Investing in a property in Bali may seem confusing, as contradicting information is sometimes provided by different actors. If finding a property in Bali is easy, investing legally and making a rental business as a foreigner in Bali requires the investor to comply with the regulations. Despite what some actors or other investors can say, there is only one way to legally rent a property out on Airbnb or on the market. It is important for the investor to understand that different solutions provided by some actors are sometimes illegal or expose the investor to high taxation in case of audit or control. We will study the different options that are suggested and will review the consequences of each option.
The number of offers on the market is now increasing and investors have a lot of options and areas where to invest. However, it is crucial for the investors to look at what could be the return of investment and how to select properly the best property to start a rental business in Bali.
How to select a property to invest in Bali
As mentioned above, in the last few years a lot of developers have taken the opportunity to build a number of properties in Bali. Farmers, Balinese owners and developers are now offering lands and villas in areas that nobody would have considered a few years ago.
Find the right location and your target market
Despite your budget and your investment plan, the location of a property remains the main criteria when investing in a property in Bali. The location has always to be correlated with your target market. Different projects may fit for one type of client and do not fit for another type of socioeconomic client. While Seminyak and Ubud are certainly places for short-term rental offering a high occupancy rate, other developments, such as in Tumbak Bayu or Kedungu, might find more difficulty in getting a higher occupancy rate.
Indeed, investing in property and starting a property business requires a business-minded approach. Are there people willing to rent property in Bali 25 minutes from the beach, restaurants, or cultural activities? The answer is certainly YES. However, how frequently can you rent out this property if 30 new villas are being developed around you in the next 5 months?
The market is indeed constantly changing and evolving. The tourism industry is changing and the behaviour, nationality and type of people coming to Bali is moving. Some actors and professional real estate agents can help to find the right place.
Define a proper Investment strategy
Investing in a property is like investing in another asset. Each investor has to think about its exit strategy and the terms of the investment. Bali is offering a lot of leasehold property that might affect the exit strategy. While leasehold property requires cashing out quickly, freehold property gives investors more time to get their return on investment. The price of a property plays an important role in the decision to invest. Even if the location is great, an investor may get a quicker Return on Investment on a property slightly further from the beach with an occupancy rate one or two points lower. Here are the things to consider before investing in a property in Bali
- When do I plan to cash out?
- What is the occupancy rate in the area? Is this area close to activities?
- Am I looking to rent out the property for a short-term or long-term stay?
- Can I resell the asset after a few years?
Understand the market trend
Even if the location is great and the current numbers predict a good return on investment at the time of the investment, it is important to understand how the market is evolving to understand how it can affect the occupancy rate and the ROI. Indeed, Bali or other areas such as Lombok have today a lot of projects in construction on areas that are not yet developed. Some projects start to attract investors not because of the tourists willing to go to this place but sometimes because the developers are pushing to invest in an area where the developers could get cheaper land.
This presents a chicken-and-egg dilemma: Is there a lack of tourist interest because there’s no property, or is it due to the area being less appealing? Likely, it’s a combination of both. For investors looking to rent out property in Bali or achieve quick returns, this factor is crucial. Some projects make sense due to their proximity to beautiful beaches, while others are developed far from attractions, lacking appealing features like beaches or cultural activities.
Understand the Competition
Bali has seen such development that it is important to take into consideration how the competition is developing around your investment. Properties take time to develop, and with the current trend, you may be surrounded by other properties around you affecting your occupancy rate but, worse, bringing complaints to your Airbnb account. Indeed, it is not rare to see investors having to cut their price or take out their property from Airbnb due to the development around their villa and offering the villa on long-term rental due to the noise of construction.
Make your own numbers
Investing is your own responsibility, and no agent or developer will sign on to any numbers. Despite the occupancy rate they can provide or any information, it is important for the investor to make their own mathematical calculations. Each party has an interest to sell something and the only one with an independent view is the investor.
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.
How to purchase the property
We have covered this section in detail in a few articles in the past. However, here are the key points on how to purchase a property in Bali:
- Make a proper legal offer with a memorandum of understanding or letter of intent
- Do not pay the seller any deposit without having any agreement signed
- Perform a proper due diligence
- Pay a deposit only on an escrow account
- Request a lawyer or legal person to review or draft the lease agreement and negotiate the terms and conditions
- Structure a legal entity to rent out the property
Also read: Property Contracts And Due Diligence In Bali And Indonesia
How to structure your investment
The way to structure the investment has consequences on how capital funds are injected from overseas and how the funds can be sent back overseas with the lowest taxation. Thinking about the structure before purchasing the property is crucial. It is unfortunate to see investors trying to rethink their investment structure after the purchase which lends to other costs of transactions. Most of the time, it is due to the pressure of the seller not letting the investor take time on how to structure the transaction.
