There has always been a connotation that freehold property is “better” than a leasehold property. The impression given is that you don’t truly own the property if it is a leasehold one, because you are living on a borrowed land. Well, does it mean that leasehold properties are a no-no then?
First, let us delve into the 101 basics of what is a leasehold property.
A leasehold property means that the property is built on land which does not belong to you (ie it belongs to the government) so your rights is to only live on the land temporarily and you do not have the rights over the land.
How long can you stay on the land you ask? Depending on the location, the type of land and the government’s restrictions surrounding it, the tenure can range from 30 years to 99 years. Well, it doesn’t seem like it is the greatest idea then to buy a leasehold property since the land doesn’t really belong to you. But, there are indeed some pros of buying a leasehold property listed below if you take a look carefully.
Pros of buying a leasehold property
Cheaper property prices
You will be able to get cheaper priced property if it is a leasehold property compared to a freehold property. Price range can vary from 10% to 20% if both are brand-new properties with full lease. The idea is that as the lease gets shorter, the gap widens.
Higher rental yields
This is because of the lower cost of entry, but do take note of other costs such as the maintenance fees. This will be a plus point if you are an investor.
Comes with facilities
As leasehold properties tend to be high-rise buildings such as apartments, condominiums and flats, these properties are often equipped with facilities such as swimming pool, gym, courts and playgrounds. However, do note that all these facilities can only be enjoyed if you pay the maintenance fee. They are also often located in prime areas such as the city centre which comes with infrastructure such as the Mass Rapid Transit (MRT), Light Railway Transit (LRT), highways and so forth.
Cons of buying a leasehold property
Property loses value over time
The value depreciates as it gets closer to the expiry of the lease. This can make reselling slightly tougher. Not only that, the process of ownership transfer requires a slightly stricter state consent compared to a freehold unit. Nonetheless, do take note that reselling either a leasehold or freehold property takes time and effort. So, do not be thrown off by this fact.
Banks may not finance the property
Banks will look at a minimum amount of years left on the lease before they accept the property as a collateral for financing purposes. If the property has lesser tenure years on it, it will diminish the chances of securing financing on the property. However, also do take note that as long as all the information provided is accurate, do not worry as the bank will have their own set of due diligence to perform and will not outright reject the financing of a home solely due to the land’s tenure.
Uncertainty in lease renewal
The renewal of lease is never guaranteed for a leasehold property. The government can choose not to extend your lease. If you have any intention to pass on the house to the next generation, a freehold property may be a better option for you.
Renewing of lease
Do not worry as all tenures for all leasehold land are renewable, so that is a good news! However, do take note that if the land is needed by the state government for public usage such as for public transport land, hospital or public school, the renewal may not be feasible.
You will need to visit the respective land office for the lease renewal. Essentially, you have to pay a premium which is the full rate of coverage that you have to pay to maintain your property’s lease.
Different types of property depending on whether they are residential, commercial, agricultural will command different premium rates. One thing to note is that the lease premium is pegged to the valuation of the land, thus, it would be a good idea to renew the lease in a down market. Of course, do also ensure that you have that extra cash on hand to pay for the renewal premium.
Below are some of the renewal premium calculation rates for private residential homes in different states
RM1,000 will need to be paid with the condition that the owner must prove their stay in the house for the duration of the entire lease. No transfer of the property to a third party is allowed which equates to a registrar caveat. Should the owner decide to dispose the property later on, he will need to pay the full premium based on the market price then.
Full premium = (1/4) x (1/100) x (the land’s market value [RM/square feet]) x (lease period [remaining years on the lease]) x (land area [perimeter])
For example, let’s say you have a leasehold land with a land size of 3,000 sq ft in Cheras with about 40 years remaining on the lease. The premium that you would have to pay shall be as follows:
(1/4) x (1/100) x (300) x (99 – 40) x (3,000) = RM132,750.
In Kuala Lumpur, the full premium calculation as follows:
(1/4) x (1/99) x (the land’s market value [RM/square feet]) x (lease period [remaining years on the lease]) x (land area [perimeter])
Automatic land lease renewal.
60 years lease – 15% of the market price
99 years lease – 30% of the market price
Remember to get your lease renewed because if you do not renew it on time, you will have to submit your application for a fresh alienation. This is a process whereby the government will reconsider you as a new title owner and you will have to pay a hefty sum for it. While the land tenure is a major consideration when purchasing a property, there are also many other important factors to consider such as the pricing, location, accessibility and access to amenities. Take your time to do your due diligence beforehand!
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