Bali investment: A Deep Dive into Leasehold Properties

Explore Bali's real estate potential, diving deep into the pros, cons, and intricacies of leasehold properties. Unlock savvy investment strategies today!

Bali investment: A Deep Dive into Leasehold Properties

For prospective investors eyeing Bali's real estate market, understanding the intricacies of leasehold properties is paramount. The tropical paradise, known for its beaches and vibrant culture, offers unique opportunities and challenges in its property landscape.

Understanding Leasehold Contracts in Bali

Leasehold contracts are prevalent in Bali, commonly tailored for holiday villas, apartments, commercial, and residential properties. In essence:

  1. The investor (lessee) rents the property from the owner (lessor) for a predetermined duration, often between 20 to 30 years with potential extensions.
  2. The lessee can build and use the property as intended during the lease period.
  3. Once the contract expires, all rights revert to the lessor unless a renewal is mutually agreed upon.

Pros of Leasehold Properties in Bali:

Pros Cons
Lower capital requirements, compared to freehold properties The property depreciates at a stable rate over time
You can sell your lease at any time The property does not provide full capital appreciation
Short to medium term income is easier to predict Is possible to use the property for as long as your contract is in force.
Ideal to run high yield short and medium term rental businesses Rely soley on revenue and residual contract value (RCV) to turn a profit
  • Flexibility: Leasehold contracts offer dynamic terms tailored to investors' needs.
  • Affordability: Lower initial capital requirements than freehold properties.
  • High Yields: The thriving Bali tourism sector can offer significant returns.
  • Liquidity: Leasehold properties in Bali are often easier to transfer or sell compared to their freehold counterparts.
  • Development Opportunities: Attractive to real estate developers seeking financing.

Cons of Leasehold Properties in Bali:

  • Opportunity Cost: A leasehold property's value decreases over time due to the time-bound nature of the contract.
  • Uncertainties: Without renewal, the value becomes nil at the end of the lease term.

Profiting from Leasehold Properties

Investors can maximize their ROI through two main avenues:

  • Establishing rental ventures like Airbnb, monthly and even yearly rental.
  • Subleasing at higher rates.

Technical Bs

Leasehold contract bali properties ROI

An underlying challenge is the property's opportunity cost. As the lease term progresses, the value the investor can derive, such as rental income, diminishes. On occasion, the property's appreciation might counteract this cost, but the inevitability remains that, without a contract extension, the value will drop to zero.

To visualize this,look at the following graph  where:

  • The grey dotted line symbolizes your initial investment.
  • The red stepped line denotes the decreasing value of the leasehold contract year by year.

To clarity, if a property worth $100,000 is on a 30-year lease, the opportunity cost is $3,333/year. This becomes an operational cost to factor into projections.

Contract Residual Value (CRV): This is the net property value at your ROI point, indicating its potential resale value. However, market dynamics heavily influence this, making accurate predictions challenging.

Extractable Value (EV): This quantifies the potential profit before the lease expires. When EV exceeds CRV, it's indicative of a lucrative opportunity, making the property appealing to new investors.

leftover value of a leasehold contracts when subleasing the property

Final Thoughts

For success in Bali's real estate scene, one should aim to recoup the initial investment swiftly, leaving ample years on the lease for profitability. This is achieved through meticulous property management, selecting prime locations, and balancing expenses.

Several factors influence success, ranging from operational costs, tourist inflow, to seasonal variations. A savvy investor manages controllable elements while strategizing against unpredictable factors.

Planning an investment in Bali? Dive deeper into the world of leasehold contracts with us. Remember, informed decisions lead to smarter investments.

Please do not hesitate to contact us to learn more and see real life examples.

Feel free to book a discovery call to deepen your knowledge on this matter. We are happy to share our knowledge openly and for free because we believe that an informed investor will make smarter decisions.

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