Display homes with leaseback, etc.

[dwv]

Hi everyone,

I'm all newbie to this forum so please be gentle... =) I've been reading posts for several weeks now and this has lead me to decide on finally taking the plunge (well not yet, technically, as I can still back out).

Let me give you a bit of a background... My friend and I migrated from the Philippines nearly 3 years ago and didn't really know what to expect coming here. Fortunately, each of us was able to get a job after 2 months and we are currently earning around 60K each a month. We were renting for nearly 2.5 years until we got an abrupt termination notice from the landlord as he was going the sell the property to his brother who went on to live there. So we decided to buy a house instead of renting again since we were already contemplating on getting into real estate anyway.

We bought a house in Nothwest Sydney (Kellyville Ridge) for 500K (just the limit for stamp duty exemption for first home buyers) 6 months ago and currently, we have 391K left on our loan with 40K on our offset account. Now we found a display home just nearby (The Ponds - a new suburb) where the land area is 506.8 sqm and the house has 4-bedrooms + study, 2.5 bath and double garage. It's complete with ducted aircon, pergola, alarm, wooden flooring, 10k wish card, 1 year leaseback + 2x6-months option to extend at 5% yield, builder is Australand and Landcom... these all for 500K which is less than the prices of their initial home+land pacakges (starts from 520K I think) which are all sold and occupied at the moment.

The only uncertainty is that it is currently their office site and they will rebuild the necessary features when they move out. I know Australand because they're the ones who built our current property... I had problems in the past but nothing major that I won't buy again from them. So I hope when they rebuild, I wouldn't have major problems.

We have given the 1K deposit yesterday with just a hope that our next loan application will be approved. We've found other display homes in The New Rouse Hill (Delfin/Cosmopoilitan) and they were selling it with 6% yield for 2 years. But there's only one left and it's a bit pricey, I think... and there are no houses built around the area yet so occupancy may be a problem in the near future (I may be very wrong, though). But I know it will be a good area in the future since it's just beside the new mega center and the proposed railway (The Ponds, btw, is just a 5-10 minute drive to the megacenter and to stanhope leisure center and shopping mall. They will also build a mini-center with IGA and other small shops and will have tennis courts and community centers with no community fees!). We also went to Nelson's ridge which we also found to be a good place since it's near Parramatta but didn't have the same feeling when we're looking around Ponds. We went to Ropes Crossing and found that the yields were 8-10% for two years. Whoah! But the properties with 10% yields are very pricey considering the location (535K at St. Mary's) but some units I found a bit reasonable (400-450K range for a 4-bedroom). The development of this area started 2 years ago and I think people are not very keen on buying here because of the reputation of the surrounding areas (it might not be the same in 5 years time though... any comments here?) and it's just too far from Parrammatta and the City. M4 and the Great Western Highway are just nearby but I was told the traffic going to GWH is a bit notorious.

Now, for my worries:

1. With 391K still left on our loan on a 500K property (109K equity?) could we successfully apply for another 535K (500K+7%) loan? I have contacted our broker but she's on holidays and will be back on Tuesday.

2. Based on the above, do you think the IP from Ponds is a good deal considering it is only giving a 5% yield compared to the 8-10% yeild in Ropes Crossing? I think the capital growth in the Ponds IP will be greater in the future than the ones in Ropes (any comments?). I have read somewhere here that a guy purchased an IP in Kellyville Ridge for 482K and the tennant pays 450 a week which is also around 5% and overall response was positive.

3. What do you think about display homes as IPs? Pros and cons?

4. Have someone here already heard about or have seen "The Ponds"? What do you think about the place? Personally, I love the view of the Blue Mountains which I can also see from our house.

5. Someone here have comments about Ropes Crossing? Pros and cons?

6. Will our 40K offset be considered in the computation of the equity?

7. I came from a country where you can buy a good second hand car by working your butt off for 10 years and buying a house is just a dream. Now, after a few years here I have a house and have been contemplating on buying another one (just 6 months after we bought our first one!). Do you think it's too early to buy another one? I know we can manage it financially as we were trained from childhood to save our money... so, why not? That's one of the main reasons I came here anyway - to fulfill my dreams.

I'm sure I will have other questions that will pop out later but for now these are what come into mind. Apologies for the long post and thank you.

