What Should I Look For When Buying Dual-Occupancy Properties?

If you’ve been scrolling through property listings lately, you’ve probably noticed dual-occupancy properties popping up everywhere. And for good reason. They’re becoming one of the hottest investment strategies in Australia’s current market. But before you jump in with both feet, there’s a lot more to consider than just the potential for two rental incomes.

Let’s face it: buying a dual-occupancy property isn’t like purchasing a standard house. You’re dealing with complex zoning regulations, unique tenant dynamics, and investment considerations that can make or break your financial future. With Australian property prices continuing to climb and rental yields averaging just 4-5% nationally, the appeal of properties offering potential returns of 10-12% is understandable.

But here’s the thing – not all dual-occupancy investments are created equal. Some will deliver those impressive returns, while others might leave you wondering where it all went wrong.

Understanding What You’re Actually Buying

Before we dive into the nitty-gritty, let’s get clear on what dual-occupancy actually means. In Australia, a dual-occupancy property features two separate dwellings on a single block of land. These can be attached (like duplexes that share a common wall) or detached (such as a main house with a granny flat in the backyard).

Dual occupancy homes come in two types: attached dwellings (duplexes) that share a wall, or detached dwellings (granny flats) with their own space on the same block. The key word here is “separate” – each dwelling should have its own entrance, kitchen, bathroom, and living areas.

The popularity of these properties has surged recently, driven by several factors. Between the 2016 and 2021 Censuses, the number of households containing three generations grew by 22%. This multigenerational living trend, combined with Australia’s ongoing housing shortage and high rental demand, has created a perfect storm for dual-occupancy investments.

Zoning: Your First and Most Critical Check

This is where many investors become stuck. Zoning regulations vary dramatically across Australia, and what’s permitted in one council area might be completely forbidden in another. You could fall in love with a property, only to discover that council regulations make your investment plans difficult.

A dual occupancy can be either attached or detached, but the specific requirements differ significantly between states and even individual councils. In New South Wales, for example, recent planning reforms have made dual occupancies permissible in all R2 zones across the state, though this comes with specific conditions.

The NSW Govt is aiming to make dual occupancies permissible in every R2 zone across the state. However, this reform includes a new minimum lot size requirement of 450 square metres, which overrides any higher minimum requirements set by local councils.

In Queensland, the rules are different again. An amendment took effect on 26 September 2022 that removed restrictions on who can live in secondary dwellings across Queensland. The amendment enabled homeowners to rent out secondary dwellings, such as granny flats, to anyone.

Before you even consider putting in an offer, you need to verify:

• Council Zoning Requirements: Check whether dual occupancy is permitted in the specific zone. R2 (Low Density Residential), R3 (Medium Density Residential), and R4 (High Density Residential) zones typically allow dual occupancy, but always confirm with the local council.
• Minimum Lot Size: Most councils have minimum lot size requirements. These can range from 300 square metres to 700 square metres or more, depending on your location.
• Development Standards: Height restrictions, setback requirements, site coverage limits, and car parking provisions all vary by council. What looks possible on paper might not meet local development standards.
• Heritage and Environmental Constraints: Properties in heritage areas or with environmental overlays may face additional restrictions or even prohibitions on dual occupancy development.

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Location, Location, Location

When it comes to dual-occupancy properties, location considerations go beyond the usual “near schools and transport” mantra. You’re looking for areas that attract the specific tenant demographics who prefer this type of accommodation.

For investors, dual occupancy product shows a much higher return than most other housing types. More people are sharing accommodation and a key to getting a better rental yield is to hold property that facilitates sharing. Two sources of rental income are often better than one.

The sweet spot for dual-occupancy investments often lies in areas with:

• Strong Rental Demand: Look for suburbs with low vacancy rates and consistent rental growth. Areas near universities, hospitals, major employment centres, and transport hubs typically perform well.
• Demographic Diversity: The best dual-occupancy locations attract various tenant types – young professionals, small families, students, and older adults seeking downsized accommodation.
• Infrastructure Development: Areas undergoing infrastructure improvements or urban renewal often see increased demand for flexible housing options.

Current market data shows that in the year ending 30 June 2024, overseas migration contributed a net gain of 446,000 people to Australia’s population, creating unprecedented demand for housing across all categories. This demographic pressure particularly benefits dual-occupancy properties in growth corridors and established suburbs with good transport links.

Financial Fundamentals

Let’s talk numbers.

You’ve probably seen claims of rental yields reaching 12% or more for granny flats, and while these returns are possible, they’re not guaranteed. Granny flats require a much lower upfront investment than buying a full-sized property, yet they offer rental yields as high as 12%.

However, successful dual-occupancy investing requires careful financial analysis that goes well beyond the headline rental yield figures.

Purchase Price Analysis

Don’t just look at the total purchase price. Break it down – what are you paying for the land versus the improvements? Is the property priced fairly compared to similar single-dwelling properties in the area?

Realistic Rental Projections

Research actual rental rates for both the main dwelling and secondary dwelling separately. As a general rule, rent percentages of 4 – 5% and above are currently considered to be good yields in Australia. Dual-occupancy properties should comfortably exceed this benchmark, but be realistic about your projections.

Operating Expenses

Don’t forget that two dwellings mean potentially higher maintenance, insurance, and management costs. Factor in council rates, water rates, insurance, repairs and maintenance, property management fees, and vacancy allowances for both dwellings.

Capital Growth Potential

While rental yield is important, don’t ignore capital growth prospects. Some areas might offer high yields but limited growth potential, while others might provide moderate yields with strong long-term appreciation.

