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Are Granny Flats A Good Investment Strategy? (Ep88)


The investors have recently started building
or started investing in properties with granny flats as a way of getting a higher rental
yield, and thus a better return on investment for their property portfolio. Today I want
to talk about whether or not granny flats are a good investment strategy. Soon I’m hoping
to do an interview or a couple of interviews with a guy by the name of Wally who’s from
granny-flats-solutions.com.au who build granny flats for people and we can talk in more detail
about how much it costs to build a granny flat, we can talk about the development process
and getting it approved and all of that sort of stuff. But today I just want to talk about
granny flats from a financial standpoint and some things that you can think about if you
are considering investing using granny flats and you can work whether or it’s going to
be a good investment strategy for your specific situation or not. This is not to be considered
a financial advice, this is just me giving general education.
Some counselors are allowing granny flats to be built more easily to help with affordable
housing, so that there are more properties are available at affordable prices to people
in those areas. From what I read generally you need to have a block that’s over 450 meters
squared, and that granny flat can be no greater than 60 meters squared. So, you can get roughly
a 2 bedroom granny flat into a 60 m2. Costs are about $100 000 give or take, but it obviously
depends which company you go with. With granny flats it’s very unlikely that you’re going
to be able to subdivide that property. There is warrant in New South Wales, if you build
a granny flat and you go ahead and do this, you’re not allowed to subdivide. Whether that
says you’ll be allowed to subdivide in the future or not, I’m not sure but it will restrict
you in being able of subdivide your block if that’s an investment strategy that you
are looking at. Granny flat is very likely to increase your
rental yield. Obviously depending on the are you’re renting it and depending on how much
you spend on the build would depend on how much your yield is. I hear about people getting
8, 9, 10, 11 % yields from their granny flat when they’re looking at the cost to build
a flat and then what they’re getting in return. Obviously, building a granny flat in high
demand, high cost area like somewhere in Sydney is probably going to generate you a higher
rental income than building a granny flat somewhere in the middle of the country where
rents for 4 bedroom houses are extremely low anyway. So depending on the area and the cost
to build would depend whether or not the granny flat will increase you yield, But in a lot
of cases and for a lot of investors it is increasing their yield both for the granny
flat itself (obviously, they’re getting a new income) but when you look at the investment
property overall it pushes the yield up and may even turn a negatively geared property
into a positive cash flow investment property. A lot of you watching this, or listening to
this or reading this will be very interested in positive cash flow properties and so one
thing that you may want to look is the potential of buying a property with a granny flat or
maybe building one yourself. But obviously always go ahead and make financial advice
before you go and make any decisions. Will granny flats increase the value of your
property above the cost of the granny flat. Now, I don’t have data on this so I couldn’t
say whether or not it is going to increase the value of the property. I guess it really
does depend on the market that you’re in and who is searching the properties. For some
young families – they might like a granny flat as a way to generate income, to help
pay off their mortgage; for some older people like baby boomers who have their kids leaving
– they might like granny flats because if the kids need to move back in they can just
move into the granny flat and they can still have their personal space. But some people
might be turned away by granny flats because maybe they don’t want that separate space
or maybe they don’t want to be paying to have that separate space, or maybe they don’t want
someone else renting it. It really depends on your market, depends on who is in your
market and what kind of properties they’re looking for. If you want to find out whether
it’s going to be good for your area, I do suggest speaking to one of your local real
estate agents – they will know a great deal about the target market, about whether or
not they’re going to like granny flats and they can estimate for you, give you a rough
valuation on if you had one versus if didn’t have one, and then you can assess that valuation
– look at the cost of the granny flat and assess whether it’s actually going to increase
your value and you’re going to get equity from it. You also need to consider bank valuations,
and whether they’re going to increase the value of your property with the granny flat
because maybe you’ve spent about 100 grand on a granny flat, you get a revaluation done
and then they value it as adding $80 000 in equity. That will actually put you $20 000
behind. But obviously, every evaluation is going to be different, every area is going
to be different. So I can’t say anything definitive because you need to assess it for your situation
and your area. You can speak to real estate agents, to people who do valuations, to your
bank, you can talk to a lot of different people. If you want to do some rough research yourself
on demographics and so forth, then I have a whole module dedicated to that over at positive-cashflow-academy.com.
So it’s unclear at this stage whether granny flat will increase the value of your property
above what you spend on it, or even up to what you spend on it, it’s going to depend
on the area. So don’t just assume granny flats increase the value of properties because it’s
not necessarily going to be the case. And lastly I just want to ask will granny
flats lead to an oversupply? And that’s only** to consider with these granny flats now being
able to be improved so easily, in some cases in just 10 days. Will that lead to more and
more people building them and oversupply so your returns might be as great. I don’t know,
that’s something that you need to speak to an advisor about or speak to a real estate
agent about, but it is something to consider if there’s loads of people doing it in your
area. Obviously there’s going to be loads more properties available for rent, and that
may effect supply and demand and thus effect your vacancy rents and your rental yield and
all these sorts of things. But for you – do your own figures, talk to a professional,
financial advisor and get advice from them to decide whether or not granny flats are
going to be a good investment strategy for you, because some people might want great
investment strategy – exactly what they want, they’ve want that high rental yield, they’ve
want that positive cash flow. For some people – they might want to spend that money somewhere
else. They might want that $100 000 that they would have spent on a granny flat build on
something else and they might generate a better return for them. So you really need to assess
your own situation and work it out for yourself. For more videos, articles and podcasts just
like this one, head over to positive-cashflow-australia.com.au or pca.im which is a short link which will
redirect you there. And on the 1st March, 2014 I am opening the doors to positive cash
flow tools, which is a membership website which gives you access to property calculators
and spreadsheets and checklists to help you make smarter investment decisions, to help
you understand more about the property and the area that you’re going to be investing
in. So you can check that out at PositiveCashflowtools.com – extremely affordable and you can access
it from anywhere. You can access it on your desktop, it’s also fully mobile responsive
so you can use it on the go as well. Until tomorrow, stay positive.

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