Two potentially perilous property investment options
Display homes and holiday investments can seem like fantasitc investment options, but they do come with pitfalls that investors need to be aware of.
Blogger: Gavin Smith, director & general manager, State Custodians
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Display and holiday homes may seem like great investments with excellent returns but ensure that you understand the pitfalls of these as investment properties.
There are several benefits for investing in a display home property. Firstly, as this property has a purpose of drawing people in and will be on public display, it has to be built to a high standard. You will have peace of mind knowing that you are buying a quality property and there is less chance of any maintenance problems.
Secondly, you are often guaranteed a high rent return for the first few years as the builder will lease the property back to you whilst it is on display.
One of the fundamental pitfalls is the inability to get a normal residential home loan for the property. Most lenders will insist on commercial funding at higher interest rates while it is a display home. Once the lease expires and it turns into a normal residential investment property, you can refinance to a lower interest rate. Location is another pitfall. Even though you may have bought a high quality new property, most major cities do not have the space for new houses, so the display village may be further out of town and not close to essential services that tenants need.
When it comes time for a holiday, many Australians love the idea of a beachside house. Homes in holiday locations can present issues when you are investing.
You may assume that if you buy a beachside house, you will have a line of potential tenants willing to pay top dollar to rent. This may be true in the summer time, but what about during winter? Some investors have fallen into the trap of buying a property that is not in demand year round. They may have tenants for a few months, but for the rest of the year, the property remains vacant. Lenders will want to see a track history of rent coming in over a long time to be able to use this income. They will often discount the rent income to what would be received if it was rented permanently. If the location is remote or rent is highly seasonal they may not want to use it at all.
Just like all investment properties, location is a huge factor that could determine how successful the investment will be in terms of increasing in value over time. Being located close to a thriving major regional location will help ensure that there is sufficient employment and infrastructure in the area to maintain solid demand for properties in the area. Having necessities such as shops, restaurants and cafes will also be helpful in attracting visitors. If you are looking to invest in a holiday home, it would be a good idea to find a location that has a strong tourism rate year round and activities to suit all seasons. It is also important to find a location that has all the necessities, such as shops, restaurants and cafes.
Some investment options may seem attractive; but just be aware of the pitfalls before diving in.
About Gavin Smith
Gavin Smith is Director & General Manager of State Custodians and has over 20 years’ experience in leadership roles within the banking services sector. An expert in personal finance, securitised lending and the mortgage industry, Gavin has a Post Graduate Degree in Management from the Australian Graduate School of Management (UNSW), including several mortgage and securitisation qualifications.
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