All Topics / Value Adding / Granny flats risky?

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  • Profile photo of waydo77waydo77
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    Hi all,

    Looking at the possibility of a granny flat on my first buy n hold

    Just after some advice/opinions on what everyone thinks of using granny flats to increase yield and cashflow?

    I have heard people stating that granny flats dont increase the value of the property, but surely if a yield is elevated from 5% to around 9% the value would increase due to increased investor appeal for the yield?

    is there a risk there may be an oversupply of granny flats in some suburbs to the point where the vacancy rate may increase or rents decrease?

    any other pros cons?

    cheers :)

    Profile photo of TheFinanceShopTheFinanceShop
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    Depends on where you are building. A GF in Mosman will add 110% in value (value defined as the amount that the valuation will increaseby) whereas a GF in Wilmot will add 60% in value. This is a time where an upfront valuation will come in handy.

    Oversupply of GF's in far western sydney is a massive concern. 

    Where exactly are you building?

    TheFinanceShop | Elite Property Finance
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    Profile photo of lukstarlukstar
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    Shanhin can you comment more on that statement about oversupply of granny flats in western sydney?

    Profile photo of CatalystCatalyst
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    Granny flats are all the buzz in western Sydney at the moment. It seems everyone is trying to put a granny flat in their backyard to increase yields. Sometimes it's good, sometimes not. It depends on privacy of the 2 tenants. Sometimes the house rent will drop considerably and be difficult to rent.

    If there is privacy for both tenants this is not an issue. As mentioned the price of the granny flat isn't added to the value of the property so you need to take that into account.

    Parts of Mt Druitt for example are being gentrified but I think too many granny flats in a small area will have negative affects. To many people together is not a good recipe for increasing a suburbs desirability.

    My opinion anyway. .

    Profile photo of ChrisA1ChrisA1
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    Catalyst wrote:
    Granny flats are all the buzz in western Sydney at the moment. It seems everyone is trying to put a granny flat in their backyard to increase yields. Sometimes it's good, sometimes not. It depends on privacy of the 2 tenants. Sometimes the house rent will drop considerably and be difficult to rent.

    If there is privacy for both tenants this is not an issue. As mentioned the price of the granny flat isn't added to the value of the property so you need to take that into account.

    Parts of Mt Druitt for example are being gentrified but I think too many granny flats in a small area will have negative affects. To many people together is not a good recipe for increasing a suburbs desirability.

    My opinion anyway. .

    Great points.

    I am also thinking about resale value. I would dare say that the resale market may be smaller than for the 'regular' property. The only buyers I could see wanting a GF would be investors, those with teenage/older children or older parents, or those looking to let out the GF for some cash on the side. There are many who just want one building on the property (i.e. they are a family and want the big backyard rather than another swelling).

    ChrisA1

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    Profile photo of Richard TaylorRichard Taylor
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    Remember on a residential property a higher rental yield doesn't mean an increase in value as a valuer is not valuing on that basis.

    More often than not he or she is valuing the property based on comparative properties in the immediate location that have settled within the last 3-4 months.

    A Commercial valuation is entirely different.

    Cheers

    Yours in Finance

    Richard Taylor | Australia's leading private lender

    Profile photo of BrazenBrazen
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    The only buyers I could see wanting a GF would be investors, those with teenage/older children or older parents, or those looking to let out the GF for some cash on the side. There are many who just want one building on the property (i.e. they are a family and want the big backyard rather than another swelling).

    I’m not sure I agree with this Richard.
    I do around 250 granny flat approvals annually. I always stay in touch with my clients post-construction and they pretty much all get re-valuations. I’m yet to see an investor cry that the valuation fell short of the construction cost. Since 2009, the major banks are seeing granny flats (especially the NAB I’ve noticed) as a verifiable addition and separate income-earner for properties across NSW.

    There is absolute merit in designing and siting granny flats so they they can be interchanged as either an investment earner but also as a family’s backyard cabin, teenage retreat or guest accommodation. It pains me when an investor buys a property which simply has bad separation and bad geometry. This I must agree is the destruction of a rear yard. It makes me cry- I simply refuse to do approvals on blocks which aren’t spatially ‘right’.

    Most of my clients boast revaluations above the initial injection. yes, some of this is probably the growth of capital across NSW but it goes beyond that. My own case-study is a Panania NSW purchase in April 2013 for $580k, granny flat completed in August (cost was $105,000 incl. landscaping, fencing etc). Valuation in March, 2014 was $874,000. The suburb has grown in value by about $60,000 so the added bonus was around $110,000. I’ve actually had an offer for $870k recently but I rejected it. I don’t want to sell. In fact I want to do 3 more before I retire. I’m 46.

    Point is, people aren’t complaining about valuations or resale. The fact is granny flats are effectively free <moderator: delete advertising>, and with an eternity of rental returns after it’s paid off (by the tenants) why on would you want to sell the property? I’ve got clients building their 7th granny flat in 5 years. It’s a bit of a frenzy out there, especially in Western Sydney.

    Brazen.

    • This reply was modified 10 years, 6 months ago by Profile photo of Brazen Brazen.

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    Profile photo of TheFinanceShopTheFinanceShop
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    Depends on the area.

