Buying Freehold vs Leasehold Property: What You Need To Know

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It is important for any potential property buyer to understand about property titles such as freehold and leasehold. A property type can significantly affect its value and the degree of control it gives its owner. Buying property is a form of investment. Therefore, it is crucial to know the key differences between freehold and leasehold titles by weighing their pros and cons. In this way, the buyers can make the most informed choice when it comes to selecting the most suitable property type for themselves. 

What is a Property Title?

Before investing in property, it is imperative that you know the common terms which relate to real estate. One of these common terms is called a property title. A title is a document which shows legal ownership of a property, as well as other specific details about the property. 

Before purchasing a house, a land title search should be conducted to ensure that everything is in order. A title search covers many years’ worth of public records and land records. Some of the common problems encountered by a title search include:

• counterfeiting
• unpaid work on the property
• additional owners
• unidentified heirs 
• outstanding taxes

To resolve these issues, the seller must clear all the taxes and outstanding payments before the property can be sold. In the case that there is an additional owner, all the owners responsible for the property are required to sign the documents which will allow the property to be sold. 

What is a Freehold Title?

A freehold title shows that the property belongs to the owner, and the government has no control over it except in rare cases. If you buy a landed property which is freehold, the ownership is stated with a Master Title. On the other hand, for a condominium or high-rise strata building, you will only have ownership of a unit of the residence which you purchased, not the entire property. Your ownership is stated with a Strata Title. 

Although the freehold title shows explicit ownership and absolute control of a property, the state or federal government has the ability to obtain the property for public use such as building MRTs or constructing highways. This is called the “Power of Eminent Domain”, which gives the government the authority to seize privately owned property for public use, as long as the proper compensation is given.

After you purchase a piece of land or real estate, you obtain a Land Title certificate which is given to you by the Malaysian government through the land registry office.

Advantages of Freehold Property

Ownership

The owner of a freehold property has full ownership of the property and the ground on which it is situated. Thus, this property can be passed down to heirs after the owner dies.

Freedom

When you purchase a freehold property, this gives you the freedom to make changes to the property as you would like. But keep in mind that certain structural changes are subject to the approval of the relevant town planning authorities. 

Optimal Resale Value

Freehold properties are generally more sought after than leasehold properties, therefore making them more profitable. Due to this, the resale value of freehold property is relatively higher when compared to its counterpart.. Building the property in an environmentally stable location will ensure that it appreciates in value over time. 

Transferring Rights

Freehold properties have fewer restrictions regarding the transfer of ownership, which makes the process of selling freehold houses easier. A Sales and Purchase Agreement (SPA) states clearly the terms of the contract and finalizes the negotiation. 

Disadvantages of Freehold Property

Cost

Freehold land and properties are usually more expensive than leasehold properties, partly because of the higher demand on the market. Although, this is not always the case, as a property’s cost depends on various factors such as the location, its surrounding environment and also the property type. 

Repairs

In a freehold property, the owner is responsible for all the repair fees and maintenance fees which the building will require. This can come down to a hefty sum when accumulated over the years. 

Possibility of Government Ownership

Although with a freehold title you have complete possession of your property, it is important to keep in mind that the government still has the right to collect your property and land. This is only possible if the state or federal government plans to use your property for public use, such as building railroad lines or other public buildings. In this case, you will be compensated by valuers who are designated by the government to determine the current market value of your property. 

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Lower Rental Yield

Freehold property has a lower rental yield than leasehold property. This is because freehold properties are usually more costly than leasehold properties. Rental yield is computed by dividing the total of the yearly income by the cost of the property. Hence, as a result of their greater expense, freehold properties have lesser rental yields. 

Common Misunderstandings about Freehold Property

Complete Control of the property

A common misconception that people have about freehold properties is that the buyer has complete control and infinite possession of them. Under Malaysia’s Land Acquisition Act of 1960, the government has the power to collect the freehold land for public use or for future development. Compensation is given to the freehold property owner based on the current market price of the land.

Lower Depreciation rate

It is mostly believed that leasehold properties depreciate at a faster rate. This is not actually true, especially for leasehold properties which are under 21 years. Both types of properties will either appreciate or depreciate based on the market and if it is doing well or not. The depreciation rates of leasehold properties, however, increase as the lease term nears an end.

What is a Leasehold Title?

A leasehold title refers to property which is given by the government to an individual for a certain amount of time, with a maximum of 999 years. Once the time elapses, the property reverts back to being in the possession of the government. To reclaim ownership of the property, the individual will have to apply for a renewal of the leasehold before the lease term ends. 

With a leasehold title, there is less freedom to make certain changes to the property, as there are rules stated in the contract agreement which regulate the type of activities allowed on the land. According to the zoning regulations and town planning controls, the buyer will be placed in charge of the building’s upkeep. The government can decide to reject the lease if it determines that the buyer is inadequate for the land’s care. Leasehold titles are the most common in high-rises.

The leaseholder pays annual ground rent to the freeholder (landlord) and also the maintenance charges, building insurance and annual service charges.

Conversion of Leasehold Property to Freehold Property

It is possible for leasehold property owners to convert their leasehold homes to freehold property. Doing so would require legal documents, admin fees and a proper application procedure. Another factor that should be considered is the state regulations regarding the property which you own. All the required documents and fees will have to be handed to the state land office. If the application is approved, then the leasehold land will be re-allotted with a new title following the settlement of the land premium as well as any outstanding costs. 

The period of time required for the whole process can take from a few months to years, therefore it is important to begin before your property is due for a leasehold extension. The processing fees and land premiums required to convert a land title differ from state to state in terms of price. Based on the difference between the property’s current market value and the freehold land price as established by the state valuation department, an estimate can be made for the land premium cost.

