Freehold vs Leasehold Property in Bali: Which One is Better?

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Freehold (Hak Milik) or Leasehold (Hak Sewa)? Which one is better? What's the pros and cons? Read more here!

If you are amongst many investors that are falling in love with Bali and plan to add your property investments portfolio on this small island, maybe you need to understand more about freehold and leasehold properties law in Indonesia.

There are some dos and don’ts regarding property ownership by expats in Indonesia, and we want to cover this issue in this oversimplified article for you.

In this article, we want to underline these matters, thus you could have a better view of property investment strategy.

Key Takeaway

  • Property Ownership Types in Indonesia
  • Is it Better to Have Leasehold or Freehold? The Pros and Cons between Them
  • Buy a Property in Bali as a Foreigner: What You Need to Know

In case you are not familiar with Indonesian Property Ownership law, we can learn about what are the types of property based on ownership certificates issued by the Indonesian Government.

Property Ownership Types in Indonesia – A Brief Overview

Owning a property in Indonesia, and Bali in particular, is an exciting prospect for many people. But before you decide to buy one, there are several things that you should consider. 

This section will give you all the information you need to know about owning a property in Indonesia.

What is a Leasehold in Indonesia? (Hak Guna Bangunan/HGB)

According to Article 44 Act 5/1960, one person or a legal entity in Indonesia could possess the right to lease land and use the land for purposes of the building by paying the owner a sum of money as leased.

The right belongs to Indonesian citizens, foreigners, as well as legal entities registered in Indonesia.

The Meaning of Freehold (Hak Milik/SHM)

Can be said, freehold rights are the highest right among the other property ownership rights. This right is given to the rightful owner of a plot of land or property. 

Unfortunately, this type of certificate can be granted to the Indonesian citizen only, foreigners can not own an SHM or Right of Freehold.

Cultivation Right on Land (Hak Guna Usaha/HGU)

The government has direct control over the right to cultivate land for farming and agriculture purposes, according to article 28 of Act No. 5/1960. 

The right is valid for 25 years and can be extended for another 35 years, and it must be registered with Indonesian National Land Agency (Badan Pertanahan Nasional), which is responsible for land measuring, registration of the extent of land rights, and issue of certificates to lenders. 

Indonesian citizens and legal entities registered in Indonesia are among those who may hold land cultivating rights.

Rights of Use (Hak Pakai)

The right of use is essential to use and exploit the land yielding. The land is owned by the government or other private parties in this case. 

As long as the obligations and rights are not in violation of the act’s provisions, they are stated by government decision or agreement with the owner. 

The rights term is based on the most recent government rule no.103/2015, which permits foreigners who are legally present in Indonesia to hold a landed residence for up to 80 years.

Is it Better to Have Leasehold or Freehold? The Pros and Cons between Them

Young couple wants to buy a new villa in Bali accompanied with a property agent

In terms of property investment, it appears that the freehold is the best option. However, there are few pros and cons to these property rights.

Learn more about it and choose what fits you most.

Freehold Property Pros:

Among the benefits of purchasing a freehold property are:

Full Ownership

If you keep up with your mortgage payments and/or pay off your mortgage, you will have total ownership of the property and land.

Flexibility

You could do whatever you want with your property, such as make architectural improvements or make it into your residence or rent it out as your income source. As long as you follow the local authority’s or council’s rules.

No Lease

You won’t have to worry about keeping track of when your lease expires or paying to extend it, which can be costly. The landlord will not require a monthly ground rent, service costs, or administrative expenses.

Freehold Property Cons:

The following are some of the drawbacks of purchasing a freehold property:

Expensive

Because you own both the land and the property, freehold properties are usually more expensive to purchase.

Property Choices

Freehold properties are more likely to be houses than flats, which may limit your options.

Upkeep Costs

You will be responsible for maintenance of the entire property as well as the payment of building insurance.

Leasehold Property Pros:

The following are some of the benefits of purchasing a leasehold property:

Less Expensive

Leasehold properties are typically less expensive than freehold properties. This is, however, due to the risks inherent.

Less Responsibility

The freeholder is normally in charge of building and shared area maintenance, as well as building insurance.

Leasehold Property Cons:

The following are some of the drawbacks of purchasing a leasehold property:

Ownership is Restricted

Leaseholders effectively rent from the freeholder and do not own the property or the land on which it sits.

Fees and Rent

You’ll have to pay ground rent and services charges on top of your mortgage, which may escalate. If you don’t make these payments on time, your home may be taken back by its owner.

Limitations

To make alterations to the property, you’ll need formal authorization from the freeholder and may have to pay additional fees.

No Business Activities

It’s possible that you won’t be able to run a business from home.

Conveyancing Fees

For leasehold properties, these are considerably more expensive.

Selling

It is more difficult to sell a leasehold property with a shorter lease, which means you may omit profiting from property price gains.

Buy a Property in Bali as a Foreigner: What You Need to Know

young couple relaxing in their brand new villa in bali

Here are a few things to consider as a foreigner if you are willing to begin your investment strategy in Indonesia.

Understanding Indonesia Government Law about Property Ownership

Foreigners could purchase property in Indonesia, however the property’s certificate is a used right certificate (sertifikat hak pakai) with a 30-year term. This can be lengthened by 20 years, renewed in 30 years.

Can a foreigner buy a property in Indonesia, or Bali Especially?

Foreigners nowadays can own landed houses and apartments not only in Jakarta, Bali, and Batam, but also in other parts of Indonesia.

If foreign investors invest in Indonesia through a local limited company, the certificate is a land right certificate (called HGB) with a maximum term of 30 years that can be extended for an additional 20 years. 

The certificate name for all property purchased by foreign investors is a land rights certificate (HGB) issued by the national land agency. It is valid for the periods stated above.

Ask an Experienced Property Agency Assistance

So, how do you buy a property in Bali and start a business here safely?

If you are unfamiliar with the Bali property market, hiring an experienced property management company is the way to go. 

You can rely on Bali Management Villas as your business partner for everything from land surveying to detailed final polishing to managing and renting it out.

Our fees are considered appropriate for a property management with over ten years of experience and over 150 rental properties.

Conclusion

Starting a property investment in a new country can be risky. Especially if you don’t have any relatives who can be questioned about it.

However, it is not the final destination, because there are numerous trusted property management companies in Bali that can assist you with this matter.

Make an appointment and start reaping the benefits of your investment gains in a few years.

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