Mudah Tackles the Pros and Cons of Leasehold Properties

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. It’s now time for to investigate the pros and cons of a leasehold property.

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, although 30 or 60 years is not uncommon.

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 on your property just like you would a freehold property, although you must seek permission in advance. The lease period is not automatically renewed at the time of 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 get round to putting up some curtains.

With all that said and done, is it a good idea to buy a leasehold property? Let’s look at the pros and cons.

Pros of buying a leasehold property

They tend to be cheaper: The biggest benefit of a leasehold is they tend to be cheaper than comparable freehold alternatives. That means if you found two identical apartments where one was leasehold, and one was freehold, the price of the leasehold apartment should be lower.

It makes sense when you think about it. A freehold offers ownership without an expiry date. As leasehold has a limited period of ownership, the prices are reduced. Since when it comes to property, price is often king, reduced costs is definitely a shiny jewel in the crown of leasehold.

More for your money: The bonus of leasehold 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 always dreamed of might be out of your price range, but perhaps you’ve got the finances to afford a leasehold condo in the neighbourhood. Leasehold potentially lowers the price to a point that you can enjoy a better property or location without the costs of freehold.

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.

Can come with perks: It’s fair to say that leasehold property is a balance between the cost benefits and the downside of a defined lease period. That does mean developers are sometimes keen to throw in extra perks to convince you to buy. Things like furnishings, improved financing and additional design options can be an added perk. Everyone likes a freebie bonus!

Lease can be renewed: The leasehold term isn’t the ticking time bomb it might first seem like. You can negotiate with the landowner and apply to the State 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 pay. There’s no guarantee that a lease will be granted of course.

Cons of buying a leasehold property

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.

Return on investment is a window of opportunity: The return on investment 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. After 30 years the value of a leasehold is likely to stagnate, or even drop.

Financing can be hard to get: Sure, leasehold might be cheaper, but the financing can be harder to get. Banks, you might have heard, can be a little conservative about giving out money. Since leasehold can be a more uncertain investment, banks are more cautious about lending for their purchase. The less time left on a lease, the harder that financing gets. As a rule of thumb, a bank is probably going to 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.

Permission needed to sell: You need permission from the State government to sell on a leasehold property. That means even when permission is granted, you’re likely to experience an additional delay in the sale due to the turnaround on applications. Bureaucracy, you either love it or hate it! Nobody actually loves it.

What’s the best choice for you?

It’s clear that a leasehold property comes with potential financial benefits, but it also comes with a few more considerations too. There are some good questions you can ask yourself to steer that decision:

  • How long is left on the lease?
  • Do you love the property?
  • What saving 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?
  • Was it your mum’s birthday yesterday and you forgot to call her?

That last question is something that troubles us a lot. As for the rest of the list? It should provide a good template to help steer your decision about whether a leasehold property is the right choice for you.