10 Things To Consider Before Investing in Granny Flats
Granny flats can be a great way to add cash flow to a property and even create positive cash flow. But there are some things you need to consider before going ahead and building a granny flat
0:00 – Introduction
0:25 – #1: Does this fit into your strategy
0:55 – #2: Can you legally build a granny flat in your area and on your block
2:33 – #3: Are you going to be able to rent out the granny flat
7:44 – #4: Make sure the tenant in the main house is aware there will be a granny flat added in the backyard
9:08 – #5: Do you have the money to build the granny flat
11:37 – #6: Consider which builder to choose
12:35 – #7: Ensure your build is a fixed price contract
13:46 – #8: What is your end goal and does this line up with your exit strategy
16:04 – #9: How will this affect the speed of sale of your property
16:53 – #10: How are you going to provide access and privacy to the property + what optional extras will you choose?
20:02 – Make sure you do your due diligence before investing in or building a granny flat
Granny Flats can be a great way to add secondary income to a property and maybe even turn that property into a positive cash flow property. But there’s some things that you need to consider before you go ahead and invest in a granny flat. So today I’m joined by Simon Everingham, buyer’s agent from Pumped on Property. Just to talk about that, what do we need to consider before we actually look at building a granny flat on our property,
I think the first and major thing that you need to consider is your strategy and how that particular project is going to come into play for your long term plan for your property portfolio. So you know, at different stages of your journey, you may need certain assets within your portfolio to achieve the property investment goals that you’re looking for. So making sure that you understand exactly what that property is going to serve you for is probably the most important aspect. Yeah,
and also, the really early stages, as well as understanding whether or not you can legally do this. So in some areas, like in Victoria, I don’t think at this point in time, you can actually legally build and rent out a granny flat, and even up in Queensland, up here in Brisbane, and there’s some councils where you can do it, and then there’s some councils where you cannot do it. So it’s really important to understand the legalities around it because every Council is different.
That’s exactly right. And it’s very easy to go and find out this information, you can literally just jump onto the local council website you can call a town planner in that particular suburb or area. And now two minute conversation get a My name is john, I’m looking to invest in a property however, I want to create Julie income from that property. Am I legally allowed to add a granny flat or build a two dual income home brand new in this area? And that will be able to give you that indication straightaway.
Yeah. And then they’ll also be able to tell you, okay, what are the requirements that you need to meet in order to build that granny flat, like, there’s often requirements around how big the block of land needs to be. So you need a certain size, sometimes a certain street frontage as well, as well as looking at how big the granny flat can be. So there’s restrictions on how large of a dwelling that you can build. I know for a lot of one of those up here as I feature five square meters is the maximum that you’re allowed to build. So understanding all of that sort of stuff, ideally, before you even purchase a property is ideal if you’re going with the granny flat strategy. Or if you already have an existing property, then finding that out and finding out what’s possible is really important. You also want to look at is this Ronnie flat going to rent?
Yeah. So jumping online, checking out the vacancy rate in that particular area is probably the best place to start. Now, for myself, if I’m investing anywhere in Australia, I don’t want to be purchasing in a suburb that’s got a vacancy rate of any more than 2%. I want something that’s got 2% or less because what this indicates to me is that there’s a severe on the supply of rental properties in that particular suburb. So what that tells me if I add another dwelling to my property, and I price it well, I set it up really nice. I shouldn’t really have too many issues with getting a tenant in the property.
Yeah. And so people I think this is people’s biggest fear around investing in granny flats as well, who’s going to live in a granny flat who’s going to renter, but a lot of us have memories of granny flats being basically a shack out yeah, that is just full of cockroaches. I have lived in one of those that was horrible. That shares things with the main dwelling or shared space, and just not very nice to live in. But when we’re talking about a new build granny flat that is so far from the truth, and we’ve done a bunch of walkthrough so I’ll link out to a walkthrough me and Simon did on a granny flat so you can see it down there.
