Why you should NOT buy dual key homes

Discussion in 'What to buy' started by Simon L, 7th Feb, 2020.

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  1. Simon L

    Simon L Well-Known Member

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    I get asked a lot by clients and builders about dual key homes so I thought I'd share my thoughts.

    A dual key home is essentially a property on one title that looks like a normal house from the outside, but has the floorplan of 2 separate units.

    Dual key homes have been around for years but have grown in popularity in recent times with the promise of high cashflow and depreciation benefits of a brand new build. To add fuel to the fire, there have been a growing number of third parties spruiking these benefits to naive investors. As a Buyers Agent, I get asked a lot about these types of properties (from both clients and builders wanting me to push their product), and in short, I always advise clients to steer clear.

    Here are some reasons why:

    1. The end product is rarely worth the money it costs to buy the land and build which means you are overcapitalizing in the end and most likely in negative equity on day 1 (one of the reasons why many lenders don't lend for this type of property and the ones that do require a minimum deposit). If there is a 3rd party involved, they are likely taking a HUGE cut in commissions from the builder (upwards of $45,000!!) - which you are essentially paying for

    2. Finding 2 different tenants who want to live in this type of property and can live so closely to each other long term is another challenge. You will run into more tenancy problems and vacancies which will erode your 'promised' cashflow over time.

    3. Dual key builds are typically found in lower socio/working class areas. For the cashflow to work, the rent these properties are commanding are similar to a typical standalone house with its own block of land. So the question will be why would people rent these over “normal properties” and what is the quality of the tenant pool who don't 'qualify' for something more normal?

    4. When you sell one day, the floorplan will only appeal to another investor who is going to be as driven by the cashflow and numbers as you are, keeping a ceiling on your sale price
     
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  2. Archaon

    Archaon Well-Known Member

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    I agree that all the one's you see on Facebook etc are incredibly overpriced, some saying they have rental guarantees for 8 years, crazy, I constantly challenge their assumptions and then end up being removed.

    Doing your research, gauging vacancy numbers for the suburb, shopping around for build quotes, and planning to use the added cash-flow to pay down non-deductible debt are all ways a Dual-key property can work in a portfolio.

    Two tenancies in the one property will mean that rent can still be coming in when one tenant moves out.

    Added benefits are you also save on land/water rates.

    Land tax is also a consideration, you could potentially own 3 dual-key properties in NSW without paying land tax.

    6 rental incomes for 3 set's of rates and no land tax.

    Dual-key has never been a CG play.
     
    Last edited: 7th Feb, 2020
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  3. Lindsay_W

    Lindsay_W Well-Known Member

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    This actually happens with most new builds whether it's normal house, dual occ/dual key etc - many people don't know about introducer commissions.
    Informative post -I'll add that lending is harder to get for dual key as lots of lenders won't touch them or have strict LVR limits and postcode restrictions for them (adding to your bit about many lenders won't lend for this type of security)

    I think the lure of of "postive cashflow" suck people into buying them
     
  4. Trainee

    Trainee Well-Known Member

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    Whats the difference between dual key and a duplex on one title?
     
  5. Archaon

    Archaon Well-Known Member

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    At a guess, more in build costs, and needing DA approval.
     
  6. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Dual key - Think of one main door. Inside the small foyer are two doors.
    Duplex are clearly side by side
     
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  7. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Builders of dual key market them to investors. Resale is more problematic as you are usually only looking at two types of buyers
    1. Investor who wants dual income and
    2. Owner occupier in one who accepts the smaller size and wants income from the other
    They really dont appeal to owner occupiers.

    They are to rentals what space saver tyres are to a nice car.
     
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  8. Gen-Y

    Gen-Y Well-Known Member

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    They are to rentals what space saver tyres are to a nice car.
    Scored! I really like that quote. :D
     
  9. Simon L

    Simon L Well-Known Member

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    Unfortunately this is a sad point that should be made more aware in mainstream media. FHOG chasers end up losing more in backdoor commissions, than the grants themselves - but become sold that they are still getting a great deal
     
  10. Rugrat

    Rugrat Well-Known Member

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    Horses for courses.
    There are way too many variables to state that dual key homes are or aren't a good option. Just like most other property, it really is dependent on individual circumstances of the property and the purchaser .

