Experiences (and Problems) with Granny Flats / Dual Occupancies

Hi guys,

About 5-10 years ago I looked into Granny Flats in Western Sydney area.

Now that some time has passed, can some people share some experiences they've had with these types of properties? The good, the bad, the ugly.

I'm looking into them again (in QLD), and, at the moment, it seems too good to be true.

Buy main house for $500k, rent for $425pw
Build $120k granny flat, rent for $275pw (have been quoted 10-12 week build)
Total cost = $620k, total rent = $700pw

Big depreciation on the Granny Flat ($10k+ per year), high income, a house in a middle suburb with a good chunk of land with good medium-long growth prospects.

What's not to love? (assuming you use a Buyers Agent or Investment Firm to acquire and project manage the build).

Thanks

 

Lots not to love imo. Big one is the lack of capital appreciation, both while building the GF and then also in the long term.

For example, not much point spending $120k building the GF if you don't even get that as an increase in value (which is pretty common).

Plus long term and depending on the set up, you are more likely to get lots of tenant issues from unrelated in such close proximity.

 

Worked well for me in Sydney, high demand, excellent income. Great growth/great income. Ticked all the boxes

Mistake in QLD for me, I sold it after 12 months

Harder to lease, not a huge demand for this product, therefore lost days, lost income. Cash flow was eroded

Also laws regarding granny flats?? Not sure now but I think hard to get these approved??

IMO I would not do g/flats in QLD, just a headache and there are better ways to increase income with less risk

 

That was my main question about granny flats. If you later sell to someone who is looking to rebuild, will they put value the granny flat at all?

the alternative is just hold the house with no granny flat. Yield is lower but you dont tie up as much capital.

 

Best option if possible buy with g/flat in situ and just renovate, or look at option of turning a garage into g/flat

Otherwise lots of capital required, not sure of refinancing will go????

 

Our experience has been very positive with granny flats - built two of them in 2013, researching them was how we stumbled across Somersoft.

One in Ryde council area cost around $150K and has been rented out every since at around $450 per week and did not impact front house rent.

One in Penrith council area cost around $110K and has been rented out every since at around $315 per week and also did not impact front house rent.

Both of them have pretty much paid for themselves and are still in good shape. Have no doubt that the full build price would still be recovered in any sale.

Most important thing is the impact on the cash flow that help us retain these properties.

I wouldn't be looking at using a buyers agent, investment firm or buying one already done.
A bit of research and education will have you starting in front rather than paying the value to someone else.

 

Still happy with ours built in Slacks Creek in 2017, total price of house and granny flat build was $510k, combined rent has been a steady $700/week, plus depreciation benefits come tax time. GF tennant is moving out in a few weeks, already have a new one lined up at same rate ($350/week). No regrets.

What suburb would you look in, can't do GF in BCC for example?

 

Why would the growth be affected? It comes from the underlying land, not the building(s) on the land?

My understanding is valuers are inconsistent with how they treat them. Some will value the total cost minus 10%, some value it right on, some value it 10% over. Is there a trend here?

This is certainly a concern I need to look into.

Unsure how it would be much different from Melbourne and Sydney where we live all packed in sardines and in duplexes even smaller than the front house would be. These are side by side though, not front/back with shared path to the back house.

 

You may struggle to get house with land for $500,

When you build GF means you taking away backward from the tenant from the house and therefore house rent will go down.

10-12 weeks may be unreasonable. 2-3 weeks just needed for CDC.

 

Good question, I will have to investigate more here.

 

Really depends on what the property is for, in my opinion. If it's for cashflow, then this might not be that much of an issue. If it's primarily for CG or a mix, then yes, I definitely agree with you.

 

Need a DA because it is conversion of class 10 building to class1. Cannot be done under cdc by private certifier. May not be permissible in some council area.

 

I have been told that the build times for granny flats in Bris are quite quick and they are slow in Melb and Syd. Was told there was more competition up in QLD for these types of things.

Yes, I agree, the rent will go down on the front house.

Thanks, I will investigate more on build times.

 

It was for a mix.

So you think instead of buying a $500k house and $120k granny flat I'd be better off buying a $620k house? (i.e. $120k more land value).

 

Includes builder engagement time, planning approval time and construction. In nsw neighbouring notification period is 14 days, i thinnk 6-7months is reasonable estimate in nsw.

 

I have been told an option when selling is to remove the granny flat (build it on stumps to start with), split it in two, sell it, then sell the house in it's original form. I agree you wouldn't get your money back (nor any growth) but you would get some.

Tying up capital is not an issue for me because my strategy going forward is lower LVR / lower debt.

I also have a problem with high tax (poor structure) so am also looking for the higher depreciation of the granny flat.

