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Investing in a builder's Display Home

Discussion in 'Real Estate' started by djellis, 9th Oct, 2008.

  1. djellis

    djellis New Member

    Joined:
    9th Oct, 2008
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    Location:
    Bowral, NSW
    We have an opportunity to invest in a builder's new showhome and looking for feedback from anyone with experience in this area. The details are as follows: house and land are independently valued at $1.3m, sell price is $1.2m as a result of supplier discounts, lease back is for 2 years with two three month options to extend, return is 8% with builder to pay all outgoings.
    Any thoughts or experiences (good or bad) with this type of investment?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Location:
    Sydney, Australia
    Your income return is only as good as the company offering the lease ... if they go under, will you be able to re-let easily ? What will that do to your cashflow ?

    Also make sure the returns you'd get aren't built in to the sales price - could you buy a similar property near by for less money ?

    Not suggesting it is a bad deal - just making some due-dilligence suggestions.
     
  3. Nigel Ward

    Nigel Ward Team InvestEd

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    Sim's point is a valid one, but it sounds like a pretty good deal.

    Devil's in the detail though so:

    1) make sure that valuation IS truly independent - if you have any doubts get your own! Builder provided would not be adequate in my view.

    2) Would you buy this house without the builder's leaseback? If the answer is no then maybe you shouldn't buy it. The growth prospects must stack up for you.

    3) make sure it really is net 8%

    4) given this is actually a commercial lease rather than a residential one, you probably need to charge GST and remit GST (but talk to your accountant please!) 8% of 1.2m will put you over the $50k threshold where you can choose not to register I think.

    5) can they give you a bit more of a discount ? :D

    Good luck with it!

    Cheers
    N
     
  4. djellis

    djellis New Member

    Joined:
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    Location:
    Bowral, NSW
    Thanks Nigel/Sim

    The builder is a large franchised builder operating in all states so hopefully its OK (but i guess who knows).
    There is a second valuation (both are from registered valuers known to my bank) and it comes in at $1.275 - so the same ball park.
    I have two exit strategies - one is to on-sell at the end of the lease. Looking at the estate the golf course will be open then as will the primary school and shopping precinct so in two to three years time hopefully the market will be looking a bit healthier than today. The second is to move in ourselves. We are relaxed about this as it seems like a great estate but our preferred position is to on-sell.
    Thanks Again
     
  5. TropicalInv

    TropicalInv New Member

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    12th Mar, 2009
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    Location:
    Brisbane
    Investing in builder Display homes

    We invested in a display home 2 years ago, and we would do it again, BUT we learned a lot from our mistakes first time around.
    Firstly, GST DOES NOT apply. It's classed as a residential investment and taxed accordingly (our builder got it wrong on this point!)
    Secondly, most houses we looked at were overpriced. In general, builders add back the rent to the price so you are only getting your own money back. Get an independent valuation and bargain hard!
    Third, insurance can be horribly expensive. We found a broker (after much searching) who was able to get us a good deal, but most quoted us commercial rates which were not affordable.
    Fourth - a big one - make sure the builder is leasing the house. In our case, the builder assigned the lease to a 'franchisee'. It was not a problem in the end because the franchisee was a great tenant, but there were big risks. It could have been a disaster if the franchisee was not financially stable.
    Fifth - Be careful if the house is not yet complete. This was where our big troubles happened. We signed for a 'to be built' house and the building took much longer than it should have and 18 months after claimed 'completion' there were still contractual items not completed properly. We DID NOT get what we paid for and had to go to court. We succeeded and came out of it all okay, but there was a lot of stress and timewasting and risk.
    In the end, we made less than we anticipated but a reasonable return. We sold quickly for a very good price at the end of the lease. We are now on the hunt for another display home, but this time we are better informed to check all the fine print.
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Location:
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    Thanks for the feedback TropicalInv - you've confirmed my own thoughts on the subject.

    Great to hear it's worked out for you. Would be interested to hear how well you go with a new display home if you end up buying one now that you are a seasoned pro :D