    Funnily enough, we just bought a dual key property toward the end of last year. We bought it as a PPOR, and use the entire space for our family of 8 (there is an interconnecting door between the two sides).
    For us it has been brilliant. (Especially because of the massive size, extra bathrooms and second kitchen and laundry - which we do use.)

    Now we intend on it being our forever home, but when we were looking at buying we looked at the property from an investment property perspective as well, because you never know what changes live will bring.
    Having the dual key property allows us lots of options.

    When our kids are older and moving out we could seal off the internal access and divide the rear yard and rent out one side to generate extra income without really impacting our own lifestyle too much. Easy downsize option.

    If we move out and rent out both sides seperately, the rental income would be approximately 1.5 that which could be acheived just renting as a single home in this area. But if we wanted to rent it as a single home, we do have that option too. And it would appeal to those who might otherwise want a granny flat (people with large families, teenagers / young adults, elderly parents, etc.)

    Its really not much different to having a duplex, only the layout allows the option to use both sides seperately or it altogether jointly.

    As for property values, we paid the same for the dual key property as other comparable single key homes in the area. So I don't think we could sell it for any more then a single key standing house of equivalent size and features, but as that is all we paid, we wouldn't be losing money there either.

    So horses for course.
    Much like many warn people away from OTP purchases. But if you do your homework well and make good choices, they can pay off as well sometimes. We have done well with 2 different OTP standalone houses in the past. The key is being informed, reading (and negotiating) contracts properly, not just relying on a solicitor, considering all senarios, and making good decisions that look at both short and long term investment, not just being swept up in the hype, or pushed or rushed into signing.

    I think the dangers with dual key (or OTP) are really the same as any property investment, not doing sufficient homework. It's just that there are more sprukers out their talking these types of properties up to novice investors who don't yet know enough to know what they should or shouldn't be looking at, so they get sucked in by the spiel and aren't prepared when things fall to bits.
     
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  11. Lindsay_W

    Lindsay_W Well-Known Member

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    The issue arises when/if you want to sell in the future
     
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  12. Rugrat

    Rugrat Well-Known Member

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    But that is what I was saying, when and if we sell in the future, the property value should still be at in line with the same value as other comparable single key houses in this area (and there are other large comparable single key homes around).
    Any end market value would only be impacted if the local market itself changes, not because it is 'dual key'. So if this house property dives, it is because ALL property in the area has taken a dive, not because of the fact it is dual key.

    And honestly, with the layout and design and features of this particular house, it is arguably more marketable then many of the other comparable houses and does appeal to a wider range of audiences then if it were just single key.

    I don't really understand why anyone would make an assumption that just because something is dual key is would lose value just based on that sole factor. In some markets, they could possibly be true. But in other markets the opposite is possibly true as well.

    And I think design plays a massive role in value and marketability that really seems to have been skipped over. There are many poorly laid out dual key properties that would most definitely limit audiences be a draw back for sale. And then there are others (like the one I live in) that are designed and laid out so they can be used for either single or dual occupancy seamlessly, without flaws in doing so.

    Added to this, is that fact that I wouldn't have bought in this area at all for capital gains anyway - we bout here because we want to live here. It is a regional area, so capital gains aren't fabulous full stop. We do own IP's here, but they are for yield not chasing capital gains. The houses we have had that have performed well with capital gains have been in capital cities, they saw some massive CG. And although the yeild hasn't been bad there, because of the higger costs of property the yeilds there have been less then here and the properties the have been neutrally or negatively geared, as opposed to this which would be significantly positively geared from day 1 if we were to rent it out.
    Whilst I live my capital gains (who doesn't love a lump sum windfall), I am personally one of those investors who sees the value in yield more as a long term investment. People forget that in determining true value, they should be adding in yeild and then deducting holding costs for the duration of ownership from the CG (after CGT is applied) when they sell.
    - but really that's a whole other discussion about investment strategy. Although it does demonstrate how and why a property (like a dual key property for example) that may not work for one strategy but does work for another.