Doing a knock down rebuild Duplex or Dual Occ (just on one title, for now) is also something I'm looking into. Obviously more time to build but then even better depreciation.

 

For long term capital gains? Probably.
Though that shouldn't be the only consideration. Sorry, while I've seen your avatar a few times, I've got no idea of where you are along your journey, nor what your plans are. But one important aspect is: How will this help you reach your ultimate goal?
A $620k would have a substantially lower rental yield percentage, so while the capital gains on this might be lower, the higher cashflow might allow you to buy more properties in the future, so your total portfolio might still have a lower capital gain percentage, but larger overall capital gains.
That's what I did in my journey anyway, buy high yielding (relatively low capital gains) properties and just keep doing that.

I only one granny flat, but it has been really good.

One other important consideration is the zoning of the land. If it's medium density (or above), it might not be the best option, as you could build townhouses later. But in Brisbane, that's probably not much of an issue as it's not nearly as land constraint as Sydney or Melbourne.

 

Great to hear it worked well for you in NSW. Shame about QLD.

Can I ask roughly where it was? Lack of demand for this product is my main concern to be honest. I wouldn't live in one but I figured the way things are going (cost of living decreasing for the majority) people will be more and more open to these types of cheaper rental options (divorcees, people saving for a house, FIFO workers, etc).

Also, as a Melbourian, I look at these enormous Brisbane backyards, 600sqm+ with a little 13sqm house on it, it almost seems like an unusable waste. Brisbane to me really looks like Melbourne 20 years ago in terms of density and population and given the projected immigration numbers it will be Melbourne (2.5M up to 5-6M) in 20-25 years.

FYI - I'm looking in Brisbane Metro area in the 5 of the 11 (or so) council areas that allow them.

Are you referring to cosmetic renovations? I think a full on development is too much risk, capital and time much for me.

A granny flat (or a knockdown a brand new house build or Dual-Occ / Duplex build) seems to be somewhere in between.

 

I started buying many IPs from a young age (21). Ended up with 7 at age 35. Then two things happened, some big negative cashflows from some 'prime inner / high capital growth' properties that didn't grow much began to catch up on me plus I was absolutely smashed with 2x properties in Gladstone halving in value and severe negative equity and cash flow ($600k capital loss + $40k negative cash flow on these two).

The stress from all the debt and negative cash flow almost killed me. Last 7 years have been really tough. Have sold down 3, plan to sell another 2 and end up with 2 left over at 50% LVR.

I'm 42 now. Feeling better. Income still good. Am looking to go a low debt, low LVR and slow and steady positive cash flow strategy (whilst trying to get some capital growth). I also believe the next cycle(s) there will be less growth, I think everyone is getting tapped out on affordability (certainly Melb and Syd) and investing in Australia will slowly become more like America (a yield focused play).

(You need to pay $800k for a nice home in the outer burbs of Melbourne these days... I can't see these being $1.6M in 10 years unless there is huge income growth - which there won't be)).

My plan is to keep my LVR and debt low (50% max), maximise yield, tax deductions and some growth.

Really, what's the alternative? The experts tell you you need to buy inner houses in Mel or Syd as a high growth strategy. Minimum buy-in is $1.2M ($700pw rent, with huge stamp duty and a $37k yearly negative cashflow if rates go back to 6%... and it *should* grow... forget it!

If in 10 years (age 52) I can end up with 4 properties (2 with granny flats / dual occs) = 6 income streams at a 50% LVR (i.e. $52.5k cash flow) I'll be happy. Will also do some debt free low cost index fund investing on the side.

If paid off, these 4 (6) properties would bring in around $105k income (today's money) which I'd be happy with.

I've decided to go with this lower risk strategy over my previously ambitious goals of at least double that.

Yes, this is what I think too. Lower growth % on a higher asset base. Not to mention, capital growth in not guaranteed. Cash flow is more certain. On advice of all the experts, I bought a $600k art deco blue chip apartment in Melb in 2007 that I sold for $800k in 2017. 3% capital growth average, no deprecation and accounting for the negative cashflow I didn't make a dollar on this one. A waste of 10 years worth of investing I'll never get back, and this was supposed to be 'high growth'. I can't afford to do that again.

Is it in Western Sydney, Brisbane metro or somewhere else?

How is the demand for the granny flat?

 

Also - happy to hear opinions on my strategy, if anyone has any.

My other options are:

1. Buy a cheap property in QLD for $400-450k (my financial advisor thinks this is a bad idea, as a property of this price will have no growth)
2. Buy a median priced property in QLD for $550-600k (same as above, poor growth I'm told)
3. Buy a 'high growth' property in QLD for $750-800k (my financial advisor wants me to do this)
4. Continue to invest into low cost index funds (my financial advisors second option)

(Probably getting a little off topic now, but I have some great people here on this thread .