Does Investing in Granny Flats Make Sense?

Building granny flats on properties you already own to get two incomes is becoming a more popular investment strategy. But does this investment strategy make sense?

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Ryan 0:00
Investing in granny flats or building granny flats on properties that you already own is becoming a more and more popular investment strategy. But does that actually mean it’s a good investment strategy? In this episode, I want to talk about whether or not granny flats make sense talking about some of the finances around it. And so you can decide for yourself whether or not this investment strategy makes sense for you. Hey, I’m Ryan from OnProperty, helping you achieve financial freedom. And I work a lot with Pumped on Property buys agency here on the Sunshine Coast. They help a lot of investors invest in southeast Queensland, and build a bunch of different granny flats on their properties. So how exactly does a granny flat work and what are the financials behind it? Well, the first thing to understand is that you can’t build a granny flat everywhere, especially up here in Queensland, there’s some councils that allow it and some councils that don’t. Brisbane City Council, for example, is a council that doesn’t allow you to build granny flats. So whether or not it makes financial sense might not matter. If you don’t purchase a property that is in an area where you can build granny flats. Same with Victoria, it can be very difficult if not impossible to build and legally rent out granny flats down there, New South Wales in Sydney can be a lot easier as well. So check your local area to see whether you can do it. A big misconception that people have is that granny flats don’t add any value to a property. But generally what we’re finding with valuations of the granny flats is that when you invest in building a granny flat, which generally costs around maybe 120 to $140,000, you’re generally getting that amount of lift in the value of your property. So let’s say you purchase a property on the beaches here in North Brisbane for around 400,000, you then spend $120,000, building the granny flat so your total costs into that property is 520,000. What you will find in most cases is that the increase in value of your property will reflect that. So no longer do you have a property that will be valued at 400,000. But often you’ll have the valuations come in at around that $520,000 mark. So obviously every situation is different, every property is different. But granny flats tend to add the value what they cost, but you rarely see granny flats actually add extra value. So that same example where you end for 520,000, it’s unlikely that unless the markets moved or if you’ve renovated the front house than the valuation is going to come in at 600,000, or 700,000. So when we talk about granny flats, not necessarily being a capital growth play in terms of adding value to a property, we’re talking about adding value above and beyond what it already cost to build that property. So we generally see an increase in value there. So that’s something to consider as to whether or not they make financial sense, and that you’re generally getting that value back. So you’re spending the money to build the property, and you’re then getting that value back. So that’s something really important to keep in mind. Now to build a granny flat, you generally need to get a construction loan. So you could get around, I think 70 to 80% construction loan depending on the lender that you go with. So speak to a mortgage broker about that. So you don’t need to put some money in to building the granny flat. So 120,020% will be $24,000 30%. If you had to put down a 30% deposit, that’s $36,000. So you got to think about the money that you’re investing into the granny flat, you’ve got to think about the extra debt that you’re taking on as a result of owning the granny flat and what the interest repayments on that debt are. But generally what we’re finding is that granny flats rent quite well. If you’re building a granny flat in the area that has an extremely low vacancy rates. Rarely Will you have difficulties renting out that granny flat especially if it’s done well. Looking at the rental returns of granny flat, every area is going to be different so I can’t say this is exactly what you’re going to get. Sydney granny flats in Sydney would rent more than granny flats up here in Brisbane or in North Brisbane. But what we’re seeing with a lot of granny flats is that building for 120,000 renting for about 300 to $310 per week, even getting some granny flats renting for 320 or 330. Or in other areas, some granny flats are renting for a bit less around that 282 90 Mark depending on the area, depending if you’re building a one bedroom or two bedroom granny flat, so two bedrooms, obviously will rent for more. So if you’re looking at $120,000 build costs renting for 310 per week, you’re looking at over a 13% rental yield on the cost of that bill. Now with interest rates being at historically low levels. That puts that property well into positive cash flow territory. Even if you were talking about seven or 8% interest rates in the market, you know getting a 13 or above 13% rental yield, you’re likely going to be positive cash flow. So that’s on the build itself. Obviously you need to take into account the purchase price of the house. how much the house is renting for as well but does building a granny flat make financial sense you know to me as an investor i think it can make a lot of financial sense for certain people it can uplift the value of a property up to the build costs you can get positive cash flow from it which allows you to pay off the loan on the granny flat or to pay off their house faster as well and so it’s a second source of income which can reduce your risk as well so when the house is empty you’ve still got the granny flat income coming in to help you with cash flow or the granny flats empty then the front house is still rented out and ideally you’ll have both rented out and have those two incomes coming in and ideally be in a cash flow neutral or positive cash flow situation where the tenants are effectively paying off your mortgage for you so i’ll now leave it up to you to look at your own investment and to consider okay how much is this granny flat going to cost me how much is it likely to rent for and you can decide yourself whether or not you think this is going to be something that suits you different markets different types of houses might suit granny flats better than others if you’re in a premium area selling a house for multiple millions of dollars then putting a granny flat in the backyard might not be the best use of that space because it could actually reduce the value of the property overall because it becomes less desirable to people who are extremely affluent so you don’t need to look at your area you need to look at the rental demand in the area and whether or not you think it’s going to be worth it for your property and your portfolio as a whole so i hope this has helped answer the question as to whether or not granny flats make financial sense i wish you the absolute best in your property investment journey while you’re here go ahead and check out one of the granny flats walkthroughs that i did on the road in brisbane so you can see what it’s like and see num some of the numbers behind that particular investment i’ll link up to that one so go ahead and check that out otherwise until next time stay positive

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