    People have to stop thinking in absolutes and start thinking in terms of individual variables.

    I know I won't buy units (unless I can own the set), as for me there is simply not enough profit in CG's or yields to justify it for me and my strategy. And if asked I would warn others to be wary of units for a range of reasons.
    But many other people do well buying units and have no such reservations as myself. It suits them and their strategies.

    Really, dual key properties are just another version of duplexes. Which can be fabulous investments in their own right.

    The biggest warning I would have about dual key properties, is that people should investigate council zoning and building regulations if they do intend on buying or building one. Because many builders / REA's will try and market it as 'dual occupancy' when there are actually council restrictions in place about it. And whilst some get away with it, others get caught out when neighbours send in complaints to councils.
    But really, that again should just be part of due dilligence in purchasing any dual occupancy.
     
    Last edited: 7th Feb, 2020
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  13. Lindsay_W

    Lindsay_W Well-Known Member

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    Don't know what area you bought in but history has shown this not to be the case and it actually limits your potential buyers while also limiting the lenders any potential buyers can use to obtain funding.
    You've convinced yourself it was a good idea and it suited your needs at the time, I'm sure there are others that will agree and also disagree, each to their own.
     
  14. Tattler

    Tattler Well-Known Member

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    If that is the case, to limit the capital loss, would it be wise to buy a second hand dual key property so that there are no premium paid for the builder/3rd party?

    This way, you are not overpaying but still have dual income?
     
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  15. Rugrat

    Rugrat Well-Known Member

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    History has shown where? Can you please show me these stats and figures? And locations?

    It's not about convincing anyone that dual key are good. Or bad. Its about saying anyone who tries to say absolutely one or the other is full of ****. There aren't absolutes. No two markets are identical. And properties that do well in one market might do poorly in another and vice versa.

    In regards to my property itself, I was using it as an example. That is all. I don't honestly care if it does tank, because it is literally intended as a 'forever' home. I have no intention of ever selling. Even if I do end up leaving, I doubt we would sell, not given it's positively geared status.

    I am sure many of the brokers of the forum have dealt with these kinds of property, along with duplexes and properties with granny flats. I don't personally believe from my own experience that funding would be much / any harder to obtain. I have never found that to be the case at any rate. But then I would think that those even considering a property such as my PPOR would have options available to them with regards to funding anyway. And even rented as a single residence, not dual, the gross rental yield is 8.9%.

    But of course you, who have no clue as to the location of the property, let alone the actual property itself, can judge better then myself what its values might or might not be worth? Really?

    I am not ignorant about, nor am I new to, this property game. I am not some wet behind the ears investor with no experience, and despite what you seem to assume, I do have some knowledge of what I am talking about.

    I am also fully aware of the realities of all of my properties, including my PPOR. I can unequivally say that being dual key isnt a negative impact in itself on this properties market value. Bigger issues in selling our property if we ever do are the fact that it lacks vehicle access to the rear and that the overall house size is much too large for most families as a single occupancy. 400m2 of living area is more them most families could ever want or need in one house. But that's why having to option to seperate or function as a single entity, unlike most of the competing properties, can actually be a boon as it can appeal to wider target market.

    Are you going to try and tell me my duplexes are bad investments too?
    If so I have a bank account that says otherwise.
    And if not, why do you think duplexes are so different to dual key properties as an investment? I mean I can see multiple things that make them different, but none of those factors automatically mean one is good or one is bad.

    You have convinced yourself that an entire type pf property must always be a bad investment? Why is that? What makes you so sure and an expert? What experience on this are you bring to the table? Do you / have you owned dual key and duplex properties?
     