For investors having a company overseas or a holding company, it might be legit and tax optimal to structure your SPV before investing into the property. We recommend to think about the following points:
- From where will the money be invested?
- Is it better to invest with private funds or a loan?
- Should I send money from a company overseas or under my personal fund?
- How the tax treaty with Indonesia influences my investment
How to rent out legally your property
As in many countries, renting out a property is considered as a business activity. Foreign investors (WNI) do not own the same rights as the Indonesian (WNA) when it comes to renting out a property in Indonesia.
To answer whether a foreigner can rent out a property in their own name, the answer is simple: a foreigner cannot legally rent out a property under their own name. A foreigner can lease a property but cannot rent out property in Bali legally. Indonesian regulations are clear, and even Indonesians need to apply for a license if they want to rent out property under their own name.
The logic is simple. Despite Indonesia protecting its market like many other countries, non-resident foreigners and non-residents have no tax card in Indonesia.
Setting up a legal entity in Indonesia
Indonesian law does not recognize the right of individuals to rent out a property and earn money from it. However, the regulator authorizes foreigners to establish a legal entity in Indonesia. The only legal entity foreigners can set up in Indonesia to earn money is called PT PMA. This type of company is open to 100% foreign investment, and foreigners do not need a local person as a partner or director in the company. The process to set up a company takes approximately 5 days and can be set up during the purchasing process of the property.
Getting the right licence
Once the company is established, there are several licences to check or apply before being able to run the business on AirBnb or any other booking platform.
Property Licence
Some sellers or developers mostly do not mention that the building permit (PBG) and SLF are crucial documents. These documents are essential for renting out a property in Bali. Like in all countries, developers must apply for a building permit before constructing a villa, hotel, or any building. The SLF is then delivered once the property is fulfilling some requirements related to its functions. In other words, if the purpose of the villa is to rent it out and as a villa, the permit has to be related to this and cannot be classified as Residential.
Unfortunately, it is not uncommon to see properties rented out with a residential license using a third party’s name (Pondok Wisata). A villa located in a residential area cannot obtain a license related to a Villa or Hotel. Some property managers offer a Pondok Wisata License. To be clear, a Pondok Wisata is a licence related to a guest house. In other words, the owner of the property has to live inside the property and can be only Indonesian. By definition, the income of the property has to go through the Indonesian and cannot be sent directly to the foreign individual.
If a foreign individual cannot receive revenue from a property rented out through a Pondok Wisata, a foreign company can manage it. The foreign company can act on behalf of the Pondok Wisata. However, since the license is in the local person’s name, the owner must live in the property by law.
Company Licence
The second leg is to have the appropriate licence under the company. There are a few licences available for foreign investors to legitimate their income from a property (villa, hotel, apartment hotel). Having a tax card is not sufficient, PT PMA needs to have the proper NIB activated (not only on the Akta or deed of establishment) and comply with the requirements in relation with the business activity.
Register your property on booking platforms
With all the legal documents, it is possible to register the property under your account on platforms such a booking.com or Airbnb. Some people list properties in Bali under a nominee name to hide the real owner, who lacks the license. The law strictly prohibits nominees, and the government has instructed Indonesians to stop this practice. It is however possible to register under the company name if this one has all the necessary documents.
Also read: How to Become a Broker in Indonesia as Foreigner
Managing yourself or with a management company
Managing a property requires time and experience. If you choose to rent out property in Bali, you can manage it yourself or hire a professional management company. Bali has many qualified professionals who can handle property management.
Property management companies often provide comprehensive services, which should include legal advice on licensing. It is advisable to consult various property management companies to compare their offerings. Typically, property management companies offer different packages, including:
- Booking management
- Marketing
- Maintenance
Pricing for a property management company can vary from 10 to 20% depending on the level of service.
Open a bank account and get the revenue
Once the property has all the necessary documents and the property is managed by the investor or by the property management company, the company can open a bank account and receive the funds from AirBnb. Some property management companies offer to handle the revenue and take their fee while others invoice the fee each month.
Report the tax
The tax part is certainly the less fun part of the business. The owner of a property has to calculate and report the tax every month to the local government.
Take your dividend and your income
As a reminder, transfers sent overseas are subject to a withholding tax of 20% for non-residents except if a tax treaty applies. However, if the owner has a KITAS, the applicable tax will be 10% in 2024 or 0% if the money is reinvested in the economy.
