Latest granny flat prices

Looks like Granny flat prices have jumped up from a few years back.
Most places are looking at 110-115K for a 2BR Vinyl clad 60m2!

 

Bad idea then, bad idea now.

 

@Greyghost bad idea then? Do you mind elaborating?

 

I would like to hear your reasoning behind this

 

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If you are no longer in acquisition phase then there may be grounds to consider yield increase via GF. However my thoughts (not saying I'm correct):
. Where is the funding coming from for the GF? Probably a refi
. If you can manage to refi and obtain $100k and still have servicing, I would buy another property.
No point collecting dog properties praying for prices to increase all the while you have a cute little yield going on.
I would rather grow my asset base, leverage my $100k into say a $450k property, exposing the leveraged about to annual growth, not just my $100k initial amount.

. I don't feel GF add value to a property. It is a depreciating asset. Old adage: land appreciates, buildings depreciate. So why chop up your land and spend equity on a depreciating asset?
Sure first couple of years it's grand, cash flow and depreciation benefits, but after 10 years whatdo you have? A 10 year old GF and yield will deteriorate as the property does. Whereas my $450k property has ticked away at 3-5% growth and I have done a small tidy up of the place, refinanced and extracted most of my equity and bought another.

. If you sell the property with a GF you are limiting your potential buyer market.

. The cashflow on a GF just increases yield. Are investors using that increase cashflow to reduce debt, pay off PPR, or wasting it?

. Struggle with the bank each time you refi to justify the value of the GF

. An extra 2% overall combined yield on a property exicitng you is shortsightedness if you ask me. Cashflow is assuring but leverage and time in the game is key

 

There were few builders I came across that traditional build Torrens title house ... they only build granny flats now. The approval is quicker for them and they have their own private certifier so it's quick in and out for them

 

I reckon I can have a go at debunking at lot of this...

Not necessarily. It's generally a matter of getting a building loan provided the valuation stacks up which they do in Sydney. Using 100k granny flat as an example you need to come up with 20k. Yes you take a 80k hit to your borrowing capacity but you also now have a very healty yield to offset it. True, you could use this to buy another property but still 80k isn't a big hit to your overall limit and it would hardly buy you anything decent anyway.

They don't generally add value, correct. Generally it is 1:1. They do depreciate but if you are doing one in an established area it isn't that bad. I would be extremely wary though of buying one of those two in one jobs you see in new estates, especially out in the boondocks...

My oldest is now 5 years old and I haven't seen that to be the case, it's increased in yield same as the house. Will probably need a paint at 10 years and away we go again, building is still very new and needs hardly any maintenance.

Might be smaller market but I haven't noticed it have any effect on prices. The good examples that have sold do so at a premium if anything. Not all granny flat developments are created equally. Privacy/Separation is a big issue, if you get it right you will have no problem offloading it.

Could use it for anything really. This year the granny flat I spent 100k on 5 years ago will have paid itself off. I can now use that $400 a week to wipe my bum with if I like.

Nope, no problem with refi, done it 3 times now on my Sydney one. Haven't done it on my Newcastle one but that would be no problem I imagine. One just sold in the same suburb I did mine for $580k. Mine cost $520k and is better. Have to be careful with regional ones further out though as valuations can be a real issue.

Yes, time in the market is important but you need good cashflow to sustain the portfolio through the down times. I wouldn't just have a portfolio full of granny flats but done right they can work out well and be quite lucrative if you have a few good ones.

 

That is about what I spent around 4 years ago.

There are so many different variables in a build that the "rack price" is almost meaningless.

All depends on design, site, what is included etc and like all things - how well you negotiate.

We built 3 back in 2013/14 and the gross yield has consistently stayed at 15 - 25% (depending on value of the land it is built on) - so they have gone a long way to paying themselves off.
More importantly they allowed us to retain a couple of low yield properties through the Sydney boom.

So if have the cashflow to retain your portfolio is an issue for you - then granny flats are a good solution.

 

Sure, can appreciate your views. Was just my opinion on the matter.
Mine was more in reference to growing a portfolio rather than sustaining it.
I agree property investing is not a linear game, adjustments and strategies are required to be able to hold onto properties, scale back to grow sometimes etc etc. - staying dynamic.

As was my point and what you also mentioned, I would rather utilise my deposit and borrowing capacity elsewhere than say building a GF on one of my Logan region properties.

Spending almost 1/3 of the property value on an ancillary dwelling doesn't make sound sense to me, I don't care how good your yield is and regardless of how it was funded. Value is in the land, the dwelling is the means to be able to hold said land. Improving yield on a high performing property location/ city fringe/ city ring makes more sense, if it means that increase in yeild will enable the investor to hold a neutral position on the property come 5-6% interest rate time. That is foreword thinking investing, but not churning out a 9-10% yield on a logan property..

Before the Logan freaks come out, yes I own 2 I'm Kingston so I'm well aware of the GF dual living potential etc etc..

 

@Biz responses are very similar to mine.

The funding from the GF was from a equity extract.

I thought about using the $100k to purchase another property, but in doing so my lifestyle would have had some dramatic cuts.

So when you run the numbers, $100k investment gave me a 20% return in income per year. That gave me a bigger boost to borrow more money - without having to sacrifice my lifestyle in any manner. In fact it changed a negative cash flow property into a positive cash flow one.

If i used that $100k to purchase a property in say Logan to gain positive cash flow, the positive cash flow wouldn't even come anywhere close to the granny flat in Sydney.

Now by changing the negative to positive cashflow, I was able to buy a $700k property in Sydney and plonked a granny flat on that too and made that positive cash flow too.

The only benefit I see if I DIDN'T use the granny flat strategy would be that I might have 3 Sydney properties (and this is stretching because I don't see how I could have sustained the negative cash flow).

That said, I could have in theory acquired more, (I reckon another two in Sydney at positive cashflow - within 20km of CBD) but I had a choice - Happy Family or Broken Family, I'm happy with my choice.

As for the Granny flat being a depreciating asset - Yes I agree with you, but the granny flat boosted my income which allowed me to hold an appreciating asset and acquire a 2nd one. Being able to hold both after watching the Sydney boom is satisfying (but at the same time scary).

As for selling, why would I sell? Its cashflow positive and has zero impact on my cash flow - even if the rates rise by another 4%.

Refinance for the properties with GF haven't been a struggle, all of mine have been equal to recent sales + the cost of the granny flat itself.

Leveraging and time in the game is definitely important. But so is being able to hold the property.

 

I definitely agree with that. That's why my focus was in Sydney and in areas that were closely serviced by public transport.

IP#1 is a 3min walk to a high frequency bus to the CBD.
IP#2 is a 8min walk to a train line with trains every 15 mins.

I personally didn't see much point in buying a $300k place in Sydney and plonking a granny flat on that.... but the Sydney boom has proven otherwise

 

I am interested to know if anyone currently have a GF(s) in their portfolio and is regretting, due to the reason's Greyhost mentioned?

 

My thoughts are the same as Nek's . 100K investment with a 20% return; difficult to get that anywhere. However now it looks like a 130-140K (incl landscaping + driveways) to rent out at 350-400 pw, which lowers the return slightly.

I could use that money to invest in another Sydney property, but I don't see the market improving i term and am not that interested in negative gearing. I could also revalue the property after the granny flat is built and extract a similar equity out that I put in to reinvest anyway.

The granny flat also offers some depreciation benefits so that boosts the yield