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The Hidden Costs To Look Out for

Many investors get caught out by unexpected costs that weren’t apparent during the buying process. Here are the big ones to watch for:

Insurance Complications: Insuring dual-occupancy properties can be more complex and expensive than standard residential insurance. You may need landlord insurance for both dwellings, and some insurers treat dual-occupancy properties as higher risk.

Strata or Body Corporate Issues: If you’re buying an attached dual occupancy (duplex), check whether there are strata arrangements in place. These can involve ongoing fees and restrictions on modifications or rental arrangements.

Utility Connections: Ensure both dwellings have separate utility connections and meters. If they don’t, you might face significant costs to separate services, or ongoing complications with tenant billing.

Council Compliance: Existing dual-occupancy setups don’t automatically mean council compliance. Previous owners might have made unauthorised modifications. Always verify that all structures have proper approval.

Construction Quality and Configuration

The physical aspects of the property deserve just as much scrutiny as the financial numbers. Poor construction or impractical layouts can lead to ongoing headaches and reduced rental appeal.

• Structural Integrity: Have both dwellings professionally inspected. Pay particular attention to any shared walls, foundations, or roof structures if dealing with attached dual occupancy.
• Privacy and Noise Separation: Good dual-occupancy design provides adequate privacy and noise separation between dwellings. Poor design in this area leads to tenant complaints and higher turnover.
• Car Parking and Access: Adequate parking for both dwellings is crucial. Most councils require at least one parking space per dwelling, and tenants increasingly expect this as standard.
• Storage and Outdoor Space: Each dwelling should have reasonable storage and access to outdoor space. Cramped or impractical layouts reduce rental appeal and limit your tenant pool.

Market Dynamics and Tenant Considerations

Understanding your potential tenant base is crucial for dual-occupancy success. These properties attract diverse demographics, each with specific needs and expectations.

• Young Professionals and Couples: Often attracted to granny flats for affordability and independence while remaining close to amenities.
• Families: Main dwellings attract families, while granny flats might house extended family or provide rental income.
• Students and FIFO Workers: Particularly in areas near universities or industrial centres, these tenant types provide consistent demand.
• Older Adults: Downsizing seniors often prefer granny flats in familiar neighbourhoods.

Properties with granny flats may attract a wider range of buyers and renters, especially multigenerational families. This diversity can be an advantage, but it also means you need to ensure your property appeals to multiple tenant types.

Tax Implications and Legal Considerations

Dual-occupancy ownership comes with unique tax implications that differ from standard residential investment properties.

• Capital Gains Tax: From 1 July 2021, capital gains tax (CGT) does not apply when a granny flat arrangement is created, varied or terminated. However, this exemption applies specifically to family granny flat arrangements, not commercial rental situations.
• Depreciation Benefits: First-year depreciation averages $10,000, blossoming into $45,000 in deductions over five years. This can provide significant tax benefits, but ensure you understand how depreciation schedules apply to dual-occupancy properties.
• Negative Gearing: You can claim deductions for expenses related to each dwelling, but you need to apportion costs correctly between the two properties.
• Land Tax: Each state has different land tax rules for dual-occupancy properties. Some treat them as a single assessment, while others may assess each dwelling separately.

When Dual-Occupancy Doesn’t Work

Despite the marketing hype, dual-occupancy properties aren’t suitable for every investor or every location. Some expert analysis suggests caution.

Limited tenant appeal, restrictive regulations, modest rental income, and low capital growth can make them more of a liability than an asset. This perspective highlights that not all dual-occupancy investments deliver the promised returns.

Rental yield does not add value to a residential property. That means that if you buy an old house on a big block and then build a granny flat which takes over a significant portion of the backyard, it will only reduce the property’s value when it comes time to sell.

The key is understanding when dual-occupancy works and when it doesn’t. Properties that work well typically have:

• Strong underlying land value
• Good design that doesn’t compromise the main dwelling
• Location in areas with genuine rental demand
• Proper legal compliance and council approval

Properties that struggle often suffer from:

• Poor design that makes both dwellings feel cramped
• Locations with weak rental demand
• Legal or council compliance issues
• Overpricing that assumes rental yields will continue indefinitely

Making Your Decision

Dual-occupancy properties can be excellent investments when chosen carefully. The key is approaching them with realistic expectations and thorough due diligence.

Dual occupancy properties offer a powerful advantage: two dwellings on one lot means you can potentially double your rental income. However, this potential comes with complexity that requires careful navigation.

Start by understanding your local market thoroughly. Spend time researching council regulations, talking to local real estate agents, and visiting open inspections. The more you understand about how dual-occupancy properties perform in your target area, the better equipped you’ll be to identify genuine opportunities.

Consider starting with existing dual-occupancy properties rather than development projects. This approach reduces construction risk and regulatory complexity while still providing the benefits of dual rental income.

Remember that like any investment strategy, dual occupancy isn’t suitable for everyone. If you’re comfortable with more complex tenant management, understand the regulatory environment, and have done thorough financial analysis, these properties can provide excellent returns.

Take the Next Step with Dual Dwelling Investments

If you’re serious about dual-occupancy property investment, start with education and professional guidance. The regulatory landscape is complex and constantly evolving, making expert advice invaluable.

At Dual Dwelling Investment, we specialise in helping investors navigate the complexities of dual-occupancy property investment. Our team understands the regulatory requirements, market dynamics, and financial considerations that determine investment success.

Contact our expert team today to discuss your dual-occupancy investment goals and learn how we can help you identify and secure properties that deliver genuine returns.

With the right guidance and careful selection, dual-occupancy properties can be the key to building substantial rental income and long-term wealth.