What is a duplex?
A duplex is a single residential building with two dwellings under the one roof and a dividing wall between, each side is a completely separate home, with its own entrance, amenities and yard. Similarly dual occupancy means two residential buildings on one block of land but typically these are separated either one in front of the other or side by side. Duplexes are sometimes on one title, meaning both halves must be sold together. These kinds of developments provide significant benefits to the developer and/or investor through achieving the highest and best use of their chosen location, resulting in equity gains, increased rental, and greater flexibility.
From an investment perspective, when you choose to construct two dwellings on the one lot, you have the option of leaving two dwellings on one title, or, subdividing and creating two titles which creates a substantial equity uplift. Duplex projects have the potential for significant profits, but considering the hidden costs, determining whether a duplex is a good investment depends on several factors and diligent number crunching.
The biggest appeal for investors is the value added to the property when a duplex development is complete as owners can live in one and still collect and income from rent on the other.
Costs to be aware of:
Duplexes generally require large, wide or dual-frontage blocks, and appropriate zoning to subdivide the property into two separate lots. Suitable sites may command premium prices, as other buyers may have the same idea.
Subdivision of a property isn’t straightforward and can cost thousands in consulting fees to town planners. These fees can be surprising to buyers as they can vary between $40,000 and $50,000, meaning that the return for your investment may be lower than expected.
Blocks with existing approval can minimise the hassle, but generally cost more than a comparable site. Design, approval and construction often takes more than a year, and holding costs can include loan repayments, council rates and land tax.
Town Planners have also noted that those taking the knock-down-rebuild route need to factor in demolition, which costs up to $20,000.
But as long as you’re aware of these costs going into the project then you’ll have a great investment in your hands once completed.
How can you make sure a duplex investment pays off?
To determine how much equity will be generated, investors should look at recent sales to estimate the value of each dwelling upon completion, and compare this with the purchase price and costs. Location is key here, so proximity to amenities, public transport, or parks – your typical growth drivers that apply to any property to maximise its chance to grow in value will apply to a duplex.
If there are a lot of duplexes in one area, oversupply can put downward pressure on rental return. Try and develop them where they are the exception and not the norm.
- Additional rental income: for a 2-bedroom granny flat in some suburbs of Sydney it could be as much as $700 per week
- Tax Benefits: with a dual property, you have extra claimables which means more money back at tax time
- Increasing the value of your property: this is also listed as a con below, so never assume this is a given
- Minimising income risk: if you have two properties, this means the likelihood of both being vacant is low
- Need for a second property: such as children or grandparents moving back in
- Unforeseen expenses: as with all building projects there can often be expensive extras, which is why research and planning is so important
- Overcapitalisation – the actual cost of the dual dwelling (especially granny flats) may be less than the added value to your property
- Subdividing or not: if you choose a granny flat it means you won’t be able to subdivide into two titles later.
Overall, dual occupancy development provides significant benefits to the developer/investor through achieving the highest and best use of their chosen location, resulting in equity gains, increased rental, and greater flexibility.