Freehold vs Leasehold Property in Bali: Pros & Cons

When considering buying property in Bali, one of the most crucial decisions you’ll face is whether to opt for a freehold or leasehold title. Each option comes with its own set of advantages and disadvantages, and understanding the differences is key to making an informed decision. In this article, we’ll explore the ins and outs of freehold vs leasehold property in Bali, covering every aspect you need to know.

What is Freehold Property?

Freehold property is the type of ownership where the buyer owns the land and any buildings on it indefinitely. This is the most complete form of property ownership, providing full rights to use, sell, or pass down the property through inheritance.

Key Features of Freehold Property:

• Ownership: The owner has full, unrestricted ownership rights.

• Duration: Ownership is indefinite and lasts as long as the owner holds the property.

• Control: You have full control over the land and buildings and can modify or develop the property as you wish.

• Saleability: Freehold properties tend to be easier to sell, as they are more attractive to buyers who want full ownership.

Freehold Property in Bali:

It’s important to note that under Indonesian law, only Indonesian citizens are allowed to hold freehold property titles (known as "Hak Milik"). Foreigners are prohibited from directly owning Bali property under a freehold title. This means if you’re not an Indonesian citizen, you’ll need to explore alternative ownership structures such as forming a local company or choosing leasehold property.

What is Leasehold Property?

Leasehold property means the buyer only has the right to use the property for a fixed period, as specified in a leasehold agreement. The property rights return to the freeholder once the lease expires.

Key Features of Leasehold Property:

• Ownership: The property is leased for a specific period (usually 25-50 years) rather than owned outright.

• Duration: Ownership expires after the lease period, though it can sometimes be renewed.

• Control: You have the right to use the property and modify it within the terms of the leasehold agreement.

• Saleability: Leasehold properties can be harder to sell, particularly if the lease is nearing its end.

Leasehold Property in Bali:

Leasehold agreements (Hak Sewa) are common in Bali and offer a legal avenue for foreigners to invest in Bali property. A lease can usually be negotiated for periods of 25 to 50 years, with the option to extend the lease if both parties agree. Leasehold agreements can also be structured to allow the property to be rented out for business or personal use, making them attractive for investors looking to enter Bali’s booming tourism market.

Pros & Cons of Freehold Property

Pros of Freehold Property:

1. Permanent Ownership: Freehold offers the security of indefinite ownership.

2. Full Control: You can make any changes or improvements to the property without restrictions.

3. Higher Resale Value: Freehold properties generally have a higher market value and can be passed on to heirs.

4. Investment Security: Freehold property provides a tangible asset that you fully own and can leverage for other financial purposes.

Cons of Freehold Property:

1. Restricted to Indonesians: Foreigners cannot own freehold property directly, limiting accessibility.

2. Higher Cost: Freehold properties are typically more expensive than leasehold options.

3. Complex Ownership Structures for Foreigners: For non-Indonesians, setting up legal structures to hold freehold property can be costly and complicated.

Pros & Cons of Leasehold Property

Pros of Leasehold Property:

1. Foreign Ownership: Leasehold is one of the few ways foreigners can legally acquire property in Bali.

2. Lower Initial Cost: Leasehold properties are generally cheaper upfront compared to freehold.

3. Flexibility: Leasehold agreements can often be renewed or extended, offering longer-term use without the need for outright ownership.

4. Business Opportunities: Leasehold is suitable for those looking to rent out their property to tourists or run a business.

Cons of Leasehold Property:

1. Limited Ownership Duration: Leasehold ownership is temporary and subject to the terms of the lease.

2. Lower Resale Value: As the lease approaches its end, the value of the property may decrease, making it harder to sell.

3. Restrictions in Leasehold Agreements: Certain leasehold agreements may have limitations on property modifications or usage.

4. Uncertainty with Lease Renewal: There's no guarantee that the lease will be renewed under the same terms when it expires.

Also read: 5 Essential Steps to Buy Land in Bali as a Foreigner

Legal Considerations: Freehold and Leasehold Agreements in Bali

Both freehold and leasehold agreements require careful legal review, particularly for foreigners. It’s crucial to work with a reputable notary and legal team to ensure the transaction complies with Indonesian law. For leasehold properties, the lease agreement should clearly define the terms of the lease, including duration, renewal options, permitted uses of the property, and obligations of both parties.

Freehold Agreement:

For Indonesians, freehold agreements grant complete ownership rights to the land and property. The legal paperwork includes the land certificate (Sertifikat Hak Milik), which proves ownership.

Leasehold Agreement:

A leasehold agreement specifies the lease term, any conditions on use, and what happens at the end of the lease. These agreements can be complex and vary in their terms, so it’s advisable to have them reviewed by a lawyer who specializes in Indonesian property law.

Tax Implications of Freehold and Leasehold Property in Bali

Freehold Property Taxes:

Freehold property owners in Bali are required to pay an annual land and building tax (Pajak Bumi dan Bangunan). This tax is generally a small percentage of the property's value but can increase if you develop or expand the property.

Leasehold Property Taxes:

For leasehold properties, the tax obligations usually fall on the landowner (freeholder), but some lease agreements may require the leaseholder to pay certain taxes or fees. Be sure to clarify the tax liabilities before signing any leasehold agreement.

Also read: Bali Real Estate Market Outlook for 2024-2025

Which Option is Better for You?

Ultimately, the decision between freehold and leasehold property in Bali depends on your individual circumstances. If you are an Indonesian citizen, freehold may be the better option due to its permanent nature and investment security. However, if you’re a foreigner, leasehold may offer a more practical and legally sound solution, especially if you’re looking to invest in Bali’s growing property market.

Key Factors to Consider:

• Duration of Stay: If you plan to stay in Bali for a long time, a leasehold property with the possibility of renewal may work. For shorter-term investments, leasehold may be more cost-effective.

• Investment Goals: Freehold properties are typically better for long-term investments, while leasehold can offer good returns in the short to medium term.

• Legal Compliance: Foreigners must navigate complex laws to hold property in Bali. Leasehold provides a clearer legal pathway compared to freehold.

Conclusion

Choosing between freehold or leasehold property in Bali is a major decision that depends on your goals, legal standing, and financial capacity. Freehold offers more permanent ownership, but it’s largely unavailable to foreigners. Leasehold, on the other hand, is accessible to foreigners and offers flexibility, albeit for a limited time.

Understanding the pros and cons of each can help you make the best decision for your property investment in Bali.