Are Granny Flats A Good Investment Strategy? (Ep88)

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Many 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 GrannyFlatSolutions.com.au who builds 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 stand point 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.

Your Block Must Be Over 450msq

Some councils 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 msq, and the granny flat can be no greater than 60 msq.

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.

Very Unlikely To Subdivide But Likely To Increase Renal Yield

With granny flats it’s very unlikely that you’re going to be able to subdivide that property. Currently in New South Wales, if you build a granny flat and you go ahead and do this, you’re actually 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 Flats Are Very Likely To Increase Your Rental Yield

Obviously depending on the area 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 8-11% 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 your 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 Your Property’s Value?

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.

Consider Bank Valuations

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 $100,000 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 valuation 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.

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.

Will Granny Flats Lead To An Oversupply?

With these granny flats now being able to be approved 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 not 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.