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, let me explain. Most property investors and home buyers 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 their best wares. They use the display homes to illustrate floor plans, fixtures & finishes and any products and building materials new to market. Some builders offer these display homes as a leaseback investment opportunity at very attractive yields. This means the investor buys the property and the builder/ developer becomes the “tenant” and uses the house as a “showhome”. The developer generally pays from a 7%-10% yield to the investor. The figures look fantastic and this can be very attractive to investors.
However, there are some cautions you need to be aware of.
Let’s run through the Pros of display homes first.
- The homes are generally in areas with strong appeal to owner occupiers. This bodes well for ongoing capital growth.
- The estates generally have several land releases, with the land prices rising each new release. The displays are usually built in the initial stages, therefore benefit from the land price growth.
- The streetscape of display sites is generally above average, again benefitting capital growth and buyer appeal.
- Gardens have more extensive landscaping and are well established by the time the properties return to the standard rental market.
- The properties are likely to be 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.
- Often, no management fees apply.
- There is no vacancy period from handover at completion.
- High depreciation allowances due to higher level of fixtures and fittings.
- In new estates, ongoing construction can deter tenants. The display home are generally in very early stages allowing the gardens to be well established when offered to the rental market
Now for the cautions ….
- These homes often have so many upgrades, which add to a higher purchase price. It can be difficult post leaseback, to achieve a satisfactory yield.
- Some banks will not finance displays. They can and fall short in valuations
- Most are sold at completion, so all inclusions are factored into the price and you miss the benefit of stamp duty savings.
- While the initial period is cash flow positive, the longer-term yield can be low.
- If you pay above market, growth will be slow.
- Appliances will be out of warranty before being used.
- Often very high returns are offered (10%)and this is reflected in the inflated purchase prices.
- It is easy to be captivated by the dream when you walk through a beautifully furnished display home. However, property investment is for the long haul, so the fundamentals for buying need to be solid and well beyond the appearance of a fancy display.
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. Often some of the “bells and whistles” are gimmicky and some technologies can be redundant quickly.
Negotiate to have all appliances checked and are in working order at the end of leaseback. The warranties may have expired, and they have not yet been used.
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 paying stamp duty only on the land component. The builder will anticipate at contract stage the inclusions, however will often add additional improvements as a new products & finishes become available. This is at their cost when if the investor has signed a fixed price contract.
Ensure the fundamental principles of a good investment apply. The initial high yield is a bonus, not the basis for your investment.
The principal factors to focus on would be:
- Preferably buy as a two part, fixed price construction contract. Benefits are lower stamp duty and opportunity for additional inclusions at builder’s expense.
- Ensure the leaseback period is longer than 12 months.
- Ensure the home is not pitched significantly above the market and is relevant to the local demographic.
- Check the details and the inclusions to ensure the design will have broad appeal.
- Ensure you have a signed lease agreement as part of your contract. In the event the estate sells out early, the builder is still responsible to pay you the agreed rent.
Recent success story… take a look at this short video Link to Display soon to complete- June 2019
An investor who purchased a leaseback opportunity which is about to complete construction, was delighted to discover she had received significantly upgraded landscaping. A gazebo with travertine tiling, and raised garden beds again with travertine pavers was installed beyond the contract specification.
Additionally, new infrastructure in the region has contributed to a high level of population growth and steady price growth already. A new university, less than 15 minutes drive is set to open in 2020.
Details of purchase:
- Price: $599,000
- Block size: 465m2
- House size: 212m2
- Rental return: 7% ( $806 p/w) for minimum 24 months.
Quality leaseback investments are few and far between. Uninformed investors often buy them based on the high yield, and then don’t have a great investment outcome as there is limited or no growth.
If a display home interest you, let us know! If we know you are interested in advance- we can contact you as soon as quality opportunities become available.
Ensure you know what to look for and explore other options as well. Let’s have short chat to see what might work well. Click here to make a time