Imagine if you could buy an investment property with all the bells and whistles, offering a guaranteed rent return of around 8% for up to five years. Imagine if this also came with perfect tenants who keep the place spotless (both inside and outside), having the home professionally cleaned a couple of times a week.
In fact, the tenants are so good there is no need for a property investment manager, so you save on property management fees too. Does this sound too good to be true? Surprisingly, it’s not.
More and more investors are discovering the benefits of buying a display home and leasing it back to the builder at a guaranteed commercial rate for the life of the display village. These property investment opportunities aren’t as easy to find compared to regular investment properties on the market but they do have the potential to offer impressive returns – just be sure to do your homework.
As with all investments in property, buyers should exercise caution and there are a number of considerations to take into account. The following table helps to highlight some of the pros and cons associated with buying a display property as an investment:
FOR: DISPLAY HOME INVESTMENT PROPERTY
- Guaranteed tenant (the builder) for the lifespan of the display village, which could be anywhere up to five years;
- High rental yield while the investment property is a display home because the builder pays rent at a commercial rate;
- Even though the rent is paid at a commercial rate, the investment property is treated as a residential building for tax purposes;
- The house is often at the highest quality as the builder is keen to showcase their best work;
- Depreciation can still be claimed;
- High short-term returns during the lease back period could generate sufficient income to fund a deposit on the next addition to your investment portfolio;
- Gardens and outdoor areas will be landscaped and well maintained by the builder while the investment property operates as a display home;
- Builders/developers make great tenants and often have the property professionally cleaned at least twice a week;
- If the home is part of a display village, your investment property will be surrounded by quality homes on an attractive street;
- There is no need for a property manager so you save on property management fees;
- Likely to attract quality tenants and a premium rent once it is no longer leased by the builder.
- In some instances, finance may be harder to obtain as some builders set a premium purchase price whilst the bank valuations will be considerably lower. Look for builders who use an independent valuation to set the purchase price;
- Banks will assess the investment property based on market rental conditions, not what the builder is willing to pay (eg. the rental return from the builder might be eight per cent but the bank may only lend based on a return of five per cent);
- Display villages don’t have a fixed end date so they could finish their lease sooner than expected;
- Short term yields may be high but they can decrease once the investment property becomes available on the rental market;
- There are no laws in place for a rental guarantee, so you must ensure you lease to a reputable builder who will meet their financial obligations;
- The tenant is often your property manager as well;
- While many of the appliances will be high spec and brand new, by the time the investment property is ready for tenants, appliances may not work due to lack of use and may be out of warranty;
- Paying for high quality fixtures and fittings may be considered a waste of money for a rental property;
- The high amount of foot traffic from viewers means carpet and flooring in many parts of the investment property would suffer from abnormally high wear and tear;
- Display homes are often close to main arterial roads (for visibility) which may be perceived as a negative by tenants later down the track;
Source: Australian Property Investor, November 2012
Once you have considered all the pros and cons of buying a display home as an investment property and you have stripped away all the incentives and benefits marketed by the builder and considered the investment fundamentals of the property, you’re looking at a great long-term investment.
Display homes are also a popular option for many first-time investors who are looking for some ‘surety’ to minimise risk in the first few years of building a portfolio.
So if you are currently evaluating your property investment options, purchasing a display home is definitely worth your consideration.
DISCLAIMER: This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.