Are you living in a house that's not particularly functional for your lifestyle? (e.g. no work/study space, not enough storage, lack of light, hot in summer and cold in winter, etc.)
Want to live in house that is tailored to your needs?
Looking to build wealth for yourself and your family?
Are you trying to help your family buy a home?
Property ownership is a dream for many, but with the rise in property prices and mortgage rates, it's becoming increasingly challenging for some to realize that dream.
However, for those considering creative pathways to home ownership and feel comfortable with building their own home, there's an alternative solution that offers a host of benefits: constructing a duplex. Here, we delve into a few of the advantages that building a duplex offers to prospective homeowners.
1. Dual Income Potential
The primary allure of a duplex is the possibility of an additional one, or maybe two income streams from a single property. By living in one unit and renting out the other, homeowners can offset their mortgage payments, making the dream of homeownership more financially attainable. This rental income can provide a cushion against unforeseen expenses or even allow homeowners to pay off their mortgage faster.
If you rent out both properties as an investment, a duplex offers a degree of diversification within a single property. Instead of relying on the rent from one tenant, there's the potential for income from two. Should one unit become vacant, there's still income from the other to fall back on. Staggering the commencement of the leasing periods can also help to mitigate the risk of vacancy occurring at the same time for both properties.
2. Wealth Building - Value Growth and Multiplication
This is where the wealth building magic in property happens. With mortgage payments offset by rental income, owners then have the opportunity to hold onto a property asset (aided by leverage and 80% of funding from the banks) and expand their asset base, which is key to building wealth.
Holding onto an investment property at the end of the development project is a tried and tested way of achieving this. Historical data indicates a well located property often appreciates in value over time, especially in Australian cities (see link to related article below). If you hold both of the units for the long term, for example 20 years, it's very likely the value of these properties could well have doubled. That's equity value one can potentially utilise to purchase more investment property and repeat the process.
Related Article: Australian property prices double every decade: true or false?
3. Proximity and Privacy - Flexible Living Arrangements
Duplexes provide a unique blend of privacy and proximity. This arrangement is ideal for families wanting to stay close – perhaps an aging parent in one unit and a younger family in the other. It allows for independent living while keeping loved ones close by. It's a unique solution to aging in place.
4. Tax Advantages
Building and holding a brand new duplex may also come with attractive tax benefits, in particular the opportunity to claim a tax deduction on the 'wear and tear' of 'plant and equipment' (e.g. ovens, carpets, blinds etc.). Armed with a depreciation schedule prepared by a quantity surveyor, investors are able to claim these deductions for properties purchased or developed as new. These deductions are not available in existing investment properties purchased after 9 May 2017. These deductions can be quite substantial in the first 5 years of holding an investment property and make a significant contribution toward offsetting mortgage repayments, sometimes to the point where the property may even be cash flow neutral or positive to hold.
Depending on the region, rental income may be taxable at a different rate, and certain expenses related to the rental unit—like maintenance, property management fees, and interest on loans—may be deductible. It's always recommended to consult with a tax professional to understand the specific advantages.
5. Cost effective approach to buying new properties
Building a duplex enables an owner and/or investor to build a new home and an investment property at the price of construction rather than at the market price of a new home; which often includes overheads in the price of the sale including selling commissions and marketing.
If the developer retains the property after construction they are then able to take advantage of the equity uplift in the market valuation of the property. If done well, the market value is usually higher than the cost of construction resulting in a net gain to the developer and investor.
For example:
The cost to construct two new dwellings in a duplex is $4.0 million, or $2.0m each. An independent valuer engaged by the bank (for the investment home loan the developer is taking out to hold the investment properties) values each dwelling at a market value of $2.5m each. The developer has achieved an equity uplift or gain of $0.5m for each property, a total of $1.0m. Said another way, the developer has built an asset with a market value of $5.0m for the wholesale price of $4.0m.
