Buying A Leasehold Home? Here’s What To Know About Lease Renewal And Reselling!
Having a leasehold property as a home can work when you understand what a leasehold agreement entails, how to commit to it, and how to deal with the possibility of reselling it later.
So before making your big purchase, be sure first to familiarise yourself with the following essential information.
What Is A Leasehold Property?
A leasehold property is built on government-owned land, which means the property can only belong to you for a limited period of time.
When you choose a leasehold unit, what you’re essentially purchasing is the right to live temporarily on a piece of land, and not the land itself.
The tenure of your ownership typically runs from 30 to 99 years, depending on the land it exists on, and the governmental restrictions subjecting it.
Some properties in places such as Petaling Jaya’s Section 11, as well as Kuala Lumpur’s Sungai Besi and Setapak tend to have leases of 50 years or less.
So before you make any big decisions, check with your agent first to know what type of lease you have at hand. It’s also vital that you thoroughly understand the various distinctions between a leasehold property and a freehold property before deciding which one is right for you.
The Pros Of A Leasehold Property
The most apparent advantage to leasehold properties is that they are often more affordable compared to freehold ones.
They also tend to be multi-levelled buildings such as condominiums, apartment complexes, and high-rise flats. These properties are especially great if you’re into communal living with a range of facilities within easy reach.
They often come with managed facilities such as gyms, public landscapes, meeting areas, swimming pools, and even event spaces that require you to pay a regular fee for maintenance.
Leasehold properties are also often found in convenient and highly developed locations (Kuala Lumpur being a prime example).
With connecting highways and public transports always available near your home, you can quickly get yourself from one place to another.
If you’re looking to purchase a property for the purpose of investment, then a leased unit can be a great choice. Its lower entry cost can earn you slightly higher higher rental yields.
The payment to renew your lease can be a lot. But if you do your research, equip yourself with the right information, and act well ahead of time, you can score yourself a great deal on a leased home.
When A Leasehold Property Isn’t The Best Idea
Unlike with freehold properties, you don’t get to own the property and land outrightly. In essence, you would have to always pay for borrowed time, and approval from the authorities.
You must also have your personal profile reviewed by the government to be considered fit to buy a leased home. This preliminary stage isn’t strictly necessary in the process of purchasing a freehold home (which plays into its factor of convenience).
The renewal of ownership of a leasehold property is never guaranteed, as the government can choose not to extend your lease. If passing on a home to your future generation is a desire you have, then a freehold property is the better option to honour the process.
Also, consider the fact that the price growth of leasehold properties are generally slower than that of freehold properties. Their values tend to depreciate and become lower than freehold properties after 30 years into the lease. This can make reselling a little tricky.
Reselling a leasehold property also isn’t as easy as saying “yes” to an interested buyer. The transfer of ownership of a leasehold unit requires a stricter state consent, as compared to that of a freehold unit. And as we know, going through bureaucratic layers can take up a lot of time!
Clearing Up The Misconceptions
Since purchasing them requires a lot of adherence to external obligations, leasehold properties have garnered a reputation for being the least popular type of purchase.
But this should not stop you from considering one, if its benefits far outweigh its disadvantages. A lot of potential buyers tend to fear that banks would not approve their loan for a leasehold unit.
In reality, your application is just as approvable as the loan applied for a freehold property. This is if all your information are accurate, and your financial standing is solid!
Your bank will have more to consider before approving your loan if the new lease you’re looking at is anything lesser than 50 years.
Also, there’s this preconceived notion that the process of reselling a leasehold property isn’t as easy, straightforward, or fast as reselling a freehold property.
The truth is, transferring the ownership of any home requires the consent of the state, the involvement of a property lawyer, and plenty of time — whether their status is freehold or leasehold.
Still not sure if you know enough to go on a lease? Below are just some of the frequently asked questions surrounding leasehold property ownership, land lease renewal, and leased home reselling.
1) “How do I extend my lease for my leasehold property?”
At this point, you must already understand that when your property’s lease expires, the unit is automatically returned to the state government.
Extending or renewing the lease will require a visit to the Land Office (translated as ‘Pejabat Tanah’ in Bahasa Malaysia).
It’s usually at this stage where you’ll discover whether the government has intentions to renew your lease or not (they typically are not able to, when they have other development plans for the land!). Should your extension request be approved, they’ll then require a payable premium.
2) “What is a premium, and how do I calculate it?”
A premium is the full rate of coverage that you have to pay to maintain your property’s lease. Unlike freehold units, leasehold properties do not carry a premium, which is why it has to be renewed from time to time, after a specific period has passed.
Renewing a leasehold understandably requires a hefty premium. The total amount to pay depends on whether your property is residential, commercial, agricultural, or another type entirely. Calculating your premium ahead of time helps you anticipate how much you have to set aside.
The maximum tenure allowed at a leasehold property (that you can extend to) is 99 years. So if there’s a total of 30 years left on your lease, you can only renew it for 69 years.
Also, it’s important to take note that different states may employ different premium calculation formulas for each property category.
The premium calculation formula for a residential unit in Selangor, for example, is slightly different than that of a residential unit in Kuala Lumpur. As per the Federal Territory of Kuala Lumpur Land Rules 1995, the calculation formula for a residential unit in Kuala Lumpur is:
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 (perimetre)
Meanwhile, as traced in the Selangor Land Rules 2003 & Selangor Quarry Rules 2003, the calculation formula for a residential unit in Selangor is:
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 (perimetre)
For Selangor homes specifically, there’s an option to pay a premium of RM1,000, provided that the owner must prove their stay in the house for the duration of the entire lease.
A registrar caveat on the property then exists, to ensure that the owner cannot transfer the property to a third party.
3) “When is the best time for me to renew my lease?”
Again, the price growth of your leasehold property tends to be slower after 30 years into the lease. So it’s always best to renew your lease early, preferably before it hits 30-year mark.
4) “What happens when I don’t renew my lease on time?”
Plainly put, your home will automatically be returned to the government. This means that anyone fit to buy the property, can apply to purchase it.
If you intend to keep the home but do not renew the lease on time, be prepared to submit your application for a fresh alienation (this is an official process, which basically puts you up for the government’s reconsideration as a new title owner), and then pay an extra hefty sum of money for it.
(a) for a period of term not exceeding 99 years;
(aa) for perpetuity;
(b) in consideration of annual rent;
(c) in consideration of a premium;
(d) subject to a category of land use; and
(e) subject to such conditions and restrictions as the SA sees fit”.
According to the National House Buyers Association, the amount to pay is almost as much as the amount for buying the land itself. So for the sake of your bank account, stay vigilant of your lease’s expiry date!
5) “Should I even renew my lease?”
This is the million-dollar question that you’ll face when your lease expiry date looms closer. Whether your home is worth all that financial maintenance ultimately depends on your lifestyle choices and what you get out of staying there.
In short: Renew your lease if you love the social and economic benefits your leased home provides, which you think you may not be able to find elsewhere.
Now, In Conclusion…
Before purchasing a home, be certain about whether you’re getting it for your own stay or investment purposes. When considering a potential home, always keep your purchasing budget in mind.
More importantly, be honest about what you require in a home, instead of letting your choice be determined by whether its status is freehold or leasehold. The type of property your home is, should fall around your needs and not the other way around!