Why Build a Granny Flat?

Why would you build a granny flat? What is the purpose of building a granny flat and how do they make money?

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0:00 – Introduction
0:40 – The idea behind investing in granny flats
2:01 – You’re going to have to invest more money to get the same income from a single income dwelling
3:26 – Granny flats can minimise your risk when investing
4:10 – Granny flats allow you to target capital growth areas but still get cash flow
6:40 – Granny flats can help you own your property outright easier and you can live off the rental income

Transcription:

Ryan 0:00
why would you go ahead and build a granny flat so here we are in brisbane about 14 kilometers from the cbd we have just been doing key handover on a completed granny flat i’m joined by simon everingham buyer’s agent from pumped on property and this is the property that a client of theirs picked up a couple of years ago or about 18 months ago and they’ve just completed a granny flat on this property out the back which we’ll walk through as we talk about this video but we kind of want to talk a bit about the numbers and why people are building these granny flats what’s the point of them what’s the intention what’s the strategy behind it

Simon 0:40
so essentially the strategy behind the idea behind it is to generate a passive income for life so the passive income is something that you receive without having to do anything so if you invest in property and you pay that property outright somebody is going to be renting that property off you you will be living off that rental income so by adding a granny flat not only are you just getting one income but you’re actually getting two incomes from the one property so if you let’s say this house for example we purchased it for $490,000 the market value rent for this property is around $420 a week so if you just had that you’ve just got your $420 a week on your $490,000 but what our client has done is he’s converted into two incomes he’s added the granny flat knees now getting multiple incomes from the one property so he spent $125,000 adding the granny flat in the backyard that’s going to rent out for a further $300 per week so essentially what you’ve got is $625,000 down and now he’s getting 707 $120 a week in rent so it takes it from negative cash flow to positive cash flow and get multiple incomes from that one property

Ryan 1:59
and that’s the thing as we walk down the back and walk towards the granny flat to show you purchasing property and getting the rental income that you get from a granny flat you’re going to have to invest a lot more money to get the same rental income from just a single income dwelling so if you’re just purchasing a house then obviously you’re getting that single income but maybe you could purchase a property maybe not in this area but in other areas that we invest in in brisbane around the 350 to $400,000 mark and you could get rent of around you know 350 to 400 per week but then for 120,000 or $125,000 you can build a granny flat if you already own a property and you can get $300 per week so the cash flow return on investment for granny flats versus buying property is much higher which can just allow you to yeah really start to see that positive cash flow and then allow the tenants to actually pay off the granny flat and to pay off the property for you so if we swing around here you’ll see that this is the granny flat here they’re both on separate leases which is really important to note so separate water separate electricity separate lease agreements so the owners i mean the renters of the front dwelling a very separate for the renters or the back dwelling so we talked about the cash flow reasons for building granny flats there’s also the minimizing your risk by diversifying your income so having two incomes from this property means that if one of the dwellings is vacant you still got some money coming in which can help you to manage your cash flow until you rent out the vacant

Simon 3:41
and what i like about this one as well and most of our clients is yes cash flow is king and it’s going to be really great to receive positive cash flow and have a property just taking away doing it seeing that you don’t have to worry about but what’s also really important to us and to all of our clients is capital growth on top of that so what we want to try and focus is an asset that’s going to continually grow in value over time and that was really important for this particular investor so what we did is we purchased really close to the cbd we’re actually only 14 kilometers from the brisbane cbd here and picked it up for a really good price so by targeting really close to the cbd in brisbane right now according to ht w is in the start of the recovery phase of the property cycle so according to lots of analysts it’s predicted to be a really really good market it’s even cheaper to purchase properties here today compared to 11 years ago so focusing on the cash flow is great but i just don’t like to throw capital growth out of the window either because i think it’s just as important as cash flow and i wouldn’t sacrifice one without the other and this is a prime example of how you target both and so