Yeah, things evolve. You know, guys, like there’s houses that you look at that were built 2030 years ago, and you just walk in, it’s like, oh my god, like that is just insane. What were they even thinking and that’s kind of the granny flats of the past. But the granny flats he can make today a beautiful, you know, it’s just a little home. Essentially, it’s completely separate. You throw up your fence to divide the main house. From the granny flat, you build a really functional two bed or one bed, granny flat that’s got its own kitchen, it’s got its own bathroom, it’s got its own laundry setup, it’s got its own bit of outdoor area, and you’re gonna start to appeal to a very massive portion of the demographics. Yeah,
so granny flats can actually be some of the easiest properties to rent if they’re done well. And if their price right for the market, I think a better way to think about it for people because granny flat people get confused is to think about, do you think you could rent a two bedroom unit in the area that had a nice deck but also had some private yard space? So it sounds sounds pretty simple when you think about it like that because that’s effectively what a granny flat is. It’s a two it’s a small two bedroom unit, but it free standing
yeah but it’s self contained so as you said it’s got the washer dryer it’s got the full kitchen bathroom and everything in it but it’s i guess the floor space is smaller than in a regular house so it’s more the size of a unit but often you get some outside space as well which people absolutely love and if you build it properly you put a fence in there go full privacy from the main dwelling at the front or the back of the block so it effectively feels like they had their own mini house and people absolutely love it i think it was was it ben who just recently rented out a granny flat
yeah so yeah he had 20 seats groups are in the first week so he completed a it was a new build one so what he did was a three bedroom two bathroom house and bought actually four bedroom two bathroom house and then under the same roof line but completely separated by a firewall he added another two bedroom one bathroom granny flat now it took him a while to get the four bedroom home rented out i think it took him like longer than expected a few weeks or something and then the granny flat first weekend 26 groups through he got six applications on that one and got $30 more per week than he was actually expect so people
are actually offering more than what he was asking for which is quite rare in the rental space but yeah that’s how i’ve always secured my rentals in high demand market people just don’t think to offer more for rentals they negotiate when purchasing a property but if you offer an extra 10 or 20 bucks a week you go to the top of the queue seeing that obviously sees that it’s in high demand so things to think about is can you legally do it are you likely to rent it out as simon said look at the vacancy rates in the area really you just going to have huge trouble renting it out if you’ve got high vacancy rates in the area already that’s going to be for the main dwelling as
well not just for any dwelling not for any house in that suburb so be very weary of that make sure that you’re always checking those vacancy rates and that’s one thing that we also like to focus on existing infill suburbs as well just to touch a bit further on that because what that tells me is there’s that sub that has been completely developed already you know there may be townhouse projects that will come up or unit complexes that may open up but it shouldn’t really skew the vacancy rates too much over the longer term because it’s completely already built but when you go into these new suburbs where they’re building hundreds of 1000s of new properties every single year this can generally throw away at those vacancy rates at different periods when new properties are being released so focusing on existing areas generally is something that we find very important
yeah so some other i guess more logistical things to think about as well as if you do have a tenant in the front of the dwelling and you do intend to build a granny flat in the back that tenant in the front needs to be aware of that and needs to know that’s going to happen ideally before you get the tenant you would actually put a fence up and so the tenant would know exactly how much space they’re going to get when they’re renting their property but basically you don’t want to have a situation where the tenant feels entitled to the entirety of the land when really they’re not
yeah exactly so what you need to do there is you talk to your property manager and you get them to put in a special condition into the lease that notifies the people that are renting out the main dwelling that there will be a granny flat added in the backyard at some point in time now we’ve probably built for close to 40 of these now and we haven’t had too many issues pop up here and there as long as you know there’s transparency between the property manager and the tenants they know exactly what they’re getting it kind of makes it a little bit easier but if you’re trying to hide things from them just like in real life if you you know it generally doesn’t come across too well but if you’re open and honest i’m sure that you’re going to be able to find someone
yeah and we’ve talked in previous videos that that can affect the rent for the front property and made negatively affected slightly by 10 or $20 per week or something like that because obviously there’s less yard space that that person is getting but yeah just having transparency there having it in writing is going to help you with that another thing to consider is obviously the monetary investment and whether or not you have the money to go ahead and build a granny flat now it’s important to know that you can often finance to build a granny flat and get a construction loan to get that bill but you do still need to put down a deposit on the granny flat
yeah so what we’ve found is that the banks will take a 20% construction loan for the granny flat build so we’ve all 80% loan 20% deposit sorry and that will allow you to get that granny flat completely built so we find that it genuinely takes to get a really high quality granny flat build it’s probably going to cost you between 120 to $130,000 so 20% deposit on that you’re looking at 24 to 28,000
yeah and so you need to make sure that you actually have that money or that you’re able to get that money maybe through an equity loan or something like that you’ll be able to do that and you also need to be able to get the finance from it as well so you will need to go and talk to your lender or talk to your mortgage broker to see if this is something that you can implement
yeah so what i love about it as well you know you are spending a little bit to get that bit on your let’s say 24 to $26,000 that you’re putting down that you’re going to be getting in brisbane right now around 290 to $300 a week for return on that investment per week so that’s about what what do we work at 12 to 14% rental yield yep when you put it through your converter
