Cashing In On The Dual Occupancy Boom - May 2024

By Rich Harvey, CEO & Founder, propertybuyer.com.au

The idea of building a duplex property on a single title, putting a granny flat in the backyard, building a new garage with a studio above it or splitting a big two-level house into separate flats are hardly new concepts.

But rising real estate prices, a severe shortage of available rental properties and worsening cost-of-living pressures have cast a new light on the concept of multi-occupancy dwellings.

Supply constraints aren’t going to ease anytime soon and nor is rampant population growth, so a growing number of local councils are responding by easing restrictions on what’s allowed. It offers savvy investors the opportunity to cash in.

While there are plenty of interesting opportunities, there are just as many potential pitfalls. Here’s what you should keep in mind.

Seems simple… right?

I heard a story recently about a woman in her late 60s who saw an opportunity to shore up her golden years.

The large home she lives in, sitting on a slanted block, had a partially built-in space underneath. Not quite a lower level but more of an ‘under-the-house’ room that had been used as a laundry, shed and storage space. Being a self-funded retiree and owing nothing on her mortgage, she figured turning it into a self-contained unit could deliver some nice rental income that would support her into the long-term.

The lady found a tradie online who came to inspect the space, assured her the vision was possible and agreed to oversee the works, including plumbing and electricals, to turn it into a suitable dwelling.

All of this was done without proper approvals and in violation of her particular council’s requirements for secondary dwellings. She’s now engaged in a bitter and costly legal crawl.

When I heard more details of the unfortunate situation, the red flags were clear. But you’ve got to sympathise with her plight, given she thought she’d engaged a professional who would handle all of the necessary compliance.

It’s an extreme but relevant insight into what can go wrong when you’re dealing with a type of housing that some governments love – and others loathe. There isn’t much consistency and what’s permitted in one suburb could be near impossible in the neighbouring one.

The rules can be confusing

Before you consider investing in a dual occupancy property or taking on a mammoth building project, it’s crucial you understand what authorities will permit in your area.

Simply buying a big block and assuming you can chuck a villa-style granny flat in the backyard is flawed. So too is imagining building a studio above a garage that will be fit for purpose.

Some councils have land size restrictions that all but prevent most dual occupancy ideas. Others are incredibly progressive, encouraging new housing supply in constrained areas by having no limits at all. Those types of councils also tend to impose far lower fees for dual occupancy developments than traditional larger-scale projects. There are far fewer town planning and infrastructure costs involved.

Some councils also have restrictions on the size of the dwelling permissible, depending on the block size. But again, other jurisdictions – particularly inner-city councils – are far more lenient. Some Melbourne councils have embraced the concept of ‘laneway homes’, which are compact micro-apartments built on small patches of backyard land with rear lane access. I’ve seen architects and planners in urban hotspots are coming up with very clever solutions.

But again, that very liberal approach isn’t universal. It’s another example of why you must be across the rules in your patch.

Simply relying on a tradie to know what’s allowed and what’s not is deeply flawed. You might find that the builder you engage in Sydney or Melbourne is used to working in a totally different local government area and therefore not be familiar with the appropriate processes. Or they might leave it up to the investor to figure that all out, which can be cumbersome and confusing.

And on a separate note, some lenders still don’t like the idea of dual occupancy so you might struggle funding the project. But most banks like higher rental yields which delivers better serviceability for borrowers. It’s worth getting your financial ducks in a row as early as possible.

Think about demand

Let’s say you’re completely familiar with what your council will allow and you’re ready to proceed with some kind of dual occupancy property.

Does your local market want it? Or are you simply blinded by the false promise of some spare land? While it’s true we’re in the midst of a housing crisis sparked by a severe undersupply of dwellings, that’s not necessarily the case in all areas.

For example, demand for a one-bedroom granny flat or an above garage studio might be non-existent in a premium blue-chip suburb or an area that’s dominated by families who want space and room to grow.

On the flipside, a neighbourhood that’s semi-suburban with big homes on well-kept blocks might not seem like a suitable location on paper, but if the demographics of the area are changing – that is, existing residents are getting older – you might find strong

untapped demand among those who want to downsize but stay close to the place they’re most familiar.

Similarly, suburbs near university campuses as well as inner-city fringe locations that are experiencing the ripple effects of gentrification could be ripe for exploration. Students and young professionals would likely jump at the chance to live in a well-located and affordable home, even if it’s in someone’s backyard.

Like any real estate decision, it’s worth doing your homework to understand what makes your target suburb tick. The last thing you want is a secondary property you can’t rent – and a main home that’s fundamental purpose has been altered and is now unwanted by the local market.

Consider the long-term

As I always harp on about, wise property investment should be made with long-term thinking in mind. This is especially the case for dual occupancy homes.

Let’s say you’re turning a big double-storey home into two separate flats – one upstairs and one downstairs. There’s some building work involved, probably removing a staircase, adding in a front door, and building a kitchen. But if you ever need to undo those changes, it won’t be the end of the world.

Likewise with a studio above a garage, which would be a great home office or gym should the market for that kind of rental property disappear or a new owner not want to take on that kind of responsibility.

Granny flats were at first thought to detract from the overall capital value – but now perceptions have changed dramatically. Owner-occupiers love them because they help pay down the mortgage much faster, and investors love them because they seriously boost the overall yield and help build equity faster.

It can also be tricky to strata title dual occupancy properties, although not in all cases. But if you wind up stuck with two homes on one title, the resale market down the track could be limited. A family with kids may not like the idea of a stranger living in their backyard, for example.

It’s also worth considering the design of your dual occupancy dwelling. There might not be room for a car space, so ensure that’s not going to be a dealbreaker for tenants, both now and into the future.

Get expert advice

There are some big opportunities at play in the dual occupancy space. Done well, they can make pretty appealing long-term investments as well as immediate cash flow generators.

And outside of the financial motivation, for those with the ability, they can also help keep elderly family members close to home – or young adults yet to fly the nest more comfortable with a big of privacy.

But finding the right property in the right suburb can be tricky, especially in a market like this where buyer competition is fierce, and supply remains restricted. There are plenty of pitfalls that could trap unsuspecting buyers.

That’s why enlisting the services of a qualified, local and experienced buyer’s agent is well worth considering. They can work with you to understand your goals, needs and wants and then scour the market for potential properties that fit the bill. A great buyer’s agent will be familiar with this type of dwelling purchase and can help guide you through the process from start to finish.

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