Buy a Display Home and lease back

[naifyboy]

Hi
I am considering buying a display home and then leasing it back to the building company instead of getting a house built.
They have guaranteed they will pay me 7% over the next 2 years.
After that I can then rent it out for the normal market rate.

It sounds like a good opportunity as the house is built with many extras and higher quality inclusions.

So far the only drawbacks I can see are:

1) Needing commercial insurance (as the lease deal will be commercial with a company), instead of residential insurance;
2) Paying stamp durty on both the land and the house

It's in a growth area.

I have no experience in property investment and am looking for advise on this....
Thanks guys...

 

[Propertunity]

I have no experience in property investment and am looking for advise on this....

You have no experience using the "search" funtion on here either apparently

Next time try a search on "display home". This has been discussed at length on the following threads:
http://www.somersoft.com/forums/showthread.php?t=53911

http://www.somersoft.com/forums/showthread.php?t=50980

http://www.somersoft.com/forums/showthread.php?t=49802

There are lots of traps and at 7% they obviously saw you coming .

Beware

 

[kotim]

Be very sure of the company, Many such deals are done with the a $2 shelf company being the one paying back your rent, not necessarily the actual building company per se.

This happened plenty of times before whereby the 'builders' don't have to pay back lease prices becasue the rent is guaranteed by a now defunct shelf company , this was especially prevelent a few years ago with big apartment/hotel type builidngs 'giving' guaranteed returns, via a shelf company

 

[tobe]

It all depends on the deal. Not all builder lease backs are bad, just like all serviced apartments arent necessarily bad. It depends on purchase price and what the likely rental will be after the lease has ended.

Many people want a display for the builders rental, and then assume they will sell it at the end of the lease at a tidy profit, having been cashflow positive, and receiving taxation depreciation while they hold.
However this is not always the case. In 2 years time what was top of the range is now dated, its more likely to be 5 years before any substantial capital growth.
Much better running the numbers over a longer term, and using the normal rent in your calculations rather than the builders lease. If it still makes sense, and ticks all the criteria, then go ahead. If the extra rental is the only thing holding the deal up, then walk away, build your own property, and just pay stamp duty on the land. This alone might offset much of the extra rental from the builder over the first 2 years.

 

[komstak]

We purchased a display home but did not take any home and content insurance. The developer took care of that. They insured the whole estate and display village for something like 30 million.

 

[mja]

It's probably in another thread somewhere, but be warned - banks won't lend much against display homes as they are commercial in nature. So, maybe a max of 70%

I believe you'll also need to be registered for GST and pay GST on the sale price. I've heard of people buying display homes and they haven't been registered for GST, thus they can't claim the GST on the purchase.

Do your research!

 

[komstak]

It's probably in another thread somewhere, but be warned - banks won't lend much against display homes as they are commercial in nature. So, maybe a max of 70%

We were able to borrow 85% (IO, no LMI) from Westpac. However the loan can only be variable. We can fix it only after 2 years.

I believe you'll also need to be registered for GST and pay GST on the sale price. I've heard of people buying display homes and they haven't been registered for GST, thus they can't claim the GST on the purchase.

Do your research!

Our accountant advised us not to register for GST? The rent for the display home does not include GST. Not sure if this correct? We will have our tax done in a few weeks and would definitely ask him about this.

 

[mja]

Our accountant advised us not to register for GST? The rent for the display home does not include GST. Not sure if this correct? We will have our tax done in a few weeks and would definitely ask him about this.

Did the purchase price include GST? It probably did. If you're registered for GST you would be able to claim this back. If you're not registered for GST, then you can't.

YMMV - I'm not an accountant and have never purchased a display home before. Check with the experts.

 

[Pablo]

Here is a thread I started about display homes, as you will read they aren't as good as they seem.

http://www.somersoft.com/forums/showthread.php?t=21411