Advantages of Leasehold Property

Less Cost

A leasehold property is usually less expensive than a freehold property, although some leasehold properties have service charges imposed on the buyer for all maintenance works involving the building during the lease.

Higher Rental Yield

Since fewer entry costs result in higher rental yield, a leasehold property has a higher rental yield in comparison to a freehold property. This is because a leasehold property is not as expensive as a freehold property, and this reflects in its rental yield calculation.

Provision of Incentives

Due to market competition, developers usually provide various amenities within the property and around its surrounding areas. This aid can attract potential buyers, in order to sell leasehold properties. Also, the convenient location of most leasehold properties serves as another benefit. 

Disadvantages of Leasehold Properties

Tenure

Leasehold properties have a set tenure for which they can be owned (30, 60, 99 years) with a maximum of 999 years. In Malaysia, a 99-year lease is the most common lease term.  But in certain parts of Petaling Jaya and other parts of Kuala Lumpur such as Sungai Besi, the leasehold properties have a 50-year lease or less as their lease tenure. After the tenure ends, the property returns to the possession of the government. This means that the lease has to be renewed before it ends, for the owner to keep it in their possession.

Restrictions

Due to the terms stated in the contractual agreement or the certain lease conditions, various restrictions are made to activities which can be performed on the land. Renovations of the property are allowed, but structural changes and cultivation are subject to the approval of the required town planning authorities. 

Maintenance Responsibilities

The owner is placed in charge of the maintenance and development of the leasehold property. Failure to do so may cause the government to forfeit the lease, as the owner will be considered unsuitable to own the property.

Renewal Fees

A leasehold title needs to be renewed as the property can only be owned for a definite amount of time. The renewal fees can rack up costs, and it is even more pricey if the owner decides to negotiate for a lease extension after the lease tenure ends.

Appreciation Value

Leasehold properties appreciate at a value higher than freehold properties during their starting years of a lease. This is because they contain facilities which make them more profitable to invest in, as well as being situated in strategic locations. However, as a leasehold property begins to near its lease expiration, its appreciation value becomes stagnant and reduces steadily. This happens because the renewal process is tedious, and it is not certain that the negotiation for the lease extension will be approved. Therefore, this causes the marketability of leasehold properties to suffer. This is in large contrast to freehold properties, which have a steady pace of appreciation. 

Bank Loans

In order to acquire a bank loan, the leasehold property must have 50 or more years left on its lease. This is because the bank will not want anything that can serve as a liability to them. Even with this, there is a possibility that the loan amount you will receive will be less than the maximum 90% that is usually given.

Transferring Ownership

Transferring ownership of a leasehold property can take a longer period than freehold ownership, due to the fact that the government is involved and there will be a need for proper consent. Although, purchasing second-hand leasehold property may take an even longer period, as it will require consent from various other sources. This stands for all leasehold properties which have an individual or strata title. When a leasehold property is purchased directly from the property developer, the time taken is less. Master title leasehold properties do not require you to apply for the state’s consent. Note that for any property to be sold, the Certificate of Completion and Compliance (CCC) has to be presented by the developer, as it verifies that the building has been completed and is safe for habitation.

Common Misunderstandings about Leasehold properties

Amount of time required

When selling leasehold properties on the secondary market, a lot of time is taken to complete the whole process due to the need for the government’s consent. Buying a second-hand leasehold home in places such as Kuala Lumpur may even take up to a year.

First-Time Home Buyer Mistakes

Lack of Budgeting

First-time home buyers may get excited and want to purchase property without putting into account the location and amenities that are available, or whether or not it will strain their finances. Straining your budget to purchase property is a costly mistake that will negatively affect your finances in the long run.

Not checking credit history

It is important to check your credit history to know if anything can affect your loan eligibility. If you have a low credit score, steps should be taken to improve your credit history such as taking care of your outstanding debts. The CCRIS database is used by banks to check all of a borrower’s information, and you can access this information to check your credit score.

Underestimating the  cost

The upfront cost for a property includes legal fees for the sales and purchase agreement (SPA) and loan agreement, stamp duty on the SPA and loan agreement, 10% of the purchase price as the down payment and about part of the property valuation’s fee. These can all rack up to be a hefty amount for first-time buyers. It is necessary to take this into consideration before purchasing the property. 

Not doing adequate research and checks

Before buying a property, proper research should be done about its location, accessibility and available amenities. Also, a proper inspection should be done to check for defects in the house before the purchase is done.

Underestimating hidden costs

Apart from the upfront costs required for the purchase of property, there are other monthly payments to look out for. These include the sinking fund, maintenance fees and also utility bills.

Freehold vs. Leasehold: The Best Choice to Make

When looking at these different property types, it is paramount to decide what roles you are prepared to take on. Is it too strenuous or restrictive? Also take the location of the property into account, as well as its surrounding environment and its provided amenities, to evaluate the comfortability of the property. Take, for example, property A which is a freehold estate but also an old one, which is priced at RM400,000. A few years from now, it does not appreciate well due to the lack of economic development in its surrounding areas and its location. Property B, in comparison, is a new leasehold property at the same price, and which is situated at a better location than property A. Also, it has a higher possibility to appreciate in the long run. 

You will have to put into consideration the level of comfortability of the house and its surrounding areas. If you are looking from an investor perspective, the capital appreciation, rental yield and the total cost required to fix and renovate the house all need to be taken into account.

For any potential property buyers, the question of the most suitable property to purchase is a fundamental one, therefore, before you make an offer on a property, be sure that it is affordable and meets your needs.