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Seeking opportunities to build an additional dwelling on a property to enjoy the benefit of having two incomes is a common investment strategy. Does it work for everyone?
Essentially, dual-income investments are 'properties that provide two incomes by way of two separate rental agreements'.
The rental or purchase price of each property usually depends on the presentation, property-related costs and the buyer/renter appeal of the separate dwellings.
Among your options for dual-income investments are:
A granny flat is an additional dwelling that is the same size or smaller than the existing property; usually located in the backyard. This type of investment usually doesn't require council approvals for construction.
In most cases, duplexes are simply two adjoining properties on the same title. On the other hand, they could also be residential buildings divided into two apartments or townhouses.
Property investors can choose to sell duplexes individually or build as many properties as they could on a single plot of land. The sides of a duplex are usually identical in order to maximise building and material efficiencies.
Like duplexes, dual-occupancy apartments also consist of two properties in one land, except they don’t have to be adjoining. This type of dual-income property usually has shared entrances, driveways and other infrastructures.
These properties are made with floor plans that “allow for an area of the residence to be locked off for separate use”. While the living quarters and kitchen facilities are separate, residents may share common facilities such as the front door.
Dual-income investments obviously come with a lot of advantages, including improved cash flow and serviceability, reduced maintenance costs and increased portfolio size without the cost associated with purchasing two properties.
However, there are also some red flags to watch out for when developing this type of real estate asset.
For one, investors are often vulnerable to the risk of overcapitalising—spending money that may not be reflected in the overall value of the property or its asking price come sale time.
Dual-income investments also entail extra expenses if you want to pass on the costs of some utilities to each of the properties in the dual-income setup, including the cost required to establish separate meters for each property.
Moreover, this type of property is often less desirable, especially for owner-occupier buyers who may find that the idea of having another property attached or in proximity to the dwelling unappealing.
Selling the asset may also be harder because, in most cases, it might be impossible to sell the properties separately. When unable to sell, investors may find themselves stuck with multiple vacant properties in one area.
The lack of market value may lead to a decreased borrowing capacity due to the inability to enhance the asset’s equity, thus hindering the growth of the investor's portfolio.
Aside from the risks associated with the asset, investors are also advised to consider costs, design and other drivers of growth before establishing dual-income properties.
For investors who are only starting out in their journey, a dual-income investment may not be the best option because it could make generating equity more difficult and expose you to the risk of overcapitalising. While you might enjoy a high yield, it could be more difficult to grow the number of assets in your portfolio as fast as you would like.
On the other hand, this strategy may be worth considering for investors with a well-established portfolio who can afford the expenditure associated with developing a dual-income investment.
Once you have decided to implement this strategy, experts strongly advised dedicating time to perfecting the design of the asset, especially if it’s a duplex or a dual-key investment, because it can ultimately influence the value of the property.
Be particular with the floor plan and understand the room configurations, flow, the bedroom and living room sizes, the available storage and general finishes, and the orientation—making sure that they are in line with the demand of the renter demographic in the area.