by Law Property Australia Principal, Colin Law
Many of my clients ask if display homes make a good investment. There is also some confusion at times about how the process works. The following are my thoughts on the potential of display homes as an investment and as future family homes.
Let’s firstly look at how the display home process usually works. Display homes are offered in display villages in new housing estates. In most cases, the life of the village is unlikely to exceed two years. In this time frame, the land development front in the estate will likely have moved further away or the available land will be sold. Builders rely on there being a ready supply of land in the village catchment; so the life of the village is often governed by this factor. After two years or so, builders may have also developed new designs. The existing display homes may therefore be superseded and colour schemes and fittings may become slightly dated.
Due to these factors, display homes will usually be offered for a minimum initial term plus several options to extend (at the builder’s option). Other normal standard terms are:
– Rent above market rates (often 7-8% of the contract price)
– Rent paid monthly in advance
– House cleaned regularly and maintained by the builder
– Builder pays all utility costs (electricity, gas, water)
– Owner pays rates and insurance (and body corporate fees if applicable)
– On termination of the tenancy agreement at the end of the display village period, the builder will remove furniture and display village fences and signs. The builder will repair any damage (usually minor, like picture hook holes), steam clean carpets if necessary and touch up paintwork if necessary. The house is not guaranteed to be returned ‘as new’. The owner must accept normal wear and tear; but as the house has not been lived in, all the fittings are virtully new and the house and gardens will be in excellent condition.
We will now examine the potential of display homes as a sound property investment. The first issue to confirm is that the basic principles that you would apply to any property investment are applicable to the display home; and this will of course be based in large part on your individual circumstances and requirements. However, you should still incorporate normal property investment considerations like proximity to services, infrastructure and transport, distance from the City, vacancy rates in the area, appeal of the style of home to the general demographic in the area, sales history in the area and as is often suggested, could you live in the house?
An obvious appeal of display homes is the above market rent up to 8% or more. however, you must factor in the fact that this rental only lasts for two years. After that, if you plan to hold the house, the rent will likely fall back to a market rent of perhaps 4.5 – 5%. You need to be able to cope with this reduction. The contract value of the home also needs to be factored into this issue. Display homes always include numerous upgrades and extensive landscaping. For this reason, the contract prices can be somewhat above the average prices for similar sized homes in the area. This is not necessarily a problem if you plan to live in the home; but as an investment property, it may mean that a rent of say 5% of the contract price may be more than the rental market will accept.
For this reason, most property investors tend to target display homes at the lower end of the price scale. In the greater Brisbane area, any display homes priced up to the mid-$500,000 range tend to be snapped up by investors. The investor can achieve a healthy 8% return for around two years and then often maintain a 5% return around $500 per week or better for a virtually new home that is very appealling to tenants. The problem with homes in higher price brackets is that the rental market in the area may hit a virtual ceiling well before the desired 5% return is reached. As an example, a large two-storey home in a display village in one of Brisbane’s developing areas might be offered for a price in the mid to high-$600,o000 range. This will return a very attractive rental over $1,000 per week during the display period. However, the market rent for the home in the same area might cap out on the mid-$500 per week range (or a return of well under 4%).
For these reasons, we are finding that higher value display homes tend to appeal more to future owner occupiers. We have several display homes currently listed above $500,000 and more than 90% of the enquiries are from people who plan to move in when the village closes. And this does make a lot of sense.
The display homes are surrounded by other quality display homes resulting in a very appealing neighbourhood. The homes are also loaded up with high quality fittings – the result of which often means that the homes are being offered well below replacement value. So long as they can fund the purchase, future owner occupiers can plan the sale of their current home in an orderly fashion and plan the move within a one to two year period. This often appeals to people contemplating a move from interstate. The rental return well above current interest rates helps address the funding issue.
Therefore, from our perspective, the market for display homes falls into two distinct categories; homes below say $550,000 appeal to investors and higher value homes predominantly appeal to future owner-occupiers.
If you have any questions, please reply below or give me a call. You will find details of the display homes we have listed in our NEW HOME OPTIONS page.