Build granny flat or subdivide and build duplex.

Hi guys, I'm just wondering what would be a better option with one of my IPs

Currently its a 4BR house in Campbelltown council renting for $440/week. There's about 615m2 and a frontage of 19m. Its zoned R2 and hence has the potential for a duplex.

Here are the numbers. I'v never built a duplex before so am unsure there.

Purchase price was $440K, and it's renting for $440 per week currently.

If I build a granny flat for approx $100K, I'll have no loss of rent, and it would be valued at an easy $600K (being conservative) . Rent would be $350 a week (with increases over the years). It would be paid off in 5-6 years.
Total cost:$540K; Total rent $790 per week. (not bad)

If I subdivide and build a duplex, I have no idea how much this will cost. I could always sell one off (and pay CGT) but would prefer to keep both. Rent would be an easy $500-550 per week for each house. They would probably be valued at 600K? each. I don't even know If I can afford the cost to build it and keep both (or if the bank will lend me that amount)

Alternatively, I could just build the granny flat now, and think about doing a duplex later down the track.

 

Hi @menty , what are your increased CG figures for the granny flat based on? Much of what I read suggests that whilst building a granny flat will deliver increased income/yield, it typically doesn't add value to the property beyond the cost of the construction, and in some cases doesn't even cover the cost of construction (ie a $100k granny flat may only increase the value of the property $70-$100k, for example).

Typically a yield play not a CG play, whereas subdivision + construction is typically a yield AND CG play.

Every area/market is different though. Do your numbers!

 

Based on past experience and sales in the area.

I'm happy if the granny flat gives a 1:1 valuation increase.

Anyway, duplex may not be an option as rough figures show this:
Purchase:$440K
Duplex build and subdivide: $800K
Total : $1.2Mil

Each duplex may be valued at 600-700K = $0- $200K profit only (plus CGT if sold, or I can hold)

 

@menty I am doing the same at my place in Western Sydney. Increase in CG depends on the area and the value of the house. A typical 3 bedder on 600sqm land in my area goes for 800k upwards. If I spend 120k on a granny flat, the extra rooms and toilet, would most definitely get me 900k+.
However, the best way to go forward is to not think about the CG as much, but the yield. The 100k investment will get you 350pw rent, which might help borrow more in the future, given your serviceability is good.

 

Watch A Current Affair 2016 Granny Flat Boom
Channel 9. Fancy a flat-pack house you can build in just four hours?

 

That is bloody expensive. For e.g. I looked at 60 sqm granny flat and it comes to approx 95k with very basic inclusions excl approvals. I can get a nice 60sqm custom granny flat done in that price and better inclusions as well.

 

I looked at doing this as a repeatable exercise as an intro to property development / way of building a portfolio. In the areas I looked at buying a house for around $400k on a plot bigger than 450m2 (to meet SEPP requirements for granny flats), whack a fence in, tenant the front house, spend a few (12) weeks getting the granny flat approved, built, installed, landscaped etc ($115k all in) and stick tenants in there. Rent would bring in $400 front house, $320 granny flat. Deal washes its own face, do it again and again. Some up front capital needed (20% on initial property buy plus the granny flat costs) however improved value can be re-appraised and borrowed against. Reasons in the end I decided not to do this and instead looking at initially duplex / townhouse dev include:

i) Tenant quality and turnover - really the bottom end of the low end of the market. Imagine the problems. Particularly when you have two sets of hard up tenants in low socio-economic areas living check by jowl.
ii) Might provide short term CG to borrow against but I don't think so in the long term. Good yield but even the nice GFs are essentially sheds. How will that look in 5-10 years time? Trashed and wonky would be my view. Unless it is very well maintained (by you) and looked after by your tenants (yeah right) it may end up becoming a liability rather than an asset.
iii) Market saturation - seems to be happening in every third investor bought house in the areas I looked at. Granny flat rents are thus down as well as dragging down rental value of the main house.

Different for you Menty as you are looking at this for your PPOR. Ultimately from a property development and investment perspective duplex / townhouse or better wins every time. Delivering a quality product for the long term will win from CG (and personal satisfaction) perspective every time.

 

I'm a fairly big fan of granny flats generally, but I don't see this as something that is self sustainable. Generally you could only draw out equity to 70% or maybe 80% on a two-dwellings-on-one-title security, and at best, you could probably get 1:1 cost to equity gain on the GF build.

So a net loss available equity.

 

I had that outlook up until I last month.

As I said it depends on the location. If you have a good PM and they screen your tenants just like any other property, you should be fine.

No they are not. The ones i have seen built are better than the house and are getting 'better' rent than the main house at the front.

There are locations where tenants (families) still want to enter to be closer to schools, communities, etc.

 

@menty
1) are you sure you can build a dupex? last time i checked requirements for r2 was 700m2 (could be wrong

2) Construction could be a lot cheaper - 800k would get you a mid level 2 storey duplex with around 200m2 each. Based on the value of the area you could build a lot cheaper if it was a single storey 130m2 dwelling.

3)Could build it detatched (if planning permits) and retain the existing house (if possible)and build a granny flat size dwelling which would cost the same

 

1) not sure I can build a duplex, as I just read it needed a 15m frontage. Ill have to check on the 700 m2 minimum
2) Not sure there would be room for a single dewlling. Ideally looking for a basic 2 storey duplex (1 have a 19m front)
3) Cant build detached and retain existing house.

 

Your lot size is pretty good, could build town houses but check with town planner of course

 

Just an update to this. Its been nearly 1.5 years since this original post and Iv done nothing.
The house would probably be valued at 550K.

I have been looking into building a Granny flat, but the costs to build one are so expensive now (nearly 130-140K). This would net me approx $350pw rent and would give me a little more serviceability (starting to reach my limit) . I have just started this process but can still change my mind. I probably have approx 100K equity at the moment. I doubt my $140K granny flat would net me 1:1.

Alternatively, I would like to build a duplex on this site. Where can I learn more information about this? Would the bank even loan me costs to do the build? How much would this cost? Ideally I would like to keep both duplexes after the build and rent both out. Would I be able to strata title each one or when I come to sell, I would have to sell both at once?