Exploring Freehold vs Leasehold
With the rapid pace of property development and the continuous influx of new listings into the market, individuals considering their next home purchase or investment now have an extensive array of options to assess before making a decision.
When it comes to property acquisition, one of the pivotal choices you’ll encounter is whether to select freehold or leasehold tenure. Each ownership type presents its unique advantages and disadvantages, underscoring the importance of comprehending the disparities before making a choice.
Freehold Ownership
Freehold ownership grants you full ownership rights over the property and the land it sits on indefinitely. This means you have the freedom to use, modify, and transfer the property as you see fit without any time restrictions. One of the main advantages of freehold ownership is the sense of security and permanence it offers. You have full control over your property without having to worry about lease expirations or renewals. Additionally, freehold properties often appreciate in value over time, providing potential long-term financial benefits.
However, with great autonomy comes greater responsibility. As a freehold owner, you are solely responsible for maintaining the property and covering all associated costs, including repairs and taxes. Furthermore, freehold properties tend to come with a higher initial purchase price compared to leasehold properties due to their perpetual ownership status.
Leasehold Ownership
Leasehold ownership, on the other hand, grants you the right to use the property for a specified period, as outlined in the lease agreement with the landowner or freeholder. While leasehold properties offer a more affordable entry point into the property market, they come with certain limitations and considerations. One of the primary advantages of leasehold ownership is affordability. Leasehold properties are typically more accessible in terms of upfront costs, making them an attractive option for first-time buyers or those on a tighter budget.
However, leasehold ownership also comes with its share of drawbacks. One of the main concerns is the finite nature of the lease term, which can range from a few decades to several centuries. As the lease term diminishes over time, the value of the property may depreciate, potentially affecting its resale value. Additionally, leasehold properties are subject to ground rent and service charges payable to the freeholder, adding to the overall cost of ownership. Moreover, leaseholders may face restrictions on property alterations and subletting, limiting their flexibility compared to freehold owners.
Freehold vs Leasehold
Tenure security
Freehold
Tenure is forever.
Both property and land are owned forever* by the purchaser.
*Note that state governments have the right to take back freehold land for major projects such as MRT or economic development and provide compensation to the owner.
Leasehold
Lease period of typically up to 99 years
Starts from 30 years and is subject to renewal but in some rare cases, it may even last up to 999 years.
Ownership
Freehold
Buyer has ownership of the property and land.
The owner has all rights upon the property and land.
Leasehold
Buyer returns ownership at the end of the lease to the landowner or government.
The buyers have the option to renew at the end of the lease.
Cost
Freehold
More expensive to own.
Freeholds usually cost more as it includes both land and property. The plus side is homeowners get more flexibility to renovate or make changes to the house and land.
Leasehold
More affordable to own.
Leaseholds generally cost less than freeholds but come with more renovation restrictions.
Transfer of Properties
Freehold
Less hassle when transferring ownership.
The process is usually more straightforward. A freehold property transaction can typically be completed within 90 days of signing the Sale and Purchase agreement.
Leasehold
Lease transfer requires state approval.
Homeowners will need a letter of consent from the landowner (the state). This process can take 6 months to almost 1 year.Property transfers from Bumi to non-Bumi owners will also need more time to approve.
*For second-hand leasehold properties, it will take more than a year in KL and Selangor.
Resale Value
Freehold
Higher resale value, lower rental yield.
Freeholds tend to appreciate in value faster but they give lower rental yields due to a higher entry price point.
Leasehold
Lower resale value, higher rental yield.
Leaseholds older than 30 years may stagnate or depreciate in value so they are usually more suited for shorter-term investment purposes but with a higher rental yield..
Freehold Property Investment
Investing in freehold property offers several advantages, notably its potential for robust returns. Industry experts suggest that freehold properties can yield returns averaging 6-7% annually, surpassing many other investment options. Moreover, freehold properties often appreciate over time, augmenting overall returns. However, it’s vital to acknowledge the associated risks. Property depreciation is a possibility, influenced by factors like economic shifts or gradual property wear.
Furthermore, acquiring freehold property necessitates a substantial upfront investment, potentially requiring a mortgage or significant loan depending on the location and size of the property. Ongoing maintenance and repair costs for the land and property can pose financial challenges.
Freehold Property Investment
Leasehold property investment presents an attractive prospect for those seeking higher returns. Industry insights indicate that leasehold properties can generate returns averaging 15-20% annually, markedly surpassing freehold counterparts. This is primarily due to lower initial investment requirements, as leaseholders pay solely for property use over a fixed period.
Nonetheless, there are notable risks to consider. Notably, leasehold properties lack property appreciation potential since leaseholders do not own the land. Consequently, property value remains stagnant, offering no benefit from appreciation. Moreover, at lease expiration, ownership reverts to the landowner (freeholder), potentially posing challenges in recouping initial investments, particularly with shorter lease periods.
However, there are also pros to a leasehold property. A leasehold property typically commands a slightly lower price compared to a freehold property, offering investors better value for their money with lower entry costs and higher rental yields. Developers often enhance leasehold properties with additional facilities and features to make them more appealing to buyers.
References / Credits:
https://www.linkedin.com/pulse/freehold-vs-leasehold-properties-which-offers-better-shihabab
https://www.cimb.com.my/en/personal/life-goals/investment/freehold-vs-leasehold-which-should-you-buy.html
https://www.iproperty.com.my/guides/freehold-vs-leasehold-title-malaysia-what-property-buyers-should-know-64117