 

[Bargain Hunter]

Hi everyone,
I will give you my opinion on a few of your questions.

2. Based on the above, do you think the IP from Ponds is a good deal considering it is only giving a 5% yield compared to the 8-10% yeild in Ropes Crossing? I think the capital growth in the Ponds IP will be greater in the future than the ones in Ropes (any comments?). I have read somewhere here that a guy purchased an IP in Kellyville Ridge for 482K and the tennant pays 450 a week which is also around 5% and overall response was positive.

The 5% yield is only guaranteed for one year. Is this return likely to continue when the developer moves out? If not, can you afford the additional repayments? The yields at Ropes Crossing are higher however again the return is only guaranteed for two years. I would think that the long term yield for Ropes Crossing would be less than a similarly priced house at Kellyville.

3. What do you think about display homes as IPs? Pros and cons?

The beneifit is a guaranteed lease with reasonable returns, the downside is that the return may be higher than the market and therefore gives a false sense of security. The ones I have looked at have generally been more expensive than the base model as they often have all the extras, although you have indicated that you are purchasing below current values, if this is true then perhaps it is worthwhile from a capital gains perspective.

4. Have someone here already heard about or have seen "The Ponds"? What do you think about the place? Personally, I love the view of the Blue Mountains which I can also see from our house.

I haven't heard of "The Ponds" but the Hills area is the fastest growing in Sydney so a good bet for capital gains.

5. Someone here have comments about Ropes Crossing? Pros and cons?

Nice looking development, is substantially higher than the surrounding suburbs. Lethbridge Park is the cheapest suburb in Sydney with three bedroom ex-commission houses selling around $200k. Would see this as a limiting factor to future capital gains.

7. I came from a country where you can buy a good second hand car by working your butt off for 10 years and buying a house is just a dream. Now, after a few years here I have a house and have been contemplating on buying another one (just 6 months after we bought our first one!). Do you think it's too early to buy another one? I know we can manage it financially as we were trained from childhood to save our money... so, why not? That's one of the main reasons I came here anyway - to fulfill my dreams.

If you can afford the repayments and the financial institutions agree there is absolutely no reason why you shouldn't give it a go.QUOTE]

 

[BV]

dwv
I think you are moving a bit too fast.
We live in uncertain times, ok the hills district is a nice area
but you are not going to see any huge capital gains for a while.
I would concentrate on reducing the main mortgage.
Do you both have secure jobs?
I know there is no job security these days but are your jobs in a safe industry?
Is Ropes Crossing in St Marys?
How do you get 8-10% yields?
It sounds like a marketing trick.
Cheers

 

[jingo]

we are currently earning around 60K each a month. .

Hi dwv,

Is that $60,000 each a month? Or between you $1,440,000 a year?

If so, do you really need a loan??

Regards Jason.

 

[dwv]

Hi dwv,

Is that $60,000 each a month? Or between you $1,440,000 a year?

If so, do you really need a loan??

Regards Jason.

Sorry Jingo, that's 60K each per YEAR. I wouldn't be worried in buying the property if we earned more than a million a year =)

 

[dwv]

dwv
I think you are moving a bit too fast.
We live in uncertain times, ok the hills district is a nice area
but you are not going to see any huge capital gains for a while.
I would concentrate on reducing the main mortgage.
Do you both have secure jobs?
I know there is no job security these days but are your jobs in a safe industry?
Is Ropes Crossing in St Marys?
How do you get 8-10% yields?
It sounds like a marketing trick.
Cheers

Hi BV.

We both have government jobs. I know it's hard to kick-out someone in our organisation because there's this guy that they're "hoping" that would leave as they wouldn't want to kick him out because it will only mean a lot of trouble... and it would take around two years, they say, to kick him out (prove that he's not doing a good job, etc.) It's not an isolated case, I was told there was a similar case before and the guy left after 7 years!

Ropes crossing is in St Mary's beside Tregear and Mt Druitt.

How did I get 8-10% yields? I inquired from their office. I didn't get more details, though. I asked the reason for the high yield and the lady didn't really give a straight answer. I asked 3 developers and they all gave me these figures.

