# How Much Passive Income Can a Granny Flat Earn?

We talk a lot about building and renting out a granny flat, but how much passive income do granny flat’s actually spin off and how long would they take to pay themselves off completely?

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0:00 – Introduction

1:28 – The overview of the big numbers

3:05 – Looking at the rental yield and cash flow

5:39 – What if we did a principal and interest loan

7:33 – How long will it take for the granny flat to pay itself off?

10:33 – What if interest rates were 1% less?

12:20 – What if we paid an extra $500/month onto the loan?

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Recommended Videos

Granny Flat With a 12% Rental Yield – https://www.youtube.com/watch?v=z1A1j97r1ho

### Transcription:

We talk a lot about building and renting out a granny flat in the two properties to financial freedom strategy, but how much passive income can a granny flat actually produce? So how much positive cashflow does the granny flats spin off? And then also how long is it going to take to completely pay off this granny flat assuming that the granny fights just going to pay itself off. That’s what we’re going to look at in today’s video. Hey, I’m Ryan from on-property, helping you achieve financial freedom. And sometimes it’s really fun to crunch the numbers and to see how adding a gray fat affects our cash flow and our passive income are positive cash flow. But also if we were to build a granny flat rented out, how quickly would that granny flat be able to pay itself off so that money can go into our pocket?

So we’re going to jump on the computer and look through a bunch of figures today. I think it goes without saying that this is not to be considered financial advice will be looking at just a rough example and I’m guessing I’ve created a spreadsheet that can kind of predict the future with this, but obviously there’s so many changes that you can’t predict. Things don’t always go according to plan. So this is not to be considered real life example. This is just for us to play with the numbers, get a rough idea of how things might play out if we were to invest in a granny flat. Okay, so generally speaking, um, I’ve got this spreadsheet here, women talking about the two properties to financial freedom strategy that we’re talking about purchasing a house for around $400,000 with rental income around four 20 per week and a granny flat purchase for around or build for around 120,000 renting for two 80 per week.

In this example, we just want to go ahead and look at the granny flat. So I’m going to put the house price at zero and the rental income for the house at zero, that will isolate it. So we’re just looking at the granny flat and I’m also going to go across to property tools.com day you now this is a cashflow calculator. I created it myself years ago. You can get access to it as well for a small monthly fee if you want. And what you do with this calculator, I’ll go ahead and reset it so you can see from the start, but basically we can put in the purchase price. So in this case it’s the build price, which would be 120,000 we can put in the rental income, which is to 80 you can also adjust the interest rate. So interest rates might be 5% they might be 4% they might end up going up over time and be 7% and so as you can see the weekly cashflow before tax here adjust as you adjust these sort of things.

Maybe we could rent it for 300 per week. Then that would increase our cashflow there as well. So this is a pretty fun tool to use. You can check it@propertytools.com dot. EU, if you want to sign up really cheap monthly fee to sign up. So let’s just use our example of 120,000 renting for two 80 per week. What is, oh, we can see the rental yield is just over 12% for that. I think me and Simon and crystal did a walkthrough of a granny flat that a client has actually built. I’ll go ahead and link that up in the description down below, but I do believe they were getting over a 12% rental yield for that one. So this is actually something that is plausible and potentially achievable. So if we just look at, let’s say it was interest only at 5% you probably be doing principal and interest because especially at the moment, you tend to be able to get cheaper interest rates if you do a principal and interest, but an interest only, you would be getting $74 and 20 cents per week roughly in positive cashflow after building the granny flat or it will improve your annual cashflow by about $3,858 so by building a granny flat, you’re improving your cashflow by around that $4,000 mark.

And in terms of cash on cash return, so if we’re looking at a 20% deposit that’s investing $24,000 of our own money, and what return are we getting for that 24,000 we put in, well, if we scroll down here, we can see the cash on cash return is about over 9% so that’s a lot more than you’re going to get putting that money in the bank. So really interesting thing to look at is that cash on cash return to see how much cash you’re getting back for the actual cash you put in, not the bank loan itself. The other thing to look at is depreciation. So depreciation’s the lowering in value of a property or of the fittings and fixtures within that property. So you could actually get depreciation schedule done and work with your accountant in order to depreciate some of this granny flat and to offset it against your income.

You do need to get professional advice if you’re going to do this, this is not taxation advice, I’m not going to go into this, but that’s something to think about to potentially offset that positive cashflow we’re earning or to even offset other income that we’re earning as well. So I won’t go into that, but as we can see, a weekly cash flow before tax $74 20 or annual, about $3,800 they’re about. So that’s pretty cool to see. I also want to look at if we did principal and interest, so let’s have a look at this loan repayment calculator from ing. I really liked this one. So loan amount is only 80% of the total amount, which is, it should be in here somewhere. I’m sure you guys can see it, but I can’t, where’s the total loan amount? No. Okay. Anyway, it’s one 20 minus 24,000 there it is.

It’s down. He goes $96,000 okay, so let’s put in $96,000 a loan period of 25 years and we’re going to do 5% interest rate re payment weekly so we can see our weekly repayments. And so interest only, we can say a weekly repayments will be 90 to 31 which is the same. If we scroll down here, 92 31 or if it’s principal and interest, that jumps up to $129 and 41 cents so 90 to 129 what is that? An extra $27 approximately. So basically if we go principal and interest for a 25 year loan, then our weekly cashflow is going to drop from 74 minus 27 which is going to be around $47 per week. So equals 47 times by 52 so that’s around $2,400 per year. Positive cashflow. Even if you were to go principal and interest on your loan. Now if you were to get a cheaper interest rate, let’s say you were able to get 4% then your weekly cashflow before tax on interest only jumps up to $92 66 from that 74 and so again that would save us even more money or improve our cashflow.