The developer can also use this market valuation to optimise the equity they need to contribute to the home loans in addition to the rental income and tax deductions to retain the properties as investments. The developer refinances the project based on the valuation and is able to borrow up to 80% of the value of each property (i.e 80% Loan-to-value-ratio [LVR] = 80% x $2.5m = $2.0m) which in this example is $2.0 million for each property. The developer is also able to subsidise the loan repayments using the rental income and tax depreciation benefits we discussed in point 4 for each dwelling.
6. Easy first step in development journey with potential for future expansion
For those who might consider growing their property portfolio, starting with a duplex can be a stepping stone. Once familiar with the nuances of managing a rental, it can be easier to venture into larger multi-family properties or other real estate investments.
7. Opportunity to build a fit-for-purpose home designed for your lifestyle
With a new home you get to design it starting with a 'clean sheet of paper'. That's a wonderful opportunity, and also a responsibility, when it comes to thinking about how you want your home to function and feel.
If you're living in an old mid-century home in Australia - of which there are plenty - you'll know first hand that the floorplan and layout of the property may not accommodate the way you'd like to live. Common feedback on older homes can be lack of light, feels pokey with lots of rooms or there's no indoor/outdoor flow and the kitchen and dining room feel segregated making entertaining challenging.
Furthermore, with remote working becoming more prevalent of late, many of us have experienced the need for a multi-functional space that can operate as a workspace to accommodate virtual meetings by day and then perhaps guestroom or playroom outside of business hours. By building a new duplex you have the opportunity to solve these functionality issues.
8. Opportunity to tread lightly on the environment: save money, reduce your carbon footprint by building with sustainability and energy efficiency in mind
A new build is also the perfect opportunity to improve the energy efficiency and thermal comfort of a home; in this case its two homes!. This will shape how you and future residents thereafter impact the environment for as long as the building stands. Approximately 20-25% of carbon emissions are generated by just living and working in buildings (i.e. lighting, hot water, heating cooling, appliances etc.). Given the state of climate change, it's impact on our environment and quality of life, we are becoming increasingly aware it is imperative we be more mindful of the energy we consume and how it is generated. Designing a home that encourages environmentally conscious habits (e.g. 100% electric appliances running off of renewable energy such as wind or solar) is a great way to make a positive contribution to the environment for the long term, one home at a time. In this instance, it's actually two homes at a time!
Related Article: See our earlier blog entitled '5 Principles for more resilient and energy efficient homes from the Passive House Design movement' for further thoughts and ideas on how a new duplex can be designed.
9. Enhanced Privacy Compared to Apartments
While duplexes share some characteristics with apartment complexes, they tend to offer more privacy. Typically, a duplex will only share one wall, and units often come with private yards or outdoor spaces. This design minimizes noise transfer and offers a greater sense of individual space.
10. Community Building
For homeowners inclined towards fostering community ties, a duplex can be an avenue to build closer relationships with neighbors. Sharing a property can lead to collaborative maintenance efforts, joint celebrations, or simply a closer bond between the two units.
11. Greater Security (bonus reason!)
With someone living next door, there's an added layer of security. Whether it's keeping an eye out for each other's parcels or noticing unusual activity, having a neighbor in such close (but not too close!) proximity can bring peace of mind.
Building a duplex offers a myriad of benefits, from the potential for rental income, wealth accumulation to flexible living arrangements and tax advantages. As with any major investment decision, it's crucial to research and understand the local property market, consult professionals, and assess your personal financial situations.
But for many, the benefits of a duplex make it an enticing and smart investment for the future. If you're considering building a new home on your existing property, a duplex might just be the perfect fit for you.
Ask Concrete + Canvas how we can help you today
We've analysed a lot of duplex projects! As a development consultancy Concrete + Canvas possess the skills, processes and knowledge to help support you in your efforts to deliver a duplex project. Leveraging the support of a development manager can save you time, frustration, avoid common pitfalls and ultimately deliver a great outcome in a shorter time frame.
Call or email Concrete + Canvas today at hello@concreteandcanvas.com.au and request a free report to understand if your property is an eligible duplex site.
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