Understanding leaseback opportunities

What is a leaseback property?

This is where a builder or developer constructs a house that is to be used as a “display home” which they sell to their potential clients from. The display is used to promote new finishes, their plans and layouts, the type of appliances, fixtures and fittings they use, so a buyer can get an understanding of how their finished product will look.

It will have a number of standard inclusions on show and then a range of “improvements and upgrades” to show off the versatility and style that the company produces.

When an investor purchases a ‘leaseback’ from a developer, the developer offers a very attractive rent, generally seven to eight per cent – which is well above the market rent. There are no management fees or maintenance expenses to be paid by the investor through this period.

The lease back period is generally for two years with further options often available, dependant on the rate of sale that the market has delivered.

These opportunities are generally ‘off market’ and can be available as house and land construction options or single contract options, usually depending on the developer’s finance structure. Some investors enjoy the initial yield they provide in a SMSF.

Things to be aware of

These homes are often loaded with upgrades that push the price well above the general market offering.

What this means is that while the home has lots of great features, bells and whistles, it will not be a comparison to other more ‘basic’ stock after the leaseback period, and therefore the follow-up yield will be impacted negatively.

In these cases the opportunities work very well for short-term local investors who can enjoy the benefits of the high yield for a few years and then move into the homes themselves, so a rental yield is not relevant.

The inclusions are sometimes overpriced and sometimes not relevant with some options being fashion fads that date quickly. The key is to be discerning and pick the gems out of this market.

Banks and some lending institutions have specific criteria around leaseback purchases and it’s best to get sound advice from your finance provider or broker to understand this aspect.

Ensure the value is in the property and the price has not been inflated to cover the high yield.

Positive aspects

Once you have established the upgrades are complementary and relevant to the immediate area, the quality of the surrounding homes is consistently high and the display home is not in a new estate that is being heavily marketed to investors, the initial high yield is very attractive.

With all investing, the biggest gains come with capital growth so the opportunity needs to be valid even without the leaseback incentive. In the current low interest rate environment, a leaseback of say $580,000 at seven per cent can be cash flow positive by close to $14,000 for an investor on $100,000 and obviously more for higher income earners.

A leaseback home generally rents back to the market, post-leaseback period at between $50 to $100 per week more than the average investment property.
The garden and surrounds of the home are more lush and established than the typical investment property and this assists in getting a higher than market post-leaseback rental.

The opportunities exist in new estates, where other new infrastructure is also going into the area enhancing the capital growth potential for the investor.

The streetscape of display homes is generally very aesthetically pleasing and a lot of effort by all builders has been put into the facades of their homes creating a very upmarket feel to the street.

In summary, as with all investment opportunities, understand the bigger picture. Don’t be misled by the prospect of an initial high yield. Ensure the general fundamentals exist and that the property stands valid as a good investment option without the leases back in place then you have a win win.