Hidden gem, or too high spec for investment?

Aren’t they just a lot more expensive?

They certainly can be! But this isn’t always the case, and you usually get everything you pay for and more, as you will see soon.

While there is no one “explain all” answer to how the price on show homes is calculated, there are usually a few factors that play into the final cost

Show homes are designed to be flashy, not necessarily rental friendly

The ideal show home and the ideal rental look very different.

Where the ideal rental may be thinner on the features to maximize yield, the show home will have as many features as possible to show off what they can do. (I remember working in a show home that had 3 different heating systems)

But there’s a big advantage that comes with the features in a show home…

Builders usually get great rates on the special features of the show home

When a builder is running a show-home it’s easy to see that the build shows off the actual build quality of the builder – but there are other purposes too.

One of these is to show off features in the show home that display what might be available to prospective clients and just how versatile a builder can be.

When someone decides to build a home, these might be the features that they learn to like and want in their own home. This is good for the builder as well as the supplier of the feature.

There is also a subset of visitors who might be looking to get ideas for their renovations and would be looking to find features to include in their big project.

This means that suppliers are often keen to get their new features in as many show homes as possible, as it is a great way to show off why their product stands out.

Because of this the builder often gets supplies cheaper than they normally wood, meaning that these savings more than often get passed onto the purchaser of the show home. I can think of a previous how home that I worked at where the skylights were all given for free – free to the builder and by extension the next purchaser.

This often applies to the section as well

The developer isn’t looking to make large money on show home sections – only to get the best show homes that show off their development the best!

Well, if its such a good deal property, why is the builder even looking to sell it at a good price?

This answer gets a little more complicated, and it has to do with how a builder runs their cashflow. Builders (believe it or not) are in the business of… well.. building, and are not in the business of holding and selling properties for capital gains (That’s what you and I do).

Cashflow is a key part of building today. If a builder wants to build a house, and receive no payment from the new owner until its all complete (a turnkey) – the build has to be funded – either by themselves, or using corporate lending.

The builder puts money into the build, builds it over a period, and then frees the capital when the home is sold – but they stay in show homes for up to 2 years. Builders prefer to keep to what they do best.

So how can they fund a home, finish the home, free up the capital, and move it into their next big project – They build the show home and sell it before they finishing using it. And that’s where we come in. They’re going to sell it, and rent it back off the owner. Selling it at a markup can increase the time the cashflow is stuck in the property

Show home arrangements aren’t sought out by first home buyers. Most first home buyers are looking for something to move into quickly, whether this is just wanting to be in their new home, or the bank requiring it. Show homes can’t be moved into for usually at least a year, often 2 but this means you buy the home and already have its first tenant.

Are builders good tenants?

Builders are great tenants! – but it’s quite a different arrangement to the one you might be used to in a normal rental property. Here are the differences:

You’re not in control of tenancy length or rental rates

The builder usually has specific lengths and rates that will be agreed at the start of the build. There won’t be any changing of tenants or increasing of rents during the time of the tenancy.

But you’re stuck with a great tenant

Builders keep a tight ship when it comes to repairs – with potential customers coming in every week, there’s no room for scuffs, damage, or broken parts in the home, meaning a protected investment for you.

And here’s the kicker – you’re more than likely going to be receiving corporate rent… and this is a big plus.

For example, a show home we have on offer at the moment has a residential rental appraisal of $750 p/w, but holds a commercial rent of $1,000 p/w – that’s quite a big difference, and for two whole years….

As well as this, the builder does touch ups when they’re finish – think of this as a post rental clean on steroids. The Builder treats this as if they have just completed a house and are handing it over for the first time (Which I guess they kind of are) They redo the paint in all areas, replace any faulty features – everything that a landlord (you) would usually do with a residential tenant. It’s much more than just a clean, its essentially making the house brand new.

Sounds like a sweet deal Nathan! What’s the catch?

A great question, I’m glad you thought of it. The main drawbacks with investing in a showhome come from the flexibility

Things you can’t do

• Control the features put into the home. If it has a crazy skylight feature, that’s what you’re getting
• Sell the property
• Raise rents
• Evict the Tenant
• Move into the property
• Use the property for your weekend get away
• And most importantly – just go out and buy one

Things you can do:

• Admire the home that the builder has spent hours finely crafting
• Ponder you next investment, and whether it will be a show home or not
• Hope they’ll let Christchurch host the rugby world cup when the Christchurch Stadium is finished

Medium sized builders usually build show homes every few years meaning there aren’t many to around. As well as this the timing maybe off for you. Maybe you’re looking for a new property for your portfolio in August, but the show home is finished in May, or maybe you’re ready for a show home investment right now, but there aren’t any available.

So, before we go over what you can do about all this today let’s review

Positives

• Commercial rent tends to be higher (or alot higher) than residential rent
• You get your first tenant with the property, and a good one at that!
• Total once over of the property when the builder moves out, paint, marks, features, chips - everything

Negatives

• You’re not going to be in control of that rent – periods, amounts, etc
• That tenant is going to be in the property for up to 2 years depends on the arrangement
• No Selection on what features go into the home
• There won’t be any alterations you can make to the property until the builder is finished, and you won’t be able to move in

For those of us who are still interested, what can we do?

If you’re looking to buy a show home investment a lot of it can come from being in the right place at the right time but there are a few things that you can do to increase your odds. Asking building companies if they have any show homes for sale is one of the best ways to tell. As we discussed the builders are looking to free up the capital so they won’t be shy about telling you about potential show homes for sale.

Otherwise (shameless plug) you can always call Investr by Mike Greer to see what we have in our stock list at the moment.