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Does building a granny flat make good investment sense?

Does building a granny flat make investment sense?

It’s now easier to build a granny flat, with some councils allowing these structures to be built on the back of suburban homes and many builders are promoting this concept as a good investment. Does building a granny flat make investment sense

Recently a client asked whether he should buy a property and build a granny flat to increase his cash flow.

Obviously they’re popular.

The NSW Department of Planning and Environment information shows that 4,818 new granny flats were built in New South Wales in 2014.

Nearly double the 2,867 built in 2013 and three times more than the 1,500 which were built in 2010.

The rise in popularity of granny flats across Australia can be attributed in part due to state-level legislative changes regarding secondary dwellings which aim to boost housing affordability in capital city areas and each state or territory provides their own legislative requirements, including the land and plot sizes of a secondary dwelling or granny flat.

But does their increasing popularity make them a good investment?

I could have given our client a simple answer:

Granny Flats are investments in inferior locations, chosen by poorly informed investors which add little value and attract bad tenants.

Instead I gave him the pros and cons:

The Benefits of Building a Granny Flat

  1. Extra rental income – putting a granny flat in your backyard or at the back of your investment property can be another source of income 
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  2. Depreciation – renting out a granny flat gives you extra claimables on your depreciation schedule
  3. Increasing the value of your property – while building a granny flat may increase the value of your property, you’ll probably find that it won’t increase it as much as the cost of construction
  4. Spreading your income risk – if you just have one investment property and it is vacant then you have no money coming in, however with a granny flat it is unlikely both properties will be vacant at the same time
  5. Suits your family’s needs – Building a granny flat at the back of your home may be suitable accommodation for your teenage children, your granny or even your mother- in-law.

The Risks when building a Granny Flat

1. It could cost more than you expect

Just like any renovation or construction project, there are likely to be cost overruns when building your granny flat.

2. Not all councils allow granny flats The Risks when building a Granny Flat

While it’s easier to get council approval to build a granny flat nowadays, make sure you cross all you i’s and dot all your t’s.

Check things like the size of the block required, access needed and how close it can be built to a fence.

3. In general those councils that allow granny flats are not in high capital growth areas

Often you’ll have to use this strategy in outer and lower socio economic areas – locations that you’ll find tend to deliver below average capital growth.

4. The cost of constructing the granny flat doesn’t always add sufficient value to the property 

Often you’ll spend $100- $120,000 on the granny flat but the banks will only increase the value of your property by $70-$80,000.

In other words you’re overcapitalising.

5. You’ll reduce your resale and rental market potential

This is because the end product has a small market with minimal demand from owner-occupiers and tenants.

Most owner-occupiers are not keen to have a granny flat in their backyard, preferring all the accommodation under the main roof.

Your property will mainly appeal to investors.You’ll experience longer vacancy periods

And most tenants don’t want another tenant in their back yard or the noise and nuisance of an adjoining property.

6. You’ll experience longer vacancy periods

Your pool of tenants will be restricted for both properties, so you’ll have less choice in your selection, experience longer vacancy periods and it’s likely you will have to deal with two sets of lower socio-economic tenants instead of one average socio-economic family.

7. You won’t be able to subdivide your property into two titles.

Put simply:

While you may increase your rent and turn your property investment from negatively geared to giving some positive cash flow, for mine if you’ve got $100,000 or so to spend on a granny flat you could generate a much better return by putting it towards an “investment grade” property.



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About

Bryce is a property development specialist, having successfully completed many development projects for Metropole's clients. Initially working as a Project Manager at Metropole since completing his Bachelor of Project Management in 2011, Bryce now acts as a buyers agent for clients, sourcing and evaluating properties with development potential.Visit Metropole.com.au


'Does building a granny flat make good investment sense?' have 7 comments

  1. Avatar for Property Update

    July 17, 2015 @ 8:22 am wayne

    Investing in property is about the numbers stacking up. If rhey stack up you do it whether it is in the eastern suburbs of sydney or the so called inferior western suburbs.

    by the way i have a granny flat in the so called inferior western suburbs that is $15k pa cash flow positive and just had a 40% capital appreciation in 3 years. So the numbers works for me.

    Like any property deal it is about the right property for the strategy. Dont put all granny flats in he bad category because others buy the wrong property.

    Rgds

    Wayne

    Reply

    • Avatar for Property Update

      July 17, 2015 @ 9:02 am Michael Yardney

      Wayne, It’s great that granny flats have worked well for you, however I have to agree with Bryce. In general I see them as a secondary form of investment.

      Reply

  2. Avatar for Property Update

    July 24, 2015 @ 2:27 pm Leah

    We live in the “superior” Northern Beaches of Sydney which has a higher socio-economic community. We built a granny flat as we’re able to achieve higher rent and greater capital growth on that than our A-grade Brisbane investment which cost 4 times to buy/build. $500+/week rent ensures a good grade of tenant and I feel we’ve actually increased our on-sell market as a granny flat can help a potential homeowner ‘get over the line’ with the banks on a mortgage in this very expensive area. Smart design and use of land is crucial when building the granny flat to ensure you don’t have that “noisy neighbour” scenario. We actually see and hear our next door neighbours far more. As with any Reno/build/development, the property has to suit what you’re planning, otherwise definitely invest elsewhere.

    Reply

    • Avatar for Property Update

      July 24, 2015 @ 3:31 pm Michael Yardney

      You’re right Leah – you have to own /build the right property for the right location

      Reply

    • Avatar for Property Update

      April 14, 2017 @ 6:03 pm Karen Rose

      I agree- a plus for Northern Beaches…can even move into and rent the house out later and travel, air bnb is huge in our area, very easy to let out, a studio, home office, extra guest accomodation, home office …never an over capitalisation.

      Reply

  3. Avatar for Property Update

    July 24, 2015 @ 7:15 pm sonia

    I agree with Leah & Wayne. We build granny flats here in SE Qld and have achieved 7, 8, 9 and in some instances 10% rent return in our local area – Ipswich and Logan. Both areas on the rise in terms of the national property clock (HTW July 15). And we have never have had any problems with valuations, at least $ for $.

    Logan is a particularly HOT area at the moment – Logan City Council having recently announced changes (18.5.15) to their planning scheme to allow 70m2, 2 bedroom granny flats for properties under 1,000m. If u r lucky and happen to own 1,000m2 or more – you can build 100m2 granny flats ! Awesome I would say …
    As both comments say : right property, right strategy. All investors r seeking the best & highest use, I personally believe they r a good option for investors to be looking at.

    Regards

    Sonia:-)

    Reply

  4. Avatar for Property Update

    July 25, 2015 @ 7:31 pm Shane Matthews

    I also built a granny flat on Sydney’s northern beaches and have had two valuations since and been extremely happy with new valuations.In fact it allowed me to re invest both because of valuation and rent being well over $500 per week.Have made sure privacy is taken care of and personally spoke to banks valuer and a few brokers and they indicated granny flat cost and added value were very favourable.

    Reply


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