Should I Buy a Dual-Income Property?
This is a question that comes up regularly when I speak to clients, and is definitely the flavour of the month amongst a lot of property marketing companies. A dual-income property is a building on a single lot (not strata titled) that has been configured so it can have two separate tenants – generally with one larger house-style configuration and a smaller unit-style configuration.
A dual income property’s main selling point is the extra yield it produces – while a normal house may produce a 5% yield, a dual income property in a similar location may produce yields of 6.5-7.5%. This is going to increase cashflow by by 1-2% of the property’s value after extra costs are taken into account, which is between $5,000-10,000 per year for a $500,000 property.
The big question is then – will a dual-income property also increase in value as quickly as a normal house? If we look at a standard dual income property, you are spending more on the building than a normal house, so, dollar for dollar, you’re getting a less valuable block of land. This means you’re either buying a smaller block of land, or more likely, in a less attractive location. We know that over the long-term, land outperforms buildings, so all things being equal, your dual income will not increase in value as quickly as an equivalent house.
Dual-income properties sit on a single lot and title but are rented separately. This creates a higher yield, but means you’re spending more on the building. You’ll need to assess if the extra cashflow will come at a greater cost in lower capital growth.
Will the extra income offset this? It might – it depends on your financial situation and long-term strategy. We know that high capital growth will produce better returns for you in the long-term than high cashflow, but in some cases getting the balance right between the two can suit you better as an investor. So here are some of the key questions you should ask yourself when considering a dual-income property:
-
Will the location I invest in still achieve good capital growth? If it’s too far from employment centres, or there’s no scarcity of land in the surrounding area, then it probably won’t
-
Am I paying too much for the overall package? Lots of dual-income properties are packaged up by property marketers with big commissions for them in both the land and build components. Even if the cashflow projections look great, you’ll take a long time for the asset to produce any capital growth if you pay too much.
-
Is the design of the property any good? Many dual-income properties have compromised designs to try and squeeze them onto tight blocks or save money on the build. If you wouldn’t be happy living in the property yourself due to bad design, don’t buy it as an investment – you’ll suffer in the long-term from lower capital growth and rental returns.
If in doubt, book in a free consultation with me to discuss your plans and do a quick common sense check on them.