    Last edited: 7th Feb, 2020
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  16. Lindsay_W

    Lindsay_W Well-Known Member

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    Take a deep breath - everything will be OK :)
    I've never assumed anything about you - My comments are based on my experience with funding these types of properties - they are not treated the same as duplex's and they do not perform the same from what I've seen. I said in my last post some will agree they are a bad investment and and some will not, each to their own. Some invest for cash-flow, others capital gains, some try to get a bit of both.
    Honestly I think you're over reacting and need to relax
     
    Last edited: 7th Feb, 2020
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  17. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    There are also many reasons why GFs may be a poor investment. And many reasons why they provide terrific sources of income. In the typical main residence with a GF in the yard there is insufficient evidence over the longer term to indicate if a GF enhances value. I would argue most will NOT add to value. They will add to its capacity to produce dual income or a supplemental income or provide dual living for a family + elderly parents etc Indirectly this may be appealing to some buyers (much like dual key) and be opposed by others.

    Its like pools. Or a bronze valiant. Its only worth what a buyer wants to pay.
     
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  18. thatbum

    thatbum Well-Known Member

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    I generally agree about the issues with dual key properties, and find that this 2nd point especially is something that is not properly weighed up.

    All other things being equal, people are not going to want to rent half a dual key property over a normal dwelling with the same features. There will also be more chances for friction between the unrelated groups of tenants living under the same roof.

    I'm generally a fan of dual occupancy or granny flats or whatever you want to call dual dwellings on the same title - but I pretty much only go for them where the dwellings are completely detached and properly separated in terms of fencing, layout and utilities.
     
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  19. Rugrat

    Rugrat Well-Known Member

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    In reply to Lindsay W. The quote somehow deleted.

    And you probably don't intend on coming across as rediculously condescending, yet you are doing just that. Interesting approach for someone who seeks to expose themselves in a professional sense in this forum.

    I have no issues with people disagreeing with myself and appreciate when others are happy to have an actual discussion and back up what they are saying. You have yet to do that, instead rather making assumptions about myself and that I must simply be wrong About what I have stated because I must be 'convincing myself' that my purchase was good - because it couldn't actually be correct right? And then reverting back to telling me to 'calm down' and be 'overreacting' simply because I am willing and able to back up what I am saying?

    Yet you still don't actually address any of the points made.
    I am not, nor have I at any point been talking about "all dual key properties" as a singular. It is the foundation of everything I have stated from the beginning, that all properties need to be measured up on their individual variables. There are always exceptions and situations for everything.

    Future buyers gaining finance for any property is going to be dependant in many variables too. And yes, it is something that should be considered when buying any property puchase. But again, there aren't absolutes, and being single or dual key occupancy is just one variable of many to consider. And as a broker you should know this.
    Resalability, and all that entails including finance, of a property should be considered and factored in. But there are many different reason why a property may or may not be good for resale, no matter the type.

    As stated about 'my' property. It was purchased at market value of a single key property. Not a dual occupancy. As such the banks all treated it as a single occupancy property, no different to any other comparable single key properties in the area. If we sell it will be at that same market comparison too. And finance for future buyers is treated the same way too. The single occupancy rent is used for rental appraisal. It is less the what you would get as dual occupancy, but then so is the purchase price. So again, not impacting actual market value.

    And as stated previously, single occupancy gross rental yield was at 8.9% (this is what it was went we purchased it as it was rented back to the previous owners for several weeks upon settlement). We also had rental appraisals done for dual occupancy and gross rental yeilds were just over 10% for that.
    If people are struggling with finance with those yields, specifically the single occupancy yield, then it is likely their personal finances are at issue, not the fact it is dual key.

    If we wanted to sell purely as dual occupancy, (and thus increase market value) this house only needs some relatively minor work completed to bring it up to regulation (fire codes etc) with local council to make it a proper duplex. (We actually went to the extent of checking all of this out with council and getting quotes for work, before purchasing as part of our due dilligence as well. Even though we have no intention of selling).
     
  20. Gen-Y

    Gen-Y Well-Known Member

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    Rugrat - sounds like a winning formula. Thought about selling it as a program like some of the property gurus out there? $5k a pop to take your course?
     

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