So really interesting to look at. What I want to look at now is let’s say our goal was to completely pay off this granny flat all by itself. Okay? So what we’re going to do is we’re going to jump into this calculator. Okay, so we’ve got 120020% deposit rental income to 80 and if we go across here, I’ve also factored in rental growth as well. So we’re looking at rental growth of two and a half percent which is basically in line with inflation. Hopefully if you invest in the right area, you can get growth above and beyond this, but we always like to be conservative when we do our numbers and then looking at the loan results and stuff here. Basically this is looking at a 25 year term on that loan amount of $96,000 now remember we had $47 per week in extra that we could put on that loan to begin with.

So what is that per month? So 47 times where I’m 52 divided by 12 that’s $203 67 extra per month. So $203 67 extra per month. I will say as well that there’s positive cashflow calculator does look at things like property manager fees, expected vacancies, repairs on the property, insurance counsel rates. Actually probably wouldn’t. Would you need to pay extra counsel rights having a granny flat. That’s okay. That’s really interesting because you already pay the council rates on the property. Council rates may go up, but they’re not going to be doubt. They’re going to be $2,000 so this, this, wow, this could really speed things up anyway, we’re just going to leave it as it is. It’s taken this stuff into account. Let’s just pretend that $2,000 has to go towards maintenance or something. Probably not because it’s a new build. So maybe the fingers would be better than this.

It’s good to be conservative. So extra $203 and 67 cents per month. So he can see the additional payments here for the first year. And then as rents go up each year, we’re adding those extra rents onto the loan. So basically what we’re doing here is this is a monthly calculation. So first of all, lance is the first year. How long is this going to take to pay off? All by itself, we’re not adding any extra money into it. We strolled down. We’re looking for where it turns to zero, which is here. So our last payment is on the 142nd month. So equals one 42 divided by 12 so that’s 11.83 years in order to pay off that granny flat by itself. So not super quick. It’s not going to happen in three years or in five years. But looking at these figures, it’s probably is going to happen in 12 years.

So we’re getting those extra rental increases. We’re putting that on. Okay. So let’s see if we change this to 4% how much that would speed up the process. So I love doing this. I love crunching the numbers and just doing what if scenarios. So currently our weekly repayments or one 29 51 plus obviously the extra, if we put that to 4% then our weekly repayments dropped to one 1694. Okay. So what’s the difference in that? That is about $13 difference. So we need to add that $13 onto the extra repayments to make sure that we’re still paying that. So 203 67 is how much we’re paying per month times by 12 that gives us our annual amount. Um, and we needed to add how much was it an extra $13. So let’s divide that by 52 that will give us, uh, yeah, so we’re at 47, sorry, I forgot that figure.

47 plus 13 makes 60 so 60 times when I had 1260 times by 52 divided by 12. So that’s $260 instead of $203 per month. So two 60 is what we’re starting with. Now. Let’s scroll down and see how long is it going to take us to pay off. How much time did this save us? And we can see here our last payment is on the 134th month. So one 34 divided by 12, that is 11.16 years. So not that long. What did it save it six months by getting that extra percent. So that’s not a great deal amount. Let’s go back. Let’s change this back to 5%. Now let’s say that I’m willing to put an extra hundred dollars per week onto this granny flat. Let’s just say 400 $400 per month. Now let’s say $500 per month extra onto the granny flat. So the extra payments go from 203 67 to 703 67 and then okay there the extra repayments and if we scroll down, this is going to cut things dramatically.

I think our final payment here is on that 85th month. Okay. 85 divided by 12 so that means we’re looking at paying it off in 7.08 years instead of, I think we’re at 11.8 years. So seven eight nine 10 11 that’s about four and a half years difference by paying approximately an extra hundred dollars per week or 500 per month, 6,000 per year off that loan from day one we can cut approximately four and a half years off that. So that’s pretty exciting too. So obviously it’s just kind of fun to play with these figures. We can see that positive cash flow. The question we asked at the beginning at 5% we’re looking at around 3,800 but there’s also those council rates of 2000 if we got rid of those or said there were only 500 then we’re looking more around over the $5,000 mark. And then if we were able to take that and get a 4% interest rate, then we’re looking at how much, you know over $6,000 per year and we’re going to pay that off as well in the next seven to 12 years or something like that.

So yeah. Cool to crunch the numbers on the granny flat. Obviously this isn’t financial advice. Something’s changed. You might get a better rental return and this you might get a worse rental return and this, you might have what happened with Ben and then had problems with your tenants and lose your rental income for a period of time. So things can happen in the market obviously, but I just thought it was interesting to crunch the numbers and to see how much positive cashflow we’re likely to get from building a granny flat. And now you can decide whether or not this is something that you want to do on your properties. Is it worth it investing that cash, getting that loan in order to get that extra passive income per year or is it not and do you want to put the extra onto the loan and try and pay it off as quickly as possible or not?

What you do is up to you, but I just thought this would be a fun episode to kind of crunch the figures and look at that and give you a better understanding of granny flats as an investment and how they can affect your cash flow. Thanks so much for watching and for crunching the numbers with me today. I hope that you enjoyed this episode. I definitely enjoyed making it. If you want to learn more about the two properties to financial freedom strategy, that I will link up to that in the description down below and you can watch an episode that I did with Ben Everingham where we talk about this strategy in detail and how within just a couple of years you can set up your financial freedom for the future and then you can focus on like we did in this episode, how can I earn extra income to pay extra off that property faster? So really cool thing to look at until next time, stay positive.