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Published: June 3, 2018

Do lease back properties make good investments?

Have you considered buying a display home? Achieving both yield and capital growth is the holy grail of investing.

For some, a display home is the answer.

For those who are not familiar with this type of investment option, let me explain. Most property investors will have looked through a display home at some stage. These are generally located where demand from owner occupiers is strong, and the builders want to show off what they can deliver. They use the display homes to illustrate floor plans, inclusions and finishes and any new products to the market. Some builders offer these display homes to an investor and lease them back at very attractive rates. They generally pay from 6%-10%. This sounds fantastic and looks very attractive to investors.

 There are many factors to consider in finding the “leaseback gems” available.

Let’s run through the Pros of display homes first.

  • These homes are generally in areas with a high uptake of owner occupiers. This is vital for ongoing capital growth prospects.
  • The estates generally have several land releases, with the land prices rising each new release. The displays are in the initial stage, therefore benefit from the price growth.
  • The homes are generally in a street with other well maintained, quality homes.
  • Gardens have more extensive landscaping than the standard investment property. The gardens are also well established by the time the properties return to the standard rental market.
  • The properties are cash flow positive, particularly while interest rates are at current low levels.
  • Display homes generally attract quality tenants and rent for $50-$100 more post leaseback than a standard, similarly configured home as they sit well above the standard in the area.
  • Generally, no management fees apply, and the builder often pays the insurance.
  • There is no vacancy period.
  • High depreciation allowances.

Now for the cons.

  • These homes often have so many upgrades, they are expensive, and the post leaseback yield will be low.
  • Displays can be difficult to get finance for and fall short in valuations
  • Most are sold at completion, so you miss the benefit of paying stamp duty on the land only.
  • While the initial period is cash flow positive, the longer-term yield can be low
  • Appliances will be out of warranty before being used.

How can you ensure success?

Ensuring you don’t buy a display that is “over specified”. This means one that has so many upgrades and inclusions it is too expensive to make investment sense.

Ideally, a builder will offer the display home as a construction, fixed price contract. This means you will buy the land then construct the home. This allows you to benefit from the reduced stamp duty. All the anticipated upgrades are identified in the inclusions schedule. In my experience, the builder will often add additional improvements, particularly as a new product or finishes come to market they wish to feature. This is at their cost and no cost to the investor.

The principal factors to focus on would be:

  • Preferably buy as a construction contract. Benefit from lower stamp duty and opportunity for additional inclusions at builder’s expense.
  • Preferably, the leaseback period is longer than 1 year.
  • Ensure the home is not significantly above the market due to too many upgrades.
  • Check the detail in the inclusions to ensure the design will have broad appeal and is not a narrow design focus.
  • Ensure the land component is in keeping with the rest of the estate offering.
  • Be aware of the location of the display in relation to traffic and any street noise etc.
  • Ensure you have a signed lease for the lease-back period. In the event the estate sells out early, so the builder is still responsible to pay you the agreed rent.

Success story.

One of my clients recently sold his display home, just as it finished the lease back period. This was not in his initial planning, however, his overall plans changed since he purchased. It was a great short-term outcome. The investment was cash flow positive approx. $25K (pa) for two and half years and made a capital appreciation of $125K. He was able to market the property with the display furniture in place which was ideal.

If you feel a display property is something that would be of interest to you, contact us now Click here to make an appointment. Let’s chat in advance to ensure it would be a good fit for you.  Once released to market, these homes get snapped up fast and certainly don’t wait for buyers. If we know you are interested in advance- we can contact you as soon as they become available.

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