In this video, Colin Fragar, our founder and CEO, shares five reasons why granny flats are a good investment.
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Or for those that prefer to read, here is a transcript of the video…
So is a granny flat a good investment? My name is Colin Fragar from Council Approval Group.
5 Key Points to Analyze Your DealSo some of you are probably looking at whether a granny flat is the right thing for you. And I want to give you some five key points for you to be able to analyze your deal to see if it’s going to be worth the effort to build this granny flat, whether it’s an investment property on your own family property.
1. How is the approval process going to be?The first question that I would ask you is the approval process, how is the approval process going to be? It’s really important that you get the right advice upfront with this granny flat. The last thing you want to do is start planning without getting the right advice. Yes, it might be a cheaper cost of construction for a granny flat than a large house. However, I don’t want you to go down a path of literally years of frustration if you get this wrong by just going to somebody who does plans, a drafter. Just because they can draft plans doesn’t mean that the approval process will go smoothly or even if you can get the approval itself. I highly recommend, if you haven’t already, to please grab Your Ultimate Guide To Council Approval. So this magazine was specifically designed for yourself and there’s a whole bunch of tips and tricks on the Council approval process. You can get that from our website, councilapproval.com.au.
So the first question is a kind of a different sort of a question. It’s not a financial question, but it is a very important question and that is how is the approval process going to be for you and your family? And I highly recommend that you talk to one of our team if you haven’t already.
2. How much capital investment is required?Okay, the second thing that I would like to ask you to ask yourself, is the capital investment required. Now a lot of people think, okay, I’ve heard that a granny flat builder can get me an $80,000, $100,000, $120,000 granny flat, and in effect, they shoot themselves in the foot because what they end up doing is reducing two things. First of all, they reduce the capital value improvements, the end value of the property. So when you finish the granny flat, how much is the property worth? If you do a really cheap build get the value is not going to value at much more than what it’s already worth.
The second thing that you’re going to shoot yourself in the foot with is the actual rent return that you will receive. And my experience has been in having done thousands of these for clients, but particularly I’ve done a few of them for myself, is that if you spend that little bit more, maybe an extra $50,000 on the build, you get a really nice secondary dwelling that you’re proud of. And it actually rents for more and it adds more value. So don’t go too low. In terms of the cost of construction, give yourself a little bit, whether you have to borrow a little bit, have to pull out some equity from your property, or whatever the solution is.
3. What is the yield?The third key point is to look at the yield. So of course, the rent return. Now when you’re looking at the yield, it’s really important that you don’t factor in 52 weeks of rent. I usually do an equation of 48 or 50 weeks because you probably have some vacancy with these. The second thing is don’t calculate on gross rent; calculate on net rent. By that I mean, make sure you take out the managing agents commission of around 7.7%. The last thing that I would ask you to look at is to look at the insurance cost. One advantage of having a granny flat is that the insurance doesn’t go up proportionally by the amount of extra capital value that you’ve put in there, the amount of construction costs. It is not a proportion of costs. Also, usually, the other ancillary costs aren’t as high for granny flat as some other investments, like strata fees, for example.
4. What are your financing options?Okay, the fourth one is to look at what your financing options are. Is it a good investment? You’ve of course got to factor in whether you’re pulling in personal money that’s just sitting in your bank account or you’re bringing in an investor or you’re doing a joint venture, or are you going to be able to access a building construction loan. I’ve done a few of these now myself, and I have two favourite paths to do it. One is to be able to pull out equity from the property to be able to build so I don’t have to put any of my own cash in. The second option for you that is usually available is a building loan. So you’re not actually accessing the equity within the property, it’s a completely separate loan. You’re getting 100% loan of the build costs. So for example, if you have $150,000 granny flat, you’re borrowing an extra $150,000, which is a construction loan. And that’s actually my favourite way to be able to pull off these.
5. What is the capital value of your granny flat?Number five is to look at the capital value. Now it’s really hard, I’ve found, to work out what’s the end valuation going to be once you finish the granny flat because usually there’s not much comparable sales data. However, you can probably do a rudimentary calculation at the very least. Hopefully, it’s going to add at least the cost of the construction. But you’re probably going to be looking at a broader maybe 12 month period to see comparable sales. Look at a broader area to be able to see what they’re worth and you’ll probably be pleasantly surprised at the amount of capital value that it adds.
It’s no secret that a granny flat does add significant value, both in a rent yield but also does add value in terms of capital growth and the valuation of the property.