Experiences (and Problems) with Granny Flats / Dual Occupancies

If you are going the lower asset base route (probably dont have a choice with apra rules for the time being), have to ask whether long term sydney / melb or brisbane is likely to grow more.

700-800 will get you a decent property in western sydney.

Averaging into etf is probably a good idea, but you dont get leverage on this unless you are borrowing against equity to do it.

 

The Brisbane metro area falls (almost?) entirely within the Brisbane City Council jurisdiction.

Not sure where you get your idea of “5 out of 11 council areas” from?

 

GFs are basically a structure like a expensive shed that doesnt really add a lot of capital value. Sometimes they add as much as their cost and sometimes its more but sometimes its less. Depends on the site and quality. It can limit future use since some family buyers wont want a shared homesite. It gets capital allowances and some depreciation (if new) but the cap allowance is just 2.5% and might be $2500 + if its a new GF maybe Div 40 of $1,000 eg HWS, cooktop, oven etc. You cant sell the GF without the property being sold. That said for a investor that holds you an get enhanced yield with little costs. eg You may be able to double rental income without having to double down on the investment commitment. The GF will have few additional "site" costs as these are already committed in to the existing dwelling. Hence better yield. But a bad GF can lower the rent on the dwelling element. And you cant add a GF easily while renting the dwelling - Of course that tenant will want a rent reduction. And dont skimp on meters - water gas and elec need TWO meters or you will be including utilities in the rent for BOTH occupants. And internet & phone issues

For Brisbane CC a GF is a legal concern.

 

Based on my experiences in South East Queensland, primarily Logan, these Auxiliary Dwellings are a fantastic addition to the right portfolio.

Assuming you put a bit of thought into your planning (e.g. make it as big as you can, properly separate the blocks and separately meter utilities) they are highly desirable to quality tenants and are very low stress.

What you need to know is that you're almost always trading off equity for yield. The finished product almost certainly wont value up to what you spent, so if you're in early days growing aggressively- they can set you back. Depending on the area, block, etc you may also be hurting growth potential because you've somewhat pigeonholed the property to investors.

Also worth mentioning, it takes about 10 years to pay back the cost of the flat. If it's a long term hold and you don't need to reuse the equity, why not?

 

NBN is only provided to one dwelling on the property. So my GF can't get nbn. Tenant not happy because other naked adsl far from the exchange and speed is poor.

I was unable to get two Water meter without subdivision and have to include water bill in the rent.

 

@euro73 has alot of experience with dual-occ builds around NSW.

A few points to consider as well, is having a property with a grannyflat means 1 set of rates to be payed for both of the dwellings.

You could potentially own 3 x dual occs (6 rentals) whilst still coming in under the land tax threshold (NSW).

Owning a dual-occ (House + GF) means that if one set of tenants move out, you still have money flowing in from the second dwelling.

 

That's odd, you should be able to get it sent to both even with one title, but you'd need to put in an "NBN New Development Applications".

 

Sorry - that's just nonsense

Sorry - that's nonsense too.

Yep. This is MUCH more of the reality in my experience... and I would wager I have more exprience with this concept than most . NSW is the place to be for this. The SEPP places it well ahead of the rest of the country in this regard. The concept is far more mature here, far better established, far more common than elsewhere and far more widely accepted.

Complying Developments in NSW, under SEPP. DA's are generally not even required unless you go bigger than 60M2 or the site is non CDC for some other reason. But in very simple terms, easy in NSW. No finance issues. Banks dont consider them a non standard security. I sell dozens every year, and we have never had a valuation shortfall or a bank say no because it's 2 on 1 title. Several lenders do 3 on 1 title and some may even do 4 on 1 title under some circumstances. Put plainly- there are no finance issues related to the security itself. And as others have already testified, the cash flow is typically far superior to anything available in any other standard resi asset

I have one in my SMSF. The rents pay the P&I comfortably. Approximately 200K of SMSF cash allowed me to buy approximately 600K of resi assets, using leverage (a LRBA /SMSF loan) I have had ZERO vacancy in either dwelling for 3 years of ownership. Its been revalued 15% higher than purchase price just recently. But even with zero growth it will simply pay itself off by itself, without monthly top ups from the SMSF. This allows Member Contributions to be used towards extra repayments , so it should be unencumbered in approximately 11 years , at which point the SMSF will have zero debt and bucket loads of equity (even with zero growth) and bucket loads of income ( 2 x rental incomes and the member contributions) allowing me to leverage again and put another one or two resi assets inside the SMSF. And when that happens, the member contributions plus the rent from the unencumbered property plus the 2 new rental incomes from the new purchase will pay the 2nd one off in approx 7 years.... end result should be that both are unencumbered in approximately 18 years time, with the income from all 4 dwellings ( 2 x Dual Occ's ) tax free in pension phase. if the current rents mature just 50% in that 18 years, it will mean well over 100K net per annum from the SMSF. Dual Occ's allow for dividend reinvestment /debt recycling using mortgages, far more effectively than any other resi asset, in very simple terms. Those worrying about growth being constrained are not seeing the forest for the trees.
The prize is 6 figures for life, folks..... and debt reduction and future borrowing capacity. The prize is not a one off lump sum you may or may never see, and equity you may or may never be able to harvest, and debt you may not be able to afford when it reverts to P&I. 30 years of easy credit failed to produce 6 figures of income for most investors - and that's when it was easy, with "actuals" and falling rates and no HEMS and no IO penalties on calcs, and no cash out restrictions, and no COVID, and plenty of wage inflation. Good luck continuing to chase those fairytales rather than following the very simple maths outlined above.... Like I said... nonsense