 

[jingo]

Sorry Jingo, that's 60K each per YEAR. I wouldn't be worried in buying the property if we earned more than a million a year =)

Yes, neither would I!!

 

[dwv]

Hi everyone,
I will give you my opinion on a few of your questions.

2. Based on the above, do you think the IP from Ponds is a good deal considering it is only giving a 5% yield compared to the 8-10% yeild in Ropes Crossing? I think the capital growth in the Ponds IP will be greater in the future than the ones in Ropes (any comments?). I have read somewhere here that a guy purchased an IP in Kellyville Ridge for 482K and the tennant pays 450 a week which is also around 5% and overall response was positive.

The 5% yield is only guaranteed for one year. Is this return likely to continue when the developer moves out? If not, can you afford the additional repayments? The yields at Ropes Crossing are higher however again the return is only guaranteed for two years. I would think that the long term yield for Ropes Crossing would be less than a similarly priced house at Kellyville.

3. What do you think about display homes as IPs? Pros and cons?

The beneifit is a guaranteed lease with reasonable returns, the downside is that the return may be higher than the market and therefore gives a false sense of security. The ones I have looked at have generally been more expensive than the base model as they often have all the extras, although you have indicated that you are purchasing below current values, if this is true then perhaps it is worthwhile from a capital gains perspective.

4. Have someone here already heard about or have seen "The Ponds"? What do you think about the place? Personally, I love the view of the Blue Mountains which I can also see from our house.

I haven't heard of "The Ponds" but the Hills area is the fastest growing in Sydney so a good bet for capital gains.

5. Someone here have comments about Ropes Crossing? Pros and cons?

Nice looking development, is substantially higher than the surrounding suburbs. Lethbridge Park is the cheapest suburb in Sydney with three bedroom ex-commission houses selling around $200k. Would see this as a limiting factor to future capital gains.

7. I came from a country where you can buy a good second hand car by working your butt off for 10 years and buying a house is just a dream. Now, after a few years here I have a house and have been contemplating on buying another one (just 6 months after we bought our first one!). Do you think it's too early to buy another one? I know we can manage it financially as we were trained from childhood to save our money... so, why not? That's one of the main reasons I came here anyway - to fulfill my dreams.

If you can afford the repayments and the financial institutions agree there is absolutely no reason why you shouldn't give it a go.QUOTE]

Hi Bargain Hunter,

I was thinking that if after a year I realised that it's hard to fulfill the repayments, I could sell it easily without incurring a loss since, as I said, it's below the market price. And, the home+land packages didn't include an A/C and this one has.. its another plus, I think. Land area is also a bit bigger than the pricier ones. It would still be like brand new after a year or two and can easily justify the higher price. If after a year and life still seems to be normal (in a financial sense) then we would happily keep the property. 5% is around 480 a week which seem to be the current norm in the surrounding areas (based on property sites).

 

[Jocker10]

Hi Dwv,

Welcome to the forum. To reply to your post , I recon , will require a book as there are lots of interesting issues for discussion.

With regards to Display home for IP, I have heard that some people have done very well doing this. More so if the developer or the project is a success.

I believe that the secret is to get in early because by the time the development is in full swing , the display home might already be showing CG as compared to what is selling from the developers stock.

However if the development is a "flop", it will work against you.

It is very difficult to remove emotion in buying display home. It is new, it is nice, it desirable --- it is a "home for show". Every display home I looked at, I like to buy. I get drawn into it.

My own PPOR ( although only 10 years old ) looks really ancient when I compare it with Display Home.

So try to separate the emotion and really do the "number crunching". If the number is right,then go for it.

I will also look at the caliber of the developer. If the developer has a good and solid history of successful development, I would be more comfortable with it as I would assume they have poured in a lot of $$$ in their own research.

Pity my price range is only up to $250K. It looks like it will only buy me a garage and a driveway in those areas.

Jocker 10

 

[dwv]

Hi Dwv,

Welcome to the forum. To reply to your post , I recon , will require a book as there are lots of interesting issues for discussion.

With regards to Display home for IP, I have heard that some people have done very well doing this. More so if the developer or the project is a success.

I believe that the secret is to get in early because by the time the development is in full swing , the display home might already be showing CG as compared to what is selling from the developers stock.

However if the development is a "flop", it will work against you.

