and Rental properties, be it daily/weekly/monthly or yearly. So when it comes to signing the contract for a Long-term Rental property, generally you will sign a ‘Rental Agreement’, which is not to be confused with a ‘Lease Agreement’, which is usually drawn up by a Notaris.
Yes, they are both leases but generally a Long-term Rental property is anything from 1 year up to 5 years, whilst a Leasehold property can be more than 5 years and is usually around 25-30 years. Both will have more or less similar clauses in the contracts, with options to extend before the contract expires.
So then, how do you decide which would be best for you? Do you test the waters first and take out a Long-term Rental contract or plunge in head first and take on a Leasehold property contract, which can have financial benefits in the long run?
Below, we have given a general outline of the differences between a Long-term Rental and a Leasehold property.
A Long-Term Rental Property
A long-term rental is usually anywhere from 1- 5 years . The owner of the property rents out his premises, typically receiving up-front yearly rental payments. A ‘Rental Agreement’ is signed by both the Landlord and the Tenant, accompanied by the signature of a witness (generally the property agent).
A Long-Term Rental is often the best solution for families or groups who regularly travel to Bali if:
- You are planning an extended vacation
- You often travel on business trips
- You are a large family and intend to relocate to Bali
- You have a higher budget but no plans to purchase a villa at this time
Is a Long-Term Rental the right solution for your needs?
There are many advantages to a long-term villa rental, for example:
- No contract renewal or return required for the rental period
- In most cases, the owner will give a discount the longer you rent
- Many villas provide 24-Hour manager assistance
- Personal cook, maids and butler service, nanny daycare (if under management)
- Fully furnished, quality interiors and amenities
- Additional free services, such as wifi internet access & satellite tv
- Having the privacy of your own villa, without the maintenance costs
- If permitted by the owner, the tenant can sub-let
A Leasehold Property
This is a long-term lease contract. Although the land title is not under the foreigner’s name and remains under the ownership of the original owner, the land can be leased for an initial period of around 25 years and can then be extended up to a period of 70 years. After the lease begins, the owner’s title of Hak Milik (Right to Own) will be legally transferred to the foreigner under the Hak Sewa title (Right to Lease).
Under the lease contract the property is able to be sub-leased (rented out to other people). This is how many foreigners turn a leasehold property into a lucrative investment and source of passive income. For most investors, the beauty of a lease is that their focus is immediate cash flow and a passive income, allowing freedom from the burden of watching market conditions as the actual value of the property is of no huge concern. In a low market there will be an increased number of long-term renters, and in a high market when everyone is purchasing, there is still the benefit of short-term holiday rentals.
If you decide to buy leasehold, the drafting of any leasehold agreement should be carried out with the assistance of a third party legal advisor, since guaranteeing renewals and limiting rent increases is the key to a cost-effective leasehold structure.
If the leasehold is not renewed once it expires, all rights go back to the original owner and it becomes a freehold Hak Milik property again.