 

Can't speak for your specific experience but this is not universally true. As @Tom Rivera said, it can be done with a new development application the NBN ($600 when I did it).

Having said that they still seemed a bit weird about it, I had to call them multiple times and escalate my ticket and it took about 10 months to get connected.

 

Why QLD? Why does your FP think it's better than another state?
I might be biased but those budgets would also go far in Perth and may have better growth prospects. Plus we have a granny flat sized (70sqm) option that can go on it's own title.

 

I agree, Perth is also very tempting. Also a great stage in it's cycle. Have lived there, awesome lifestyle and place.

The reason for Brisbane was really due to future immigration numbers (I'm personally not keen on the idea of big 50-60M Australia, but that seems to be where we are headed).

However, after looking at these ABS links for QLD vs WA, they both have lots of predicted growth. WA even higher!

I'll need to look at the long term CG, but it does looks like WA is worth adding to the list - thanks!

 

Thank you for the excellent post!

The part I highlighted gave me another option idea - buy now with a view to add a granny flat in 5-10 years.

Kind of like selling down a growth asset to buy an income asset that people usually do near retirement. You would also think this will become a more normal thing as time goes on. Personally, I'd rather live in a Granny Flat than an apartment building. Some of these GFs look really nice too, stone island bench-tops and so on.

 

Can anyone comment on the net tax implications of a Granny Flat / Dual Occ?

The loan for the build would be deductible (assuming you borrowed against exist equity to buy it).

Then you also have good depreciation. I assume the quicker depreciating things (AC, dishwasher, etc) would be a larger % of the total GF cost since they're not made out of bricks nor is there a slab. The depreciation benefit drops off quickly after 5 years though.

Also, on the other hand, you have the increased cash flow.

I wonder how it works out in the wash?

I can run the calcs if anyone can share some rough depreciation figures. I assume a brick dual-occ / duplex is just like an equivalent single occ house.

 

You pay back the depreciation deductions when you sell, at half your future marginal rate. But you can't sell the granny flat separately. So the hard part is determining how much of your purchase price relates to the granny flat.

 

Have a look at pumped on property on YouTube, they are a BA which do the granny flat strategy in Morton bay, they have quite a few video walk throughs of gf builds/ numbers etc.

 

Don't even get me started on problems with NBN Co. They are the biggest clusterf*ck I have ever experienced. In four years I have had problems with EVERY. SINGLE. CONNECTION. and it's NEVER BEEN THE SAME PROBLEM TWICE.

Right now, I've got a situation where we had the flat hooked up to the same connection point as the front house, which accepted an overhead line from over the road (their instruction, they said we could run two lines). Once the works were done and the tenant applied for connection, NBN Co came back and said the flat actually had to connect via an underground pit on our side of the road- so we have to get the Electrician back out to trench and run cable to to the boundary!? So the original house must connect via overhead line, and the flat must connect via boundary pit. We're currently arguing with them to pay for the further works, but it's not going well.
___________________________________________________________________

Oh, and in order to stay on topic (haha!), the morale of the story is:

If you are building an auxiliary dwelling, make your development application with NBN as soon as you have approved construction plans!

Your Builder is more than likely sick of dealing with NBN and wont apply for the connection themselves, in which case you'd probably only find out after the flat is completed and a tenant moves in asking for internet- 6 months too late.

 

Is this a big deal though? There are mobile data plans that are quite acceptable for the vast majority of tenants (eg Optus has a 500GB 4G plan for ~$75 IIRC, thats cheaper than most NBN plans), I wouldn't be worrying about NBN access as it is almost redundant tech now anyway lol

 

Could not disagree with this more.

I have my phone with 100gb and the mobile broadband @ 500gb, but still, you rely on cell coverage, and optus isnt great, even though it is showing 4bars of service I get terrible speeds/lag.

Give me NBN, please.

 

Agreed. We run a backup 4G network in the office and it's terribly unreliable. When we first hooked it up, it would get up to 40mpbs download, but now we're cheering if we get 6mbps...! It also plays up during peak times, bad weather and whenever it feels like it. We've had our equipment looked over by multiple people and been told that's just how 4G is.

 

Dual Occ done right...