Buying Display Homes?

[YPG]

Has anybody here bought a display home as an investment?

I feel it is something that a lot of people on this forum would advise against. But I thought I would check.

Have been looking at a couple examples (around the 500k mark) to possibly buy together with my parents + brother.

For example Metricon has a few new ones being built offering 7% rental yield for 2 years + possibility of 1-2 year extension. Because of metricon's size I would suspect that the risk of them going broke and having to break the lease would be much less risky compared to a smaller builder with display homes.

I was just curious that with 7% yield and depreciation and a healthy deposit the potential property could be neutral.

It would be a long term investment - so it would not be sold after the 3 year period. Some of the bigger land estates do scare me though - because they generally have 5+ stages released over 5+ years.

Maybe it would be better to stay away from display homes or even new builds in general. Perhaps an older style property would prove to be a better option.

Any thoughts?

Cheers

 

[twobobsworth]

The ones I've seen are on pretty small blocks and prices seem inflated. If you need to sell the property quickly in the future you have a limited buyer pool while under lease.

 

[Aaron_C]

Display homes are treated as special securities by the bank (and I'm not talking about the 'good' special either). The bank valuation will come in much less than what you paid for it, as will the market rental from the property, resulting in a low LVR. I personally would never recommend a display home as an investment (what if the builder goes bust? You are finished)

 

[CHam]

Hi YPG,

We purchased a display home almost 2 years ago as an IP and had 18 months lease at 8%.

We did not find any problems with finance, and the valuation came in at the purchase price (we only paid $390k for ours).

What you do have to be careful with is:

-A lot of display homes are priced significantly above the market rate for properties in the same area. You need to be wary of this as Aaron mentioned your valuation may come in lower;
-Check the market rent of the area as although you may get higher than normal it will still be significantly less than what you are getting as a display when the original lease finishes. We found that when we rented ours out after the builder left we were able to get $50/week more than other homes (however obviously this was significant less than the original lease amount);
-Getting house insurance whilst it is a display home is very difficult (we ended up getting insurance on the back of the builder). Insurance companies do not like house being vacant at night;
-As display homes are often built in outer areas or new suburbs you need to do your due diligence on where you think prices will go.

On the positive side you get great depreciation, plus in my opinion you do end up with a house that has all the bells and whistles and should therefore have a point of difference for re-sale or renting out at the end of the initial term. Also our builder went through and repainted, cleaned, etc when they moved out. Not sure many other tenants would do that.

Personally I think if you can buy at the right price in the right area you then get 2+ years at 7-8% plus excellent depreciation, hopefully some capital growth thrown in over the term and increases in market rent when it comes off the lease with the builder I don't think that purchasing a display home should be completely discounted.

Lastly not sure why it is a worry about the builder going under - the same risk (i think less of a risk) than your normal tenant not paying the rent.

Hope this helps.

Cheers,

 

[YPG]

Thanks for your reply CHam and bringing those points to my attention.

Very helpful.

Cheers

 

[Rolf Latham]

Lastly not sure why it is a worry about the builder going under - the same risk (i think less of a risk) than your normal tenant not paying the rent.

Not quite that simple

Commercial lease terms for getting control back of your display home are a bit different than normal home.

There is that issue and likely there is a covenant that the display home cant be resi or owner occupied, and in any case not too many tennants would want to live in Homeworld 5 : )

I agree the risk of this is minimal but does bear thinking about

ta
rolf

 

[Ed Barton]

I'd want a better deal than 7% for two years.

higher yield and or longer lease, with make good provisions (although these should be minimal as they're not going to have a display house that's crappy).

once the display house 'commercial' deal is finished you will revert to a resi lease in an area with abundant supply and few renters.

 

[CHam]

I'd want a better deal than 7% for two years.

higher yield and or longer lease, with make good provisions (although these should be minimal as they're not going to have a display house that's crappy).

once the display house 'commercial' deal is finished you will revert to a resi lease in an area with abundant supply and few renters.

Thats a bit of a generalisation isn't it?? Not all display homes are in areas where there are abundant supply and few renters. Normally the display homes are used as displays until after the area is built out, by which time there is not necessarily an abundance of land or new homes.

And I would have thought 7-8% return in a capital city / growth area for 2 years isn't a bad return as long as you get it for the right price.

Like anything it is about doing you research.