Display homes are designed to sell the dream, featuring a builder's best finishes, finest floor plans, premium upgrades and immaculate landscaping. But the picture-perfect homes aren't just for show.
Many are sold to investors or future owner-occupiers who want the luxury of a newly built home, with the added financial bonus of earning a rental income from the builder until the end of their display home run.
For buyers seeking a reliable rental income, coupled with the chance to eventually own a high-spec home, the arrangement can be the perfect match. However, the path to ownership doesn’t necessarily take the traditional route.
Why display homes attract buyers
Unlike a standard investment property, display homes that are sold at the beginning or part way through the life of a display village set up will keep the builder on as the tenant for an agreed leaseback period. Meanwhile, the premises continues on as a fully functional demonstration model.
McDonald Jones Homes general manager Paul Sidney said the arrangement appeals to both investors and forward-thinking home owners.
“For pure investors, they have a guaranteed above market rental yield, without the risk of a poor tenant, vacancy, property damage or liability,” he says.
Experts say display homes in new build areas can be attractive options for investors. Picture: Getty
“For people wanting to move in, it provides certainty and cash-flow advantages to be able to plan the move effectively - whilst still having a never-lived-in home at the end, which is aways special.”
Metricon Victorian sales manager Mark Richardson said many buyers saw display homes as a long-term strategy rather than an immediate place to live.
“The perfect purchaser is someone who wants to live in that estate, or that area, and loves the home," he explains. "But, in the meantime, they're happy taking an 8% rental return, at least that's the case with us, so the loan is essentially covered.
"That gives them time to prepare, or sell their own home, knowing the end of life for the display village."
Display homes are also carefully curated to show off the best a builder has to offer, which means buyers often receive premium inclusions that would normally be optional extras.
“We get a lot of repeat investors who look at these homes for a solid rental return with the depreciation of a brand new asset, and the certainty of a quality tenant who's not actually living in the home and aging it,” Richardson explains.
If the property is part of a masterplanned community, display homes usually benefit from a prime position within it.
“You don't just move into a house; you move into the whole established street," he adds. "And you're going to be surrounded by display home quality houses.”
How the leaseback works
Instead of advertising for tenants, paying management fees and dealing with maintenance, the builder leases the property back for an agreed period.
The display home builder generally leases the property back for an agreed period. Picture: Getty
“The majority of the maintenance costs and insurances are managed by the lessee," Mr Sidney explains. "There are no agent commissions and the rent is paid monthly into the owner's bank account directly.
"There is usually a longer fixed-term lease (more than 12 months) with regular (and often annual) rent reviews and no risk of vacancy."
Some builders even cover council and water rates during the tenancy, keeping ongoing holding costs comparatively low.
Richardson said Metricon, like most other builders, also deliver established gardens which are rarely part of the deal with a new build.
“We maintain all the landscaping, which is often quite extensive with a display home, because they're our showrooms and presentation is everything,” he says
Landscaping work is the responsibility of the builder while the property is functioning as a display home. Picture: Metricon
“The intended consequence is the landlord ends up with a home that's been perfectly maintained throughout its lifespan.”
Upon the end of the commercial lease, and the winding up of the display village, signage is removed and all remnants of its retail life are removed. The property is then handed over to the owners to move in or convert to a traditional lease agreement.
Before you sign
While display homes look like the whole package, buyers should understand exactly what's included in the sale.
“Furniture is leased from a third-party company and does not come with the home, although there may be an opportunity to purchase it at the end of the lease,” Mr Sidney notes.
Furniture in display homes is usually leased and will not be given to the owner. Picture: Metricon
Permanent fixtures, including upgraded lighting and window furnishings, generally remain with the home, he adds.
Knowing just when they can move in, or need to find new tenants is also important to clarify.
“You cannot remove the builder and decide to live in the house when it suits you," he warns. "Mostly, homes are located in display villages, which means you usually cannot live in the home whilst the village is open.”
How to finance a display home
Mortgage Choice broker Samuel Uno says potential purchasers should be aware that financing a leased back display home can also differ significantly from a standard residential purchase.
“There are a couple of major lenders lending for display homes," he reveals. "They may not be ideal for a first-home buyer, but for an upgrader or investor, it's not as difficult as it used to be.
“It is still quite rare to see these loans come up, because they're often treated as a commercial loan during the lease period, and purchasers will need a larger deposit."
Mr Uno warns lenders may only lend up to 70% of the property's value and they will want to see a long-term lease from the builder.
"But, since they’re usually renting them back at about a 7% to 8% yield, they can be considered really strong investments."
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