Houses still trump dual occupancy dwellings when it comes to a sound investment strategy, says RiskWise Property Research CEO Doron Peleg.
While more property developers turn to dual occupancy residences in order to maximise the potential of their land, these remain high-risk investments, according to Mr Peleg.
He said while there were certainly some benefits to dual occupancy investment, in particular, improved cash flow and reduced maintenance costs, the risks associated with them were high.
While dual occupancy properties look similar to duplex developments, these are completely different assets as dual occupancy homes are on one formal title as opposed to two titles, with separate utilities.
"It has to be remembered that freestanding houses will always be the preferred option not just for owner-occupiers but also for renters, so you already have a limit on who you can market to," he said.
"And now, in the current market conditions created by COVID-19, homebuyers with long-term holding strategies are well positioned to negotiate aggressively to purchase high-quality houses that usually enjoyed very strong demand.
"Investors buying these dual occupancy properties, especially if they are unsuitable for families, are taking an enormous gamble on both equity and cash flow.
"The problems could start when you apply for a loan, with a risk that the pre-settlement valuation will take into consideration the potential risk, and the formal valuation might be lower than the contractual purchase price."
He said many owner-occupiers were now taking advantage of great buying opportunities in NSW, Victoria and southeast Queensland.
"Before COVID-19 hit, there was already a strong trend of sea- and tree-change homebuyers looking for the best of all worlds – lifestyle, accessibility to employment hubs and affordable housing," he said.
"These include areas of southeast Queensland such as the Sunshine Coast and the Gold Coast, just over the NSW border in Byron Bay and further south on the Central Coast, in areas such as North Avoca, Terrigal and Wamberal. Then there's also sought-after locations such as the Hunter Valley, Wollongong and the South Coast, and in Victoria, the Mornington Peninsula, Geelong and Ballarat."
However, he said the risks in buying dual occupancy projects included the possibility of lenders introducing stronger requirements either in the form of greater deposits (lower LVR) and/or greater serviceability given dependency on a high rental income was the substance of the investment.
"You might also have a problem when you want to sell them as these properties are on one title, meaning there are two dwellings and you have to sell them jointly.
"Also, these types of properties are largely sold to investors - whether both are rented out or whether one is rented and the other owner-occupied. Generally, at least one of them is an investment property.
"So there will be a very small number of owner-occupiers who want to buy them, as most want standalone houses on decent-sized blocks. Which means you are losing a major market segment, the owner-occupiers.
"In addition, renters also have a strong preference for freestanding houses meaning, the demand by tenants for standalone dwellings is likely to be stronger and your rental pool is greatly reduced."
He said the price of dual occupancy properties was in many cases 70 - 80 per cent or higher than the price of an off-the-plan standalone house in the same suburb, which put them in the top 5 per cent of the market and buyers at that price range preferred "houses in better places, with higher median prices".
"The third risk is, in many cases, there is a large supply of similar properties, so you have over-saturation of the market and renters obviously have preference for a standalone house with a big backyard, so finding tenants can become problematic, which means your actual cash flow might be lower than the projected cash flow," Mr Peleg said.
RiskWise Property Research was formed in 2016 with the goal of providing property risk advise and research services to help its clients make informed purchasing decisions.
Its goal is to provide private investors, home buyers, property professionals and institutional clients with detailed risk information to support smarter decision making. Its vision is to be a global leader in property risk rating and research helping its clients to achieve deeper risk insights so they can make smarter property investment decisions.