Granny Flat returns VS share investment

Hi all,

I am looking at a granny flat from an investment perspective.

The below table shows the calculations on the left of the shares investment at a 5% annual return, compounding and the granny flat calculations on the right over a 15 year period.

The following assumptions:
1) No loan interest applied
2) Tax on income has not been factored
3) Depreciation benefits has not been factored
4) Repairs and maintenance have not been factored
5) Share income may be more that 5%
6) Rental income may be more than the projected figures

At the end of the period it appears that we would be better off by $52,810 with the granny flat option over the shares option.

I am a bit of a novice when it comes to things like this so I would appreciate any feedback as to if my calculations are correct or if I have missed anything fundamental.

Any and all feedback would be most appreciated.

Thanks in advance.

JR

 

I think you are trying to compare apples with oranges but anyway:
Shares are measured by total return rather than income as whether the returns come from capital appreciation or income depends on the payout policy of your holdings.

The general rule of thumb for the ASX is a 9% total return.
Compound 9% for your calcs. The transaction costs are negligible for shares so the income to capital growth trade off is less important.

Id also consider tax as the franking benefits of Australian shares can make a reasonable difference to your calcs too.

 

Why not include these?

a) where is money coming from to fund it?

 

The calc is very, very misleading.

Gearing and capital gains have been ignored.

You would expect shares to grow in price as well over time. But you ignore the end value of the capital gains because to make it 'comparable' to your zero value GF at the end?

Even a simple 140k in shares x 12% a year for 15 years would be 765k.
But you've compounded the shares at the income rate and ignored the reinvestment piece for the GF rent.

 

You are comparing topline returns with a distribution from the bottom line( part of the net returns or a capital distribution) . If you are going to compare apples to apples you should compare topline returns to top line returns. Companies can achieve way over 30 % returns. There is no argument about shares outperforming property if you look at top line returns. What you should do is use cash to aquire the granny flat and secure you capital, than take out a loan of 110k to buy ownership of a company , at the very least it gives your property liquidty. more available funds than just rent. Also understand that the performance of a share ( the value of the certificate proving your ownership) is very different to the performance of the company. Share price can change 20% in hours while the performance of company hasnt.

 

Hi all,

Thanks for your comments and feedback. As I mentioned I am a bit of a newbie in this area and I now realize the model is too primitive to take into account all the moving parts in the scenario.

I suppose my mission/question was to establish which option, over say a 15 year period would be the better investment given a 140K seed fund.

Given this what would you say?

Also gearing is not an option, my wife would not hear of it.

Thanks in advance.
JR

 

So there is no gearing,and it's a 15 year plan..
The only question I would be asking as I know very little about granny flats is what are you buying and is there a registered title for that land that the GF sits on,as you can alter a property as much as you like,but you can't change the location..
With 15 years statistics and depending how one reads the data as I know nothing about GF,
and the value range..
Myself I would buy the whole property with granny flat ,or just buy into one of the big 4 banks which range above 9 percent returns ..
But just remember in all market's. "The bull climbs up the stairs ,but the bears jump out all the windows ..good luck.

 

Hi Willair,

We own the property that the GF would be built on. We would sacrifice the rear part of the property to erect the granny flat.

Thanks JR

 

The best way to start is with a target income in mind and work backwards to devise a strategy. Generally you need to.build capital first and then move it (or part of it) into high yielding assets such as Etf or Lic when you reach your goal in a capital gain friendly way (exit strategy). Having a mix of both in an end state is a good idea as if one under performs (like covid rental defaults) then the other can carry it along with cash buffers. You also need to pick and setup the right type of property forgranny flats otherwise they will erode your return due to repairs. Generally, lic or etf significantly out perform granny flats yield wise when you factor in rising council fees, repairs etc.

 

15 year plan then what? You cant sell the gf separate to the house. Honestly cant see what you are trying to do here given there is no goal and you have cherrypicked (but for what?) only parts of the total return.

what does the rest of your portfolio look like? What are your goals? Do you need income or capital growth? What you need might be different from what you think you want.

Tax rate? Eg if your marginal tax rate is high the rent from the gf will be taxed heavily as well, while some shares which focus more on cg less so.

 

Retirement income is the goal.

 

The boring as bat poo approach.

 

@JonnyR, as others have posted, your comparison is absolute rubbish.

This post might help you:
Not sure what strategy to go with

 

As per above. It's an impossible calculation.

 

Yes guys - I realize the comparison is absolute rubbish - no need to rub it in - I am trying to learn here - thanks for the input and resources.

 

Not trying to rub anything in. Is the potential GF at the rear of an investment, or your own home?

 

Suggestion is this. State the facts of your situation. Age, income, assets, goals. Don't assume anything, because your strategy depends on your knowledge and assumptions, and these are probably flawed.

e.g. you might think you want the granny flat for retirement income, but if you are 35 and won't / can't retire for 30 years anyway, should you really focus on income now?

 

Have you used the PC search function?

This site is an absolute goldmine for knowledge and experience.

If you identify a poster who resonates with you, your thoughts, your strategies, … then PM them if you need to; most will reply.

 

Rear of our own home. Thanks.

 

That changes a lot, you know. What's the impact on PPOR CG exemption?

Fact is, you don't know the right questions to ask. If you are serious about it, take your facts to an expert, pay them, and get a proper analysis. Or post it here and get some ideas (not advice) for free.