Ryan 4:53
many people often ask should i invest for capital growth or should i invest for cash flow and granny flats or Way to invest for capital growth and cash flow. So I have run a website used to run a membership site where I would find cash flow properties for people. It used to be that cash flow properties, obviously much easier to find in regional centers and things like that very difficult to find in regional markets, except for Julian calm properties, properties that already had granny flats or that had, you know, upstairs, downstairs, two different living arrangements. So they’re actually quite complex and difficult to find these opportunities. But now, in certain areas within Brisbane, as well as within Sydney or New South Wales, building granny flats can be quite a simple way to actually invest in a high quality area in a metro market, we know there’s going to be that long term demand, both in terms of rent ability of your property, as well as saleability of your property. So you know that long term demand is going to be there. But if you just purchase the property by itself, then you’d be negatively geared, and how many negatively geared properties can you own before you can’t afford any more, but if you’re able to build the granny flat, you’ve got a property in a good quality area, you’ve now got the cash flow neutral cashflow, positive situation, so the renters are actually paying more, and you’re getting more in income than you putting out in expenses. So it’s putting money into your pocket every week, how many of those can you afford to own, basically as as many as you can get your hands on, and as many as you can afford to buy. And so it really, I guess flips the script there from it’s very difficult to own property, negatively geared, you got to pay money out of your pocket every single week to we can buy high quality properties in good areas, they’re giving us extra money. So let’s just keep accumulating as many as we can throughout our life.

Simon 6:40
So the plan for this one, now that he’s got both of them, essentially was to own them outright within the next 15 years. So if he does that, if he pays off all the debt on the granny flat and the main dwelling over that 15 year period, with rents rising at historically, around 2.5%. On average, that $720 per week that he’s receiving today would look more like closer to 1000, maybe even more than $1,000 per week in 15 years time. Once it there’s no more debt on that property. That is his income. So that’s $1,000 per week from the one income that he’ll be receiving at this property in 15 years. Yeah,

Ryan 7:19
and obviously there’s property manager expenses, and there’s council rates and insurances and things like that. So there are some expenses there. But once your mortgage is completely paid off, that’s generally going to be your biggest expense. So let’s just finish this off as we walk inside the granny flat. And you can just really say why this makes so much sense. You can see that they’re fully fenced in the front dwelling so completely separate, completely separate dwellings in here. And as you can see, in the granny flats, it’s, it’s a very far call from what you would expect a granny flat to be like, I have previously lived in a old school granny flat, which was a cockroach den that wasn’t self contained. And so these gang fights nowadays, brand new build, as you can see, beautiful kitchen, we’ve got air conditioning, we’ve got fans, we’ve got two bedrooms as well. So quite a large master bedroom in here with lots of space for a bed and a little note down there for either yoga mat, a reading area I would put in an office, we’ve also got bathrooms, so completely self contained bathroom room for washing machine and dryer, and then a second bedroom as well. So I like to call granny flats, two bedroom, two bedroom units, generally with a backyard. Or in this case, this one has a really nice deck out the front. But if you think of it in terms of that these tend to rent pretty well, if you’re investing in an area that has a low vacancy rate like this area.

Simon 8:48
Yeah, I think that’s something that needs to be considered like, you wouldn’t just be going and adding this anywhere, especially, you know, in those brand new estates and things like that, where there’s 1000s of properties coming onto the market at the same time, the more incomes, the harder that it may be to find tenants. But in this particular area, there’s an under supply of rental properties in this market. So there’s a vacancy rate of less than 2% actually in this area. So when you price your property as well. So I think our tenants look I mean, our owners looking about looking at putting it online for around $290 a week with that and current demand shouldn’t should get snatched up within the first couple of weeks hopefully,

Ryan 9:28
yeah, so why do people will granny flats generally they build granny flats because it is a cash flow play investing 125,000 to get $290 per week rent, you’re looking at definitely over 10% yield probably over a 12% rental yield on the build cost itself, which is definitely going to be positive cash flow in terms of current interest rates and can actually push the entire dwelling like including the front house in a positive cash flow situation. So it’s a positive cash flow play but then gives owners and investors the flexibility to buy in higher quality areas but still get positive cash flow than they could have otherwise so if this is something that you’re interested in that maybe suit that might suit you sorry then simon is brotherband and the team over pumped on property are offering free strategy sessions so you can get on the phone to them talk about your situation talk about your property investment goals and whether something like this might suit you where you can get that growth and that cash flow as well so go to onproperty com au forward slash session to check out that and to book in a time in the calendar that suits you that’s it from us today we wish you the absolute best in your property investment journey until next time stay positive

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