Investment Strategy – Duplex / Dual Lot Subdivision + Build
For those investors who already have an investment property or two and want to start to be more active and accelerate their results, the duplex or dual lot subdivision may be the perfect strategy. It is a proven way to create instant equity in an investment and manufacture positive cash-flow by investing at a wholesale level. Going through the construction process may initially sound daunting, but with the right management team building an investment can be quite an easy procedure. Sound Property has experience and great success in guiding clients through this process. Outlined below are some key aspects of this strategy, including the benefits and risk mitigation.
The duplex or dual lot subdivision is essentially a continuation of the ‘House and Land’ strategy which has been discussed here, except instead of improving the land with one dwelling, further value and income is forced out of the land by building two dwellings. These may either be attached in the form of a duplex under a simple strata scheme or be detached on two separate Torrens titles.
The site:
Sites with the potential for a duplex or subdivision can be very popular as they are still in reach of the individual investor and ‘part-time’ developer. They often don’t make it to market as most agents will have a long list of interested parties. It can almost be a full time job to keep in the agent’s pocket and be notified of opportunities coming to market.
The local zoning and land size usually determine if the site is suitable for a duplex on one title or subdivision into separate lots. The site may be a corner lot with separate street frontages or a battle axe where one dwelling is built behind the other. A corner lot is usually more straight forward and desirable.
Other aspects to analyse include the slope or gradient of the land, position of utilities connections (such as water, sewage and power), easements, flood levels and soil quality. All will have an impact on the feasibility and costings of the project.
Lending:
In these examples, as less than 3 dwellings are being built, most Banks will still consider it a residential rather than commercial project so loan-to-value ratios (LVRs) of up to 90% can be obtained meaning less deposits required by the investor. Usually the loan will be structured with two portions, one for the land and one for the build. The loan on the land is similar to a normal loan which will draw down in full at the settlement of the land. The build portion will be lent under a construction loan which draws down at 5 or 6 specified milestones or stages of the project. Interest will begin to be incurred when the land settles and balloon towards the end of the project when the final drawdown is made on the build. This interest will be tax deductible and should be offset by profit in the project or stamp duty savings, which is only payable on the land component. This can save several thousand dollars compared to buying an existing dwelling.
Process:
There are generally 6 build stages which are highlighted in the images below.
Stages: Base, Frame, Enclosed
Stages: Fixing, Practical Completion, Handover
Benefits:
For the right investor there are there are many benefits to the duplex or dual lot construction strategy. A few of these are listed below.
- Buying wholesale: Essentially you are buying raw parts and the end product should be worth more than that sum of the parts creating in-built equity or profit.
- Less finance or borrowing risk: Unlike an off-the-plan purchase you can obtain your finance approval before being fully committed to the contract by supplying the bank with a land contract, building plans and list of inclusions and finishes for them to conduct a full upfront valuation and calculate the borrowing capacity of the investor.
- Stamp duty savings: Stamp duty is only payable on the land component, not the full purchase price potentially savings thousands of dollars.
- Depreciation: A brand new dwelling attracts high deprecation and tax deductions.
- Higher yields: Getting in at a wholesale level and building new attracts a higher rental premium to older dwellings in the same suburb. This can lead to the investment being in a positive cashflow position.
- Home Owners Warranty: Depending on which State you buy in the building contract will contain around 6 years of structural warranty.
- Finite land availability: If you buy in an Infill estate it won’t be long before land supplies are exhausted and this is reflected in appreciation of value.
- Options: To keep both for future capital growth and cashflow or sell one or both to realise the project profit and free up servicing for future opportunities
Risks:
There are some obvious risks associated with the duplex or dual lot construction strategy. However, once understood there are ways to mitigate them as outlined below.
- Town Planning: Factors such as zoning, heritage, covenants, easements and overland flow all must be assessed prior to committing to the purchase of the land
- Timeframes: In our experience it is the land registration or subdivision which can be delayed rather than the build. Once the build starts you can keep the builder to time by adding a liquidator damages clause to the contract which specifies an end date the build must be completed by (less holidays and weather delays). If the build goes over the specified time a penalty interest, usually the weekly rent, is paid on a daily rate at the conclusion of the build.
- Costs: So that there are no extra cost surprises it is important to enter a fixed price build contract, making sure that the end product is ‘turn-key’ and has all the inclusions needed to occupy. Also make sure that there are allowances in the build contract to cover situations where rock or bad soil are discovered on the site and who is going to pay for the removal or alterations to design.
- Builder going broke: This is one of the risks which is not directly in the purchasers control so it is very important to engage a reputable builder with a strong history and pipeline of projects. In the odd event that a builder goes under during the build it is possible to source a new builder to finish the project.
- Structural and minor defects: Most build contracts will have a 3-6 month minor defect period where the builder is responsible to fix things such as connections, leaks, loose fittings etc. Depending on the State in which the investment is purchased there will also be around 6 years structural Home Owners Warranty (HOW) for any major issues if they arose.
- Overcapitalising: The package price must be around the median house price for the suburb. Do not over spend on items such as fixtures and fittings. Remember it is not your own home to live in so does not need to be fitted as such. Finding a middle level of finish is the key.
Case study
Brief: Dual Lot Subdivision and Build (Managed by SPG) for growth, rental yield and tax deductions. Budget $1m
Dwelling – 2 x 4 Bed | 2 Bath | 2 Car
Build Price – $600,000
Total Package = $920,000
Value on completion = $1,100,000
Gross profit before tax = $180,000
Purchase costs:
20% deposit – $184,000
Stamp duty – $8,000 (only on land component)
Solicitors – $2,000
Total Purchase costs = $194,000
- Return on Investment (ROI) = 91% over 2 years
- Current Rent: $550/w each house or 6.2%
- Positive cash flow before tax
- 6-month minor defect period and 6 years Home Owners Warranty
Client Feedback:
“The end result not only returned a profit but we have decided to hold both houses as the cash-flow is positive. Due to the location of the development in the town and its strong economy we also envisage good capital growth over time. We really appreciate the work and support of Sound Property to help us look outside the square with this investment”
Written by Andrew Cull, Sound Property Group
This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.