Buying a house is kind of a big deal. So, when you commit, it’s important to know just what you’re getting. That’s why understanding the realities of a leasehold property is important to any prospective home-buyer.
Let’s take a look at the pros and cons of buying a leasehold home in Malaysia, so you can better understand the reasons to choose a leasehold property or not.
What Is A Leasehold Property?
A leasehold property refers to property which is purchased with a set tenure of ownership, often 99 years from the point of a lease being issued. Some properties may also have a lease of 30 or 60 years.
Leasehold property means the land and property is leased from the land’s owner for a designated period of time. The rules of this are governed by Malaysia’s National Land Code, meaning the owner can’t just turn up on a rainy Tuesday and kick you out of the house you paid for.
Crucially, you can also sell your property just like you would for a freehold property, although you must seek permission in advance.
The lease period is not automatically renewed at the time of the sale, so it’s always important to check the remaining time on a lease when purchasing a leasehold property. There’s no point moving in and finding out you’ve only got four years left on a lease – that’s hardly enough time to put up some curtains.
With all that said and done, is it a good idea to buy a leasehold property? Let’s look at the advantages and disadvantages of them.
5 Pros Of Buying Leasehold Property
1. They tend to be cheaper
One of the biggest advantages of a leasehold property is they tend to be cheaper than comparable freehold alternatives. That means if you find two identical apartments with the same price, built-up, and general location, where one is leasehold and the other is freehold, the price of the leasehold apartment should be lower.
It makes sense when you think about it. A freehold home offers ownership without an expiry date. As leasehold properties have a limited period of ownership because of its lease, the prices are reduced. When it comes to property, price is often king, and reduced costs are definitely a shiny jewel in the crown of leasehold.
2. More for your money
The bonus of leasehold properties costing less is you can potentially get more for your money, and be able to upgrade the size and location of your property.
Maybe you can finally afford a decent house within walking distance of the MRT or KTM. That freehold property in Mont Kiara you’ve always dreamed of might be out of your price range, but perhaps you have the finances to afford a leasehold condo in the same neighbourhood.
As such, choosing a leasehold property potentially lowers the property’s price, to a point where you can enjoy a better home or location without the freehold costs.
3. Higher rental yields
Renters don’t care if your house is freehold or leasehold! They just want a nice place to live.
That means if you’re buying a leasehold property at a lower price than a freehold, but renting it out at a comparable price, you’re getting a better rental yield return compared to the amount you paid for your property.
4. Can come with perks
It’s fair to say that a leasehold property is a balance between the cost benefits and the downside of a defined lease period.
What this also means is that developers are sometimes keen to throw in extra perks to convince you to buy. This can be anything like furnishings, improved financing, free stamp duty, or additional design options as an added perk. Everyone likes a freebie!
5. The lease can be renewed
The term ‘leasehold’ isn’t the ticking time bomb it might seem like. You can negotiate with the landowner and apply to the State Authority to renew the lease before it expires. This does of course come with a cost.
The cost varies by state, but tends to be based on the size and value of the property and proposed renewal term. The bigger the place, the more you’ll pay. However, there’s no guarantee that a lease will be granted.
5 Cons Of Buying Leasehold Property
1. Expectation of care and maintenance
It’s hardly an unfair expectation that you will care for a property, but when it comes to leaseholds, it’s also a legal obligation.
If you do not appropriately care for the land and property as per the terms of the original agreement, you may be liable to forfeit the lease. There is a legal process for this, so you must receive notification of a breach and period to remedy it prior to forfeiture.
2. Your Return On Investment (ROI) is a window of opportunity
The ROI for a leasehold property is tied to the time left on the lease.
If a property is in the first 20-30 years of the lease, studies have shown that the price will rise at a similar rate to that of similar freehold properties. After that, things become a bit more uncertain. 30 years later, the value of a leasehold home is likely to stagnate, or even drop.
3. Financing can be hard to get
Sure, leasehold properties might be cheaper, but the financing can be harder to get. Banks will be more cautious about giving you a mortgage, since leasehold properties can be an uncertain investment.
Moreover, the less time left on a lease, the harder financing gets. As a rule of thumb, a bank will probably want at least 75 years left on a lease to be comfortable with their offer, and there’s no guarantee they will come in with a maximum 90% home loan offer like they tend to with freehold properties.
4. Permission needed to sell
One of the challenges of leasehold property is that you need permission from the State Authority to sell it. That means even when permission is granted, you’re likely to experience an additional delay in the sale due to the turnaround on applications.
5. Cost of renewing the lease
Before the lease expires, you can apply with the State Authority to prolong or renew your lease. You will then be notified of the leasehold premium to pay.
The leasehold premium is essentially the cost of renewing the property’s lease, and varies by state. The premium is calculated based on factors like the market value of the land, the land area, and the years remaining on the lease.
While this simple calculation helps estimate how much it costs to renew your lease, the price can go way up if you apply only after your lease has expired. It can even be half of the property price!
What’s The Best Choice For You?
If you’re debating which is the ideal home for you, let’s take a quick look at the pros and cons of buying a leasehold property.
|
Pros |
Cons |
|
Cheaper price than freehold |
Legal obligation to care and maintain the property |
|
Greater value for your money |
Limited ROI based on time of the lease |
|
Can yield higher returns on rental |
May be more difficult to get financing |
|
Developer perks may be included |
Requires the State Authority’s permission to sell |
| The lease can be renewed |
Cost of renewing the lease may be expensive |
It’s clear that a leasehold property comes with potential financial benefits, but it also comes with a few more considerations too. Some good questions you can ask yourself to steer that decision are:
- How long is left on the lease?
- Do you love the property?
- What savings are you making compared to a similar freehold property?
- Do you have an idea of when you might want to sell?
- Are you planning to rent the property?
- Do you have funds to potentially make up a home loan shortfall?
By asking yourself these questions and weighing it deeply, it might just help you decide better whether a leasehold property is the right choice for you.
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