For investors to Lombok and Bali, it is not easy to navigate through all the offers on the market and avoid mistakes during your first investment. From the illegal project to the overpriced property and misleading ROI, the investor coming to Bali or Lombok needs to step carefully with all the information provided.
Project with lack of permit (PBG/ SLF)
Unfortunately, Bali has some illegal projects on the market, and one of the first real estate investment mistakes is buying into a project without the necessary licenses or permits.
As a reminder, each property in Indonesia requires a building permit (PBG) before the contractor can start the construction. Unfortunately, some agents believe or let clients think that the SLF application is sufficient. They sell on purpose to the developer and their client an SLF application that takes ages before seeing the approval. In some circumstances, certain constructions do not respect the norms or comply with regulations, and the PUPR might request amendments, creating issues for the client.
Make navigating real estate in Indonesia easy
Save time and money by letting ILA’s team of experts guide your real estate journey in Indonesia. We can help with due diligence, land title transfers, notary services, contract drafting and reviewing, building permits, various licences and more.
Find more information about our broad range of real estate services, or reach out today for a free consultation.
Unlicensed property
Buying a property in Bali doesn’t mean the property can be rented out on Airbnb or Booking.com on a daily basis. The property must be located in an area allowing daily rental business. The areas are characterised by different zoning and colours. The zones allowing daily rentals are usually the Pink Zone (tourist zone) and Yellow Zone (under certain conditions). The Yellow Zone typically allows rentals only for local companies or individuals.
The property owner must apply for a license (hotel, apartment hotel, Pondok Wisata, or Vila) to obtain a Business Identification Number (NIB).
Once the property has got the NIB, the owner has to pay the tax every month under an NPWPD (local tax number).
Wrong Location and Unexpected ROI
One of the biggest real estate investment mistakes in Bali and Lombok is buying in the wrong location without understanding the potential return on investment (ROI). Before investing in Bali or Lombok, it is important to understand where the property is located. Unfortunately, too many properties on the market are offered by real estate agents in areas unsuitable for daily rentals. Bali’s infrastructure and traffic are so bad that a property seeming close on the map may be 20-30 minutes from the beach.
This is due to the fact that a lot of developers could not invest closer to the beach but are not trying to offer those properties to their clients. Unfortunately, those properties will probably not have a high occupancy rate and will lack good comments. Those properties unfortunately cannot get the ROI promised by some agents. The average ROI will turn around 8%.
Real Estate Agent and Developers in Bali and Lombok
The previous point is, unfortunately, connected with the point here. Bali and Lombok have several actors who are unqualified, do not have real estate agent qualifications, or cannot act as developers or contractors in Indonesia.
As a reminder, the property agent needs to be a member of the broker association. It is common to see on contracts “consultant commission” and not directly agent commission as the “real estate agent” are in reality not agents. It could not be an issue if it has no impact as well on clients. We face situations where real estate agents provide incorrect information to clients to push the sale. This impacts the return on investment for clients’ property investments in Bali and Lombok.. Some of the advice has a serious impact on their tax exposure.
On the other hand, contractors are usually also unlicensed, and this has some serious consequences on the quality of the construction. A contractor or consultant in construction needs to have a certification in Indonesia and cannot operate without any qualifications. This is to protect clients of vice-cache. Unfortunately, some clients had to sue developers for construction delays, especially with properties showing serious issues after a few years.
Also read: Why Now is the Perfect Time for Property Investment in Lombok
Weak contract and extension
To avoid costly real estate investment mistakes, it’s crucial to protect your investment, whether it’s under Freehold (HGB) or Leasehold (Hak Sewa).
Indeed, both parties can notarize and legalize leaseholds as private contracts, defining their terms and conditions. In order to sell fast, some agents provide weak contracts so as not to offend the seller and to accommodate the transaction with the buyer quickly. This situation can have heavy consequences for the buyers, especially in the extension phase. Indeed, some landlords use weak parts of the contract to avoid signing or extending the leasehold. They may only agree if the lessee is willing to pay the construction price again. Other clauses, such as responsibility for taxes and the access road, must be well-covered and secured.
Property management selection in Bali and Lombok
Once the property has been bought, it now conveys the listing of the property on the platform for daily or monthly rental. “Having a great car is not essential if nobody is able to drive the car and win the race”.
Property management companies such as Pulse Villa Management handle your villa from A to Z by focusing on the return of the investor. Looking at the price offered by the villa management company is crucial. A 20% marketing or management fee will significantly impact the return on investment (ROI) in Bali and Lombok.
Investment under the personal name in property
The seventh mistake to avoid before buying property in Bali is investing under your personal name. This is important if you plan to have a business with your property or generate income from the property management company. Indeed, most of the agents are promoting investing under personal names:
- As the process of creating a company slows down their process. The process takes only 5 days
- As the seller for whom they get the commission, they don’t want to declare the tax, and the company is responsible for paying the tax. and the owner can be tracked in case of audit
- As having a practice of double documents makes the work of the notary more risky as the company paying from a corporate bank account is more exposed to control
To be clear, an individual can invest under their personal name. However, it is not allowed to generate income from a property as a foreign individual. The only way is through a company that has some licence and uses agreements with different third parties.
As well, taxation at the company level and personal level is much more efficient under a company. A shareholder pays a 10% dividend tax or 0% after three years. Meanwhile, their home country may tax the income. The personal income tax rate can exceed 30% or 40%, depending on the country of origin.
To avoid these common real estate investment mistakes in Bali and Lombok, we recommend contacting a legal and tax specialist such as ILA or others to understand the best set-up to make your investment secure.
Also read: How to Rent Out A Property in Bali and Lombok as Foreigner
