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A well-built duplex in a carefully-chosen location has the potential to generate high rental yield and capital growth, so it's not hard to see why it has become such as popular investment option for first-time buyers and investors alike. But it's not quite a penalty kick either- there are certain things you need to factor in to ensure the success of your project.
This article will walk you through the benefits, the costs, and what you need to look out for to make sure it's only your bank balance that's shooting up, not your blood pressure!
What is a duplex
A duplex (also known as a 'dual occupancy') is a residential building with two units under one roof- with one dividing wall splitting it into two separate homes—each home with its own yard, entrance and amenities.
So with one block of land, you can build two homes. It will cost more than building a single freestanding home but much less than building two, and that's where the obvious benefit comes in for investors.
What are the benefits of building a duplex?
Instant equity
Simply the process of building two homes on a block of land can significantly increase its value- something called 'instant equity'. It's not unheard of to see gains of $300,000 in the first year, in larger projects.
Help with cash flow
The rental yield from the second property can go a long way to paying off any mortgage you took out to fund the project, or if it was an investment property, there’s every chance the yield from both properties will more than cover the repayments you need to make.
High growth potential
If you are astute with your choice of location and builder, there is scope for real capital growth potential. And not just on one property, but two.
You can even create equity to put the deposit on another property and get the ball rolling on building your portfolio and property empire!
Great for first-time buyers
Duplexes are a no-brainer for buyers looking to get on the ladder, costing more than a single freestanding house, but that extra is instantly offset by the rental potential and instant equity released by the second property.
Lower maintenance costs
The smaller size of duplexes is reflected in lower maintenance costs. Many have smaller yards and more modest exteriors, which also cuts down on landscaping costs.
What are the average costs of a duplex in Melbourne? And what are the average costs of a duplex in Australia?
A variety of factors impact the final cost of building a duplex (and more on those shortly), but here are the rough averages:
Costs in Australia
Melbourne: $650,000- $1 million
(2 units in 300sqm, standard finish and modern build is $600,210.00- $663.390 with Eastbound’ s cost estimator)
Sydney: $600,000- $1.2 million
Canberra: $500,000- $1.1 million
Again though, we must stress these are only averages. The factors below will determine where your project sits on this scale.
Duplexes usually take longer than your average freehold- not surprisingly- anywhere from 3 to 6 months longer, depending on the size and complexity.
What factors affect the price of the duplex build?
1. "Location, location, location."
You will have heard that old cliché, and it's absolutely true: the location of your site build is the main factor that will drive the final price. How popular the area is with renters and buyers. It also determines how likely you'll be to get approval for all the necessary permits from the local councils.
When choosing the location, you need to get into the investment mindset and consider:
- how close it is to the city or any commercial hubs
- how convenient it is for public transport, schools and shops
- other amenities in the area
- local rental demand and supply
2. Site size
The size of the plot of land and, again, the demand in that area, will affect the land costs and thus the value of the investment and its earning potential.
3. Materials used
The quality of the build- from the frame to the countertops- plays a significant role in the final purchase price.
4. The architects and contractors
The design and build obviously account for the lion's share of the costs. The most skilled and experienced often come with a premium cost attached.
The architect will look after everything from drafting the floor plans, to helping establish the preliminary budget and obtaining necessary permits.
The contractors usually hire and co-ordinate all the sub-contracting teams necessary, ensuring all materials are available and advising along the way.
5. Additional costs
Unexpected additional costs (often termed ‘latent conditions’),can include anything from rock removal to service connections.
Things to be wary of
- A dual occupancy project will usually require a substantial dual-frontage block and then appropriate zoning to subdivide into two separate lots. The best sites come with the highest price tags, as you can be sure other buyers will be thinking along the same lines. Sometimes it can even get to a point where the numbers don't stack up, and you pick your battle elsewhere.
- These subdivisions can cost a surprising amount in consultation fees to town planners too- often $40,000 to $50,000.
- You can bypass this hassle by going for pre-approved blocks, but this is normally factored into their (higher) price.
- Between the design, its approval and the construction, it can take over a year, accruing holding costs along the way such as loan repayments, land tax and council rates.
- If you need to knock down an existing property and then rebuild, demolition costs can be up to $20,000.
- Ensure your contract includes a maximum construction completion date and a warranty check-up after six months to fix any minor issues.
- And if you plan on selling within five years of building, you need to factor in GST (Goods and Service Tax) and Capital Gains Tax if it isn't your principal place of residence.
Tips to save money with your duplex development
First off, to avoid a lot of hassle and wasted time, money and energy, keep on the right side of the local council straight away. Find out the local rules and regulations, which development application(s) you'll need down the road, and the likelihood of permit approval.
Smaller duplexes = cheaper duplexes (all things being equal), so this is a way to cut your cloth according to your budget. Building during the offseason can save those precious pennies too.
Vanity may have you seduced by the highest end finishes, but sometimes they don't add the value to justify the expenditure. It would be best to find a trade-off between what you can afford, what will be attractive to renters and what adds value.
Lastly, look into flat blocks as another way to save on your construction costs.
As you can see, the duplex may be a no-brainer as an investment, but it is certainly nothing to jump into without experienced professionals in your corner. Luckily, we know just the guys.
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