    You will not get a valuation covering construction in say Willmot or Albury but will in say St Leonards or Willoughby.

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    Profile photo of Mick CMick C
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    Yep will come down to the area….

    Northwest, South and inner west generally ok – like Dundas etc..
    Some western areas- like penrith, Wilmot etc..average increase is around 60% of the total cost to build…and we are talking about re-value 1 week after build not 12-18 month later etc..

    • This reply was modified 10 years, 6 months ago by Profile photo of Mick C Mick C.

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    Profile photo of BrazenBrazen
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    Depends on the area.

    You will not get a valuation covering construction in say Willmot or Albury but will in say St Leonards or Willoughby.

    That’s just not my experience of it, sorry guys. My clients are reporting 100% and more. Perhaps a few years ago but not today.

    Brazen | Granny Flat Approvals Sydney
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    Profile photo of waydo77waydo77
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    Im guessing the valuation of the GF would be better also if it has its own separation from the existing property? e.g its own seperate car parking area and fenced or gated. making it almost like its own self sufficient dwelling. not sure if council allow fencing and whatnot like this but i would think it would make a difference.

    Profile photo of CatalystCatalyst
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    Im guessing the valuation of the GF would be better also if it has its own separation from the existing property? e.g its own seperate car parking area and fenced or gated. making it almost like its own self sufficient dwelling. not sure if council allow fencing and whatnot like this but i would think it would make a difference.

    Yes, I agree.
    If you have a granny flat but have lost all the yard, maybe not so good. But, positioned correctly and not creating too many negatives for the original property the value should be there.

    A separate entrance and yard would have to add the greatest value I think.

    Profile photo of BrazenBrazen
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    Well said^^.
    It’s absolutely essential that you plan for adequate separation and privacy! Check out this guide on the importance of this: http://www.grannyflatapprovals.com.au/granny-flats-privacy-separation

    Brazen

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    Profile photo of Kylie WalshKylie Walsh
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    If you are looking at dual income there are some other great options available which don’t limit you to your potential buyers on re-sale.

    1 option is to consider maybe splitter blocks. Buy a property on a larger block, split and then build another dwelling on the property or alternatively sell the block you have split off to reduce the mortgage on the original block.

    Another option is to raise an existing property and build in underneath. You can still rent out upstairs while being renovated giving you an income while developing.

    Both of these options give you dual income but I also believe it will leave you to the open market when thinking about selling or the other option of using the equity you have gained to invest again.

    <moderator – delete advertising>

    Regards

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    Profile photo of waydo77waydo77
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    Hi kylie, Have you done the lift and build beneath?

    Profile photo of Kylie WalshKylie Walsh
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    Yes quite often

    Kylie Walsh | PPI Investment Advice
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    Profile photo of waydo77waydo77
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    Would of never thought of that thanks for the advice, how do u build underneath, do beams pillars etc get put in place and house lifted and put on or something?

    Profile photo of Kylie WalshKylie Walsh
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    You use pallets, similar to fork lift pallets, jack it up to it is legal height, then put cement slab in, remove the pallets, put steel pillars in and then build underneath.

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    Profile photo of Don NicolussiDon Nicolussi
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    There is absolute merit in designing and siting granny flats so they they can be interchanged as either an investment earner but also as a family’s backyard cabin, teenage retreat or guest accommodation. It pains me when an investor buys a property which simply has bad separation and bad geometry. This I must agree is the destruction of a rear yard. It makes me cry- I simply refuse to do approvals on blocks which aren’t spatially ‘right’.

    Have to agree that design is the key. If you are looking at a refinance of your granny flat loan after completion it is important to ask are you using the right bank – who is doing the valuation and remember that the valuation (whether favourable to you or not) is entirely and completely separate to the true market value. Valuations are based on historical comps (as mnentioned) and when you sit your property on the market to sell you need to see what the market will pay for it. If you have done a good job (great job really) then the market will respond as you have added equity and cash flow. Now in most peoples language that is a good outcome. But if you haven’t – well you haven’t and the market will tell you that at sale time. Valuations are just a finance tool. Another one of the tools we use as investors to get things done that we need done. Probably a good idea to respect them but not get to hung up on. Robert Schiller says that finance is the technology of getting things done. Nothing more and definitely not rocket surgery. Often times, what people are doing with a granny flat strategy is converting properties that leak cash into properties that add cash. Now I have been banging on about this since I joined the forums and been in a couple of heated stouches over that back in the day. If something is leaking then plug the leak.

    As for the Northern Sydney versus Western Sydney debate. Well I look at it this way. Some things are generally more saleable than others before we throw the grannys into the mix. As a starting point its good to ask a due diligence question, “Is the property whether it be out west or some other place a good idea before the granny flat. If yes proceed. Is the granny flat is the key to making the deal a good idea – avoid! A great property that has had a value add strategy applied to it will be great plus have some income. A dog property will be a dog property with or without the GF on it. When I am investing for myself I always ask the question, “If I am not around can this property support itself.” If it can’t then the exit strategy has to be pretty good to justify a purchase.

    • This reply was modified 10 years, 4 months ago by Profile photo of Don Nicolussi Don Nicolussi.

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