Renting out a villa in Bali is one of the most common business activities among foreigners on the island. However, due to lack of experience or wrong information, it is easy to lose money instead of making profits when renting out villas in Bali.
This article will explain how you as a foreigner can rent out a villa in Bali legally without jeopardizing your investment.
Foreign ownership in villa rental segment is now possible
Bali did not previously allow foreign business ownership in the villa rental segment. It does now. Prior regulations in Bali made it impossible to get the local operational licenses that you would need to operate legally.
On July 9, 2018 the government released the new OSS system for online business management. Since this time, the local government moratorium on foreign ownership of villa businesses became unenforceable. It is now possible to obtain operational licenses under the villa business classification.
Foreign owners of such a limited liability company (PT/PMA) with a villa rental classification may also hold up to 100% of the shares. The only provision is that there are at least two shareholders.
Why start a villa rental business in Bali?
According to the Bali Statistics Agency, about 5.7 million international tourists visited Bali in 2017 which is nearly a million more than in 2016. In 2019, the island aims to attract 8 million foreign visitors.
Adding the numerous entrepreneurs and nomads who have chosen to relocate to Bali permanently, the demand for housing in Bali is on a constant rise.
Bali’s reputation as a paradise island also describes its accommodation market. Many people look for a paradise and the feeling of getting lost in it during a cozy getaway – something they will not find in a big hotel but rather in a private villa.
People have different motives for renting out a villa in Bali, the most popular ones being:
- Buying and renting multiple villas for luxurious getaways
- Buying a villa for personal use, renting it out occasionally during high seasons or while traveling
- Both – building a villa complex that has units for renting out and others for personal use
Choose the right business structure
Once you’ve found the right property (or properties), there are two primary solutions to structure your business for short-term rentals. Choosing between them depends on the scale and purpose of your planned operations.
The first is to setup a foreign owned (PT/PMA) management company with the scope to manage homestay “Pondok Wisata” type businesses. To do this, you make agreements with locals that will have their name used on the registry for each rental building. Whether this person is actually involved in managing the building – or is simply added in name only – is defined by the contract you create. This method is faster and more cost efficient to obtain licenses and get started. It is however a less traditional business arrangement that requires local cooperation. This local person can also be the same as the local that leased you the land.
A second option is to register a foreign owned (PT/PMA) company with permitted activities in the villa/real estate business area. This classification allows you to own and directly manage a villa. Each location however requires a branch classification for the company, and its own IMB building permit. The registration process involved for this method is slightly longer and more complex. It provides for more direct control of your business and properties, and has more requirements.
What is a nominee company?
A nominee company is a company which registered owner (nominee) is not the same as the actual owner (beneficiary). As the nominee company will be locally-owned, there is no foreign ownership restriction, and you don’t have to comply with the minimum capital requirement in Indonesia either.
The relations between the nominee shareholder and beneficiaries are commercially governed through a loan agreement where the nominee (Emerhub) is purchasing the shares in the company by using a loan provided by the recipient (you).
Why you shouldn’t use individual nominees in Bali
When facing foreign ownership restrictions, many foreigners in Bali put their investment at risk by getting into unsafe nominee agreements with friends or family members.
These types of agreements are often based on blind trust and give the foreigner no protection over the investment. Even if the nominee has the best intentions, the problems usually start when other family members are involved.
Death, marriage, and divorce can all bring in third parties who may have different plans with your investment. There are plenty of foreigners who have gotten into trouble with their property investments in Bali for the same reason.
The safe way would be to use a nominee company service that uses corporate shareholders. It also allows you to legally become the director of the company and therefore, fully control its finances.
Want to know more about renting out a villa in Bali using a nominee company with corporate shareholders? Reach out to us for a free consultation via [email protected].
The importance of the building permit
Make sure the villa you are purchasing has the correct building permit (IMB) or obtain it before the beginning of the construction as this is the document that defines the legal use of the building.
However, it often happens that villa owners realize too late that their properties do not have the necessary building documentation.
If you find out that your villa IMB is different than what you need, don’t worry. It is still possible to make the necessary changes.
Also, whether you can operate a homestay, villa, or a hotel depends on the IMB of the building or the plan of how it is going to look like.
If you decide to build a villa, conduct thorough research on land acquisition and the types of land certificates. For an in-depth overview, read our previous article on land acquisition in Bali.
Requirements for villas in Bali
If you decide to invest in a villa in Bali, keep in mind that the minimum land size for a villa is ten are (1,000m2). While there are no restrictions on the room size, your villa can only have up to 25 rooms.
The building must consist of several units and 1 unit of several rooms, not to confuse with a hotel where one building comprises many rooms, not units.
Alternative business classifications for villa rental in Bali
There are also alternative business classifications if your property does not have an IMB with the function “villa.”
Hospitality management consultation
You can use the hospitality management consultation classification for managing accommodation businesses. It allows 100% foreign ownership. This includes activities such as:
- Provision of views
- Preparation of feasibility studies
- Research in the field of tourism
This classification allows for the administration of different accommodations in different locations. This involves less licensing time, cost and paperwork than other business classifications. Whereas to operate a villa rental business, licenses can take considerably longer. You also need to register your company where the villa is located.
Real estate classification
Foreign investors can setup a fully foreign-owned real estate businesses in Indonesia. However, only long-term rentals are legal under this classification. This works well if you plan on living in your villa for half a year. You can lease it out to tourists for the rest of the year. You can not rent out your villa to tourists on a daily basis.
For the above business classifications, it is possible to register the company using a virtual office. This means that your company will not have an actual office. Instead, it will use a registered address where your mail can be delivered.
Having a virtual office also means that you can register the company before buying the property. Consequently, you can acquire the property under the name of the company.
Other types of accommodation businesses in Bali
#1 Running a homestay (Pondok Wisata)
It is possible for a foreign investor to run a homestay (Pondok Wisata) in Bali. You can setup a wholly foreign-owned company in Indonesia (PT PMA) for acquiring land in Bali. This company then manages the Pondok Wisata under the “hospitality management consultation” classification.
However, the Pondok Wisata can only be under the name of an Indonesian individual. This is usually the name of the (former) landowner.
In these cases, the person subject to the accommodation tax is the owner of the homestay. It is common practice that the owner and the PMA make a management agreement. In the agreement, they state that the PMA will pay the accommodation tax on behalf of the Pondok Wisata’s owner.
The general requirements for a homestay in Bali are:
- Up to 5 rooms (suitable for small buildings)
- Maximum room size 32m2
- Maximum 2 floors
- Building coverage ratio 50%
- Possible facilities: pool, kitchen, living room, family room
#2 Setting up a hotel in Bali
Registration of hotel businesses in Bali is quite complex. This business classification is mainly suitable for large hotels located in tourist areas.
While there are no restrictions on the dimensions of the building and the number of rooms, the maximum allowed room size is 32m2, and the minimum land areas must be:
- 75 Are (7,500m2) in North Kuta
- 50 Are (5,000m2) in Kuta
If the land area of your hotel exceeds 1 ha, you will also need a classification from the Indonesia Hotels and Restaurants Association (PHRI).
All accommodation businesses in Bali must be located in tourist zoned areas. You cannot operate a short-term stay accommodation business if the building is in a residential area.
However, when in a residential area, you can setup your business to provide long-term leases. This kind of company can be both foreign or local owned.
Ready to start renting out a villa in Bali?
Our consultants are here to assist you. Book a free initial appointment via the form below or send us an email at [email protected].