Duplex investment has continually proven to be one of the most rewarding real estate investment strategies, both for building instant equity and for those wanting capital growth in their wider portfolio.
Property investors can either buy an existing duplex or build one from scratch, each option holding its own benefits. If this is an investment strategy you’re considering, here’s everything you need to know to help you make the right decision.
What Is a Duplex Home?
When you take a single freestanding property on one block of land and divide it into two separate residences but still within the same building, it becomes a duplex.
The two residences are under the same roof and share a common wall, with two different tenants residing in each property. They will also have different numbers for their mailing address, such as 1A and 1B.
Each residence has its own entrance, garden, garage, kitchen, bathroom, amenities, and standard features applicable to a freestanding home.
The two sides of the property don’t have to be a mirror image, although this design is most common; one residence could have three bedrooms and the adjoining residence only one.
Pros of Duplex Property Investment
You could qualify for a larger mortgage when applying for a home loan to fund a duplex property investment, as lenders will consider the potential income from both rental units.
Investing in a duplex provides two options: you can live on one side of the property and rent out the other or stay somewhere else and rent out both units.
Renting out both sides:
- As a dual-income property, there’s a good chance that the combined rental income could cover the whole mortgage.
- In the best-case scenario, you could make a positive cash flow. If you recycle this money back into your mortgage, you’ll build up your home equity faster.
Although a duplex may be more expensive than buying a single property, you ultimately get two units from one transaction. Therefore, the investment potential of owning a duplex makes it a very lucrative option.
Cons of Duplex Property Investment
Investing in duplex properties still has the same constraints as single properties, such as:
- If you can’t find tenants, you must cover your mortgage payment.
- If you’re staying in your duplex property, you have to deal with only having a single wall dividing your residence from that of your tenants. This could be a con if they’re very noisy and inconsiderate.
- Might have disputes between the 2 occupiers as they are so close together.
Buying vs Building a Duplex Investment Property
Buyers receive two immediate benefits when purchasing an existing duplex: more accessible financing and greater convenience.
It’s often easier to finance an existing duplex because there aren’t any holding costs involved. Holding costs are the expenses incurred by an investment property owner pending the receipt of rental income.
Plus, it’s much quicker than going through the entire building process, so you can start renting it out and generating revenue.
On the other hand, while building a duplex could require more financial commitment, it could increase tax breaks in the form of depreciation.
If you installed brand-new appliances, you could claim deductions on those plant and equipment assets twice. For example, there could be two air-conditioners and two dishwashers.
Other additional fees are payable when buying property, but these can be reduced when building from scratch. Some of these may include:
- build costs
- stamp duty
- insurance costs
- council rates
- holding fees
- strata fees
Laura paid a total of $600,000 which covered the land, the costs to build the property, subdivision fees, and the council fees.
Once the property was built and subdivided, she sold each residence for $350,000 ($700,000 in total).
Laura made an impressive $100,000 profit —in a mere 18 months.
If she had chosen to rent out each residence for between $350 and $400 per week, she would’ve achieved a high return of 6-7%.
A Mortgage Broker Can Help You Choose the Right Property for Positive Cash Flow
You can discuss with your mortgage broker what your goals are, such as a cash flow positive property that generates passive income, they will discuss the pros and cons and the rental income earning potential versus your costs.
They will then assist you through the entire application process and help you get the best home loan deal to suit your financial situation.
Key Takeaways on the Investment Strategy
Whether it’s your first investment property or your tenth, when deciding between buying a single-family home or a duplex project, the key is choosing the one that will generate a better long-term return on investment.
If you rent out both sides of your duplex, the rental earning potential means you may not have to pay any of the mortgage at all. Even if you stay in one residence and rent the adjoining property, your mortgage will reduce significantly.
Like with a single-family home, if you can’t find tenants, you have to cover your entire mortgage payment. But it’s unlikely that you’ll be in a position where you have both residences vacant.
Going the duplex property development route will take longer to get started, but more tax benefits are claimable from the ATO. If you buy an existing duplex, you can start renting it out quicker and generating income sooner.
There is a higher demand for single-family rentals than duplexes, so it could take a while if you would like to purchase and then sell a duplex.
Secure High-Quality Investment Properties with The Mortgage Agency
The Mortgage Agency has experienced mortgage brokers who specialise in duplex property investment.
Get in touch with one of our team today and discuss expanding your investment property portfolio.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.