It is very difficult to remove emotion in buying display home. It is new, it is nice, it desirable --- it is a "home for show". Every display home I looked at, I like to buy. I get drawn into it.

My own PPOR ( although only 10 years old ) looks really ancient when I compare it with Display Home.

So try to separate the emotion and really do the "number crunching". If the number is right,then go for it.

I will also look at the caliber of the developer. If the developer has a good and solid history of successful development, I would be more comfortable with it as I would assume they have poured in a lot of $$$ in their own research.

Pity my price range is only up to $250K. It looks like it will only buy me a garage and a driveway in those areas.

Jocker 10

Hi Jocker10,

The Ponds is a collaboration of Australand and Landcom which are already established developers. For these development, people are literally lining-up whenever they release blocks of land and are able to sell it in a matter of days (I know because we usually go there once a week and we can see which blocks got sold). Even their home+land packages got sold-out in a few weeks. The development beside it (Braemont Estate) is also Australand's and houses pop-up each week.

Our only problem really right now is if we could get another loan this early. I know cashflow would be a problem in a few months but we'll make few sacrifices to lessen spending. After a year or so I think we'll be fine... just need to get past of the initial problems.

I know what you feel about display homes. Even now I want to buy every display home I go to. Must stop doing this for a while... or else... =)

 

[888abundance]

Display Home - what kind of tenant?

Hi Dwv

Just a few different considerations you might want to think about apart from what has already been said.

Is the display home only to be used as display (?) or is there a likelihood that the developer will 'occupy' at some point. There are three issues with the answer to this.

If used only for display, they might be considered as a type of 'commercial property' for the duration of the display plus the two extension options. If so, you might want to include in your contract 'clauses' for all outgoings to be covered by the tenant and a 'makegood' provision of some type.

Also this may determine what insurance cover you need as it may not be viewed as a 'typical' scenarion for a landlord's policy for residential property. The amount of customer traffic might raise some additional public liability issues. Also it might be interesting from a quantity surveyors perspective whether the higher traffic would lead to more rapid depreciation lifespan.

Perhaps you could use these issues for leverage in getting a better leaseback rental rate and terms & conditions.

Best of luck.

 

[sue78]

It sounds like your emotions play a big part and you have more or less already made up your mind to buy it hence the $1k deposit.

Personally, I'm not a big fan of Australand houses....they only have limited designs so you often see a few of the same houses on every street. There are better builders out there. However, it's the location that matters and if the houses are in a desirable area then I'd consider Australand.

Have you looked a other options? $500k will tie you up...don't you want to buy more IP's. Have you considered houses where you can add value through reno or buy a house on a large block of land? do u know what is happening interstate? for $500k investment I would be looking at something with at min 6% yield and good and quick capital growth potential.

You could buy two houses for the price tag.

Sorry...probably just confusing you more!

 

[dwv]

It sounds like your emotions play a big part and you have more or less already made up your mind to buy it hence the $1k deposit.

Personally, I'm not a big fan of Australand houses....they only have limited designs so you often see a few of the same houses on every street. There are better builders out there. However, it's the location that matters and if the houses are in a desirable area then I'd consider Australand.

Have you looked a other options? $500k will tie you up...don't you want to buy more IP's. Have you considered houses where you can add value through reno or buy a house on a large block of land? do u know what is happening interstate? for $500k investment I would be looking at something with at min 6% yield and good and quick capital growth potential.

You could buy two houses for the price tag.

Sorry...probably just confusing you more!

Hi Sue,

I have some idea what's happening interstate but I'm hesitant because I'm not familiar with the areas outside Sydney. I'm hearing so much from everywhere and I don't know what to pick. What's the first step? Who can I ask and trust? I can research only that much about an area and I'm the kind of person who wants to see what I am actually buying and where I'm buying from - probably not a good trait for a property investor, though. Currently, we don't have the time to physically go there to check them out and we only have time to check out our surrounding area thus our decision.

Hopefully it will work out but if not, it's not the end of the world. We can sell it and try again maybe with a different strategy. Maybe someone out there could give some tips on when, where and what to buy? Or just what to do when you're just starting? We don't plan to stop here... we'll do it again in 2 or 3 years time if it goes well.

Btw, Gary I replied to your post at the other forum. Thanks.