yeah so it’s not you can’t really get that rental yield buying an existing property and obviously that’s not the rental yield for the full property as a whole but for the cost of the construction of the granny flat for the rent that you get back the return you get on that in terms of the rental income coming in can be absolutely massive compared to what you would get just buying an existing property on the market and so obviously that can help hugely for cash flow the granny flat in and of itself is highly likely to be positive cash flow definitely should be with current interest
you’re doing something wrong and then that can actually if you purchase correctly also push the full property into a positive cash flow position meaning you’ve got two incomes coming in the tenants actually paying more in rental income then you’re paying in expenses in terms of your loan and your interest on your loan as well as your property manager fees all of that sort of stuff so effectively your tenants are paying off your mortgage for you which is a really exciting position to be in so i guess some other things to consider which granny flat company to go with or who to get to build your granny flat so there’s companies out there that build exclusively granny flats you can get a builder to do it i know you guys work with a builder do
yeah well we’ve worked with five leading granny flat providers in southeast queensland now and you know all of them come at different prices different quality different process so it was took us a little bit of time to find the right provider that we’re actually happy with the quality of the granny flat and the way that they go about building it because you don’t want it to take too long you don’t want it to blow out it still is an investment so you need to keep the cost as low as you possibly can so you need to really do that extra due diligence maybe even get a solicitor if you need to look at the contract and get it all
sorted and do always do always look for those fixed price contracts
yeah and so that’s something to think about that often what especially with new build homes
is that they’ll give you a price but then that price doesn’t include certain things like it doesn’t include there’s so many different little add ons so what a lot of building companies do to suck you in they’ve got this amazing base price but then when you go through the process and you look at the contract they’ve got all these plus plus plus plus plus so making sure that you know exactly what you’re getting exactly how much you’re going to spend is really important and making sure that there’s not going to be this plus plus plus and they suck you in with this $80,000 granny flat but then it ends up costing you 150 with all the extras
so getting a fixed price contract is really key there and also allows you to compare the different builders are granny flat providers to each other so much easier as well if you’ve got that fixed price contract in place versus a lowball one with all this plus plus plus and you don’t know how much it’s going to cost so that’s definitely something to consider because obviously in the building industry they do that a lot so you need to be very diligent with that very diligent with what they say they’re going to provide and then obviously get that in writing in the contract and then you’ll need to follow that up as well
yeah one of the other considerations i think it’s cool to talk about as well is the fact that you’re getting two incomes from the one property so essentially that means 50% less properties that you need to purchase to get to the financial goal that you’re probably looking at yeah which is the main reason that i really liked this strategy as well so rather than me having to own like six or seven properties completely outright to achieve $150,000 worth of passive income essentially i just need three of these so that’s going to mean that i only have debt to pay off on three properties as opposed to six or seven which is going to allow me to achieve those goals a little bit faster
yeah and then having that end goal in mind is really important so for your investments obviously you’re buying your foundational properties the goal is to pay them off completely and then just live on off the rental income so property that you purchase this year you may potentially own into retirement yeah into your home so so having an end goal in mind is really important as well so obviously if assignments angle holding that property long term that’ll be the same as when i invest the end goal is to pay it off and then live off the rental income so you want to consider that when you’re doing the build as well too Not really like cut corners. Yeah. So that you’re paying for that in the future, if you’re gonna own that outright for years and years to come, but also thinking about does this line up with your exit strategy for the property if you do intend to sell in the future, because I guess there’s not enough information in the market to understand whether or not granny flats, add equity to a property or reduce equity from a property. But from a lending standpoint, at this point in time, it’s very rare that you would see a valuation come back where after the granny flats being built, there now value the property above the cost of the build of the granny flat.
That’s immediately Yeah, that’s what we’ve found immediately after you’ve constructed the granny flat. But we’ve actually worked with people who did this in Sydney 15 years ago. And what he’s told us is that property has maintained the median price for the particular suburb that he’s purchased in. So it hadn’t had any impact on the capital growth on his property throughout that boom cycle that Sydney’s just been through from what 2012 to 2016. Yeah.
And so I guess the only thing to consider there if it’s not going to affect your capital growth is just what how’s it going to affect the saleability of that property? Because obviously, the majority of the sharing market is owner occupiers. And so you need to look at the area and think, okay, will this mean that there’s going to be less people making offers on my property? And how might that affect how quickly the property sells? Sometimes it actually works in your favor. And more people want the property because there’s a granny flat on their secondary income, or family members can live there. And then I snap it up. And other times people just want a single income or like it just a regular dwelling. And so yeah, depending on the area, depending on the market. Yeah, that’s something to consider. Yeah, I think most people building granny flats, plan to own the long term, because it’s a cash flow play. So for most people, that’s not going to be an issue, but it’s still something to consider.
Yeah, exactly. So what other things are there to consider?
I think we kind of covered most of them. Right? What about like the cost of fencing?
Yeah, so generally, we have optional extras, because most people want to get a carport, they need to get a fence to divide the main dwelling to the granny flat sometimes, most times you need to put a pathway or, or a driveway out the side so that they’ve got their own separate access. And all of these can be optional extras. You know, you don’t need to do it, but it’s definitely recommended to do it.
Well. This is Yeah, definitely something to consider is the access to the granny flat Yeah, and how you’re going to create both that access and that privacy, which is going to be an extra cost to the granny flat build. So like that includes fencing.
Yeah, so when I say 120 to $130,000, that would be including your fencing, your driveways, and carports, and things like that. For us, we’ve been able to negotiate a fixed price contract of 115,000 for just your granny flat, that includes your approvals, you connections, all of those different moving parts plus the fully construction, fully constructed two bedroom, one bathroom granny flat, but then there’s optional extras on top of that, which that’s, that includes the fencing, the driveways, the carport, maybe some turf, things like that, which sometimes add up to push that a little bit further.
And obviously, there’s volume that you guys do with the builders. And so you’re used to negotiating both on new builds as well as granny flat. So people out there might be looking at different pricing for that sort of thing. But yeah, definitely, especially if you’re going out by yourself, like if you’re working with Pumped on Property to get help building your granny flat, then they’re going to think of all this stuff for you and tell you but if you’re out there by yourself, then you’re going to need to think about fencing and how much that’s going to cost and what kind of fencing you’re going to put in, you’re going to need to think about, yeah, the concrete for either a pathway or a driveway. Obviously, a pathway is going to be cheaper in terms of less concrete, because it’s skinnier than our driveway. And so sometimes people will do a driveway and carport at the front. And then even though there’s enough room for a driveway all the way down to the granny flat, then they’ll basically the tents Park out there, then they have a little path to walk down to the granny flat, which can also leave more green space, in fact for the tenants. So there’s all of those sorts of things to consider. It worked out
really well that you know, kind of side parking space, maybe a carport don’t even need a carport and that pathway out the other side, we’ve actually found that there hasn’t been any real correlation between having a driveway or a pathway to actually gain access to the granny flat it hasn’t really affected the rentability Yeah, I
think it’s more just having that like onsite parking so you don’t have to park on the street especially if you’re in a busy street where parking maybe harder knowing that they can park somewhere. Obviously if you have a carport because protected people would prefer that definitely but as you said it’s not necessary and again depends on the area and depends on how much you want to spend and whether you want to invest in in carport or not and so yeah i think we’ve covered most of it
yeah so once again like every everything that we talked about it’s always coming back and making sure that you’re going out you’re doing your due diligence you’re talking to the necessary people and do all this before as you said before you consider inspecting the property or before you consider you know
purchasing a property
or purchasing a property like you need to have your strategy down pat you need to understand exactly what you need to know to achieve your property investment goals both short term and longer term goals so that all like if your strategy is to purchase a dual income property like you shouldn’t be really focusing on areas where you can’t legally do it because you’re just setting yourself up for failure there
and that’s the thing but then you may have also already purchased an existing property not knowing that this strategy existed and now you want to implement it and it can definitely be done in a lot of areas and not a lot of properties and so you just have to do those checks to see if you can implement it it could just be a great way to really boost the income and boost the cash flow of the property which i really feel reduces the risk for a lot of people because when you’re in a positive cash flow situation if things happen in life if you’re not getting the capital growth you want in a property you know or like you lose your job or something like that that property is paying for itself and paying itself off then you can weather the storms of life and property market and you know hold that property for the long term and get that long term growth and that long term financial security
yeah exactly and in the short term the risk aversion is you’ve got two separate tenants on two separate lease agreements so if something happens in the granny flat or the main dwelling and one of those tenants moves out you still got some sort of rental income helping you pay that mortgage on that property until you do find another tenant for the other dwelling
yeah and it’s important to note that the granny flat and the front dwelling should have separate leases yes so he should have separate leases there should be separate water meters yeah electricity meters and things like that
and for me when i build my granny flats i’m going to have someone completely separate to the main dwelling like i wouldn’t have the one family renting out both of them because i want to avoid that potential risk of having no income from the property when they decide to move out so getting completely separate people and completely separate walks of life
yeah and that can just help with cash flow if you still got some money coming in even though you don’t have the full amount it can just help tie you over until you get a tenant for the house or the granny flat whichever one’s vacant yeah so we hope that this has helped you understand some things that you could you should consider before investing in a granny flat it’s not for everyone so what you do is completely up to you whether you decide to do this or you decide that it’s not for you but yeah if you are considering it hopefully this has given you some things to think about i’m going to link up to two different videos one is a walkthrough that i did with simon and crystal where we actually looked at a granny flat that has been built and you can see the granny flat you can see the privacy that they have and how nice it is as well as a property where you could potentially build a granny flat so i’ll link up to those two videos go ahead
out otherwise until next time stay positive