Property investment - Are display homes good investments?

Imagine if you could buy an investment property offering a rent return of around 8%. Imagine if this also came with tenants who kept the place spotless (both inside and outside), having the home professionally cleaned a couple of times a week. Sounds too good to be true, doesn’t it?

This is the promise that comes with purchasing a display home, but does it really stack up as a long-term investment option? Let’s look at the pros and cons

THE PROS

Single 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 commercial rates
The house is often at the highest quality as the builder is keen to showcase their best work
Gardens and outdoor areas will be landscaped and well maintained by the builder while the investment property operates as a display home
Builders 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
There is no need for a property manager so you can save on property management fees

THE CONS

Finance can be more difficult to obtain as the property is essentially a commercial property. Some lenders will not finance at all or some will require a much larger deposit than a standard residential property. It is important to remember that these same obstacles will be met by someone else seeking finance if you wanted to sell the property during the leaseback period
Banks will not use the rent the builder is willing to pay for loan assessment. They will only use the expected rent achievable if the property was rented for residential purposes which may only be 4-5% rather than 8%.
Builders will often set a premium price for these properties so you are not necessarily buying at value
There may be a substantial gap between the contract price and the bank valuation which would require additional equity contribution
Display villages don’t have a fixed end date so the builder could finish their lease sooner than expected
Yields will only be high while the property is leased to the builder. Longer term the property will only achieve market rates
You are not protected under the Residential Tenancy Act which sets out clear guidelines and remedies between landlord and tenant. Your agreement is commercial and therefore any disputes would require the involvement of a solicitor which could prove expensive
The rent received is not guaranteed. If the builder runs into financial difficulty and stops paying or fails to maintain the property, then you will need to pursue legal action which can be costly. And even if you were successful in court the builder may have no funds to pay
If the property is in an active display village then the only tenant for the property is the current builder. It clearly would not be rented by another builder as it is not their work and it will not be rented by a residential tenant. So, if the builder falls over your property could remain vacant until the display village ceases.
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;
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;
Many display homes use the garage as an office space with glass sliding doors and in some cases they may also not have a driveway therefore you are likely to incur additional costs modifying the property at the end of the term to make it marketable for residential tenants
Display homes are often close to main arterial roads for visibility which may be perceived as a negative by tenants later down the track
There will be a limited resale market for the property during the display village period as many investors are not seeking this type of property

Obviously, the reliability of the builder is a major factor that needs to be considered in entering into this type of property. But the other serious consideration should be the long-term outcome. The lease back period is like a home loan honeymoon rate. It’s short lived whereas your holding period will be long term. The factors that make it desirable for the builder are likely to be different to those of a residential tenant or a future buyer.

Based on our experience there are other options available that can deliver good cashflow that don’t have the same level of commercial risk. Contact us to discuss your investment plans.