23/06/2008
Next time you look around a display home, stop and think: you may be standing in the middle of your best investment yet.
Display homes offer a range of extremely tempting advantages, from guaranteed rent for a set period, to high yields of around 7% pa, as well as reliable tenants with a vested interest in keeping your property ship shape.
“Display homes represent an excellent opportunity for investors and are highly regarded as a prized addition to any investment portfolio,” says Ted Anderson, sales manager, Burbank, a leading builder and developer.
How it works
For an investor who’s only ever bought property via more conventional means, the method of purchasing a display home may seem a little odd. Typically what happens is that a developer buys some land in a high-profile area and puts together a display village, marketing all the properties on the site directly to buyers.
Builders will usually look for a display home site “where the action is, in a quality development with access to a large number of blocks of land,” explains Dennis Carter, manager, international sales, Metricon, a leading home builder. “At some stage during the building process, or when it’s just finished, we’ll sell it and then lease it back from the owner (lease-back option).”
Lease-back option is when you purchase the house and rent it to the builder for anywhere between 12 months to five years. The builder uses the house as a display home and in return pays you as the owner a fixed rent. The rent varies but is generally higher than what you would earn renting the property to a tenant on the normal rental market.
“Because it’s such a large investment, Metricon endeavours to maintain it as a display home for a minimum period of 18–24 months,” adds Carter. “Some homebuilders will also write extension options into the lease-back agreement to enable them to extend. This may be for another 12–18 months.” Once the estate has been fully developed, the display home is no longer required, and the developers will be ready to move on to their next project.
Until then, one of the major incentives for investors is the promise of a high quality tenant who will treat the property with the utmost respect, because it’s in their own best interests to do so. “It’s guaranteed that you’ll always have a very good tenant in there,” says Carter.
Top quality
Anderson agrees that, for an investor, having a major builder as a tenant is ideal. “The property will be maintained in pristine condition throughout the tenancy, and when the home is handed over it will be in ‘as new’ condition,” he says. “Extensive landscaping and external features such as alfresco areas, timber decking, BBQ areas and paving are included and will save the investor thousands of dollars.”
The quality of the finish is a major drawcard and, by their very nature, they’re there to attract buyers to a new development – after all, display homes tend to be of the highest quality.
“They always occupy a prime location within the developing estate, and are surrounded by homes of similar quality,” says Anderson. “Display homes are constructed to the highest standards and all inclusions and fittings reflect the quality that’s expected of such a home, and in most cases will include a number of upgrades that all add to the appeal of the home.” Angus Raine, CEO, Raine & Horne agrees that display homes have a lot to offer. “Top of the range display homes will have the very best fittings and inclusions such as floor coverings, appliances and light fittings,” he says. “They’re also usually professionally landscaped and interior designed with the best colour schemes so they look as good as possible.
“The best homes are often found in the best locations in a development. Mid-range display homes won’t have as many inclusions while those at the value end will have standard inclusions that come with any new home.”
Some developers will also include rates and insurance for the term of the lease – and there won’t be an agent grappling for their 8%. “The fact that we take care of all maintenance, rates and insurances and there are no agents fees charged, together with the higher rate of depreciation that a new home brings, all make display homes very attractive,” says Carter.
High yields
And of course the other major incentive is the guaranteed high rental yield. “A return of 7% pa for a residential investment is excellent,” says Anderson. “Most residential property will show a much lower return, plus in this case, there’s no maintenance issue for the investor. The rental is guaranteed for the lease period, and in many instances the lease may be extended subject to the life of the display village. After hand over, the investor will have an imposing home suitable for re-leasing or, as many investors do, moving into.”
However, due to the relative scarcity of display homes, they can be hard to get hold of. “They’re usually keenly sought after,” confirms Carter, adding that market forces will also play a part in availability issues. He advises keen investors to register their interest with a reputable builder.
Anderson says that, as the supply of display homes is sometimes so limited, “often investors will pay a holding deposit to secure first selection in the next release of display homes”.
Do the numbers stack up?
It depends, according to author and educator Helen Collier-Kogtevs. As an owner of two display homes, both in Sydney, she says her experience with investing in display homes has been very successful.
Collier-Kogtevs bought the two display homes when the property market was booming and it was difficult to find cash flow opportunities in capital cities. “The idea of purchasing a property with a fixed rental return of 7.5% for three years when the five-year fixed interest rate at the time was 5.99% was very attractive,” she says.
“The added bonus was that the builder also paid all the outgoings. Recently, one of the lease-back options came to an end and the display home went onto the open rental market. It didn’t take long to find a tenant – especially now that we’re experiencing a rental boom – paying $450 per week. The return isn’t as good as the lease-back arrangement, however it’s much better than had we not had the lease-back option in the first place.”
Collier-Kogtevs says it would have been difficult to achieve a weekly rent of $300 just over three years ago. The second display home has a five-year lease-back option with all outgoings paid by the builder, so it’s still ticking over quite nicely. “We purchased the second display home from the same builder due to the success of the first display home,” she says.
But are all display homes that good a deal?
“Not from my experience,” Collier-Kogtevs admits. “From the success of these two display homes, I thought I’d hit the jackpot – long leases, good returns… but it’s not always the case.” She said she nearly bought a display home for $30,000 more than the market value. Thankfully, a real estate agent tipped her off before she signed on the dotted line.
He suggested that the display home wasn’t worth the asking price, as he knew the estate very well. However, being a skeptic, Collier-Kogtevs continued her investigations into the value of the display home. “There was a problem. Although the lease-back option for this display home was 8% for two years, I did have a couple of concerns regarding the lease agreement and the purchase price. Unlike our existing display homes, this lease didn’t include the builder paying any of the outgoings. Therefore it had to come out of our pocket.
It appeared that the builder added on his two years of lease payments to the purchase price of the display home. At first I thought it was a mistake but after exploring what other builders do in Melbourne and other states, it seemed to be common practice,” she explains, confidently.“
Had I purchased the display home with a view to selling at the end of the two-year lease agreement, I would have quickly found out that the valuation would have equalled the purchase price of two years before.
“Yet had I purchased a normal home of the same standard in the housing estate, I’d have enjoyed around $40,000 in capital growth, which isn’t bad considering the property market was commencing its downturn.”
So are display homes such a good deal for investors? “Yes and no – as always, you need to do your research,” says Collier-Kogtevs.
The long term?
For such a niche area of investment, it’s surprising to learn that some investors concentrate solely on display homes. “We often see it,” says Carter. “The higher than usual return for the first two years is a good start and then it simply reverts to the market rate. It’s well worth considering as part of a balanced portfolio.
”Raine agrees that a display home can be “a good, long-term investment” – subject to the usual criteria. It needs to be “a quality, well-located property, which is in close proximity to excellent facilities such as transport, schools, hospitals and entertainment options such as theatres, restaurants and the like,” he says.
However, investors will need to prepare themselves for a slip in returns once the term of their original agreement expires. But while returns are higher during the lease-back period, there’s no reason to believe they’ll attract less than the market rate once the builder moves out, says Carter. They’re “better over the long term”, he adds. And they’re “more likely to attract higher than the average rental rate due to the quality inclusions.”
Overall, display homes offer an interesting investment opportunity. They “enable investors and homebuyers to buy a house at today’s value, featuring a range of luxurious upgrades and top-notch landscaping with a guaranteed return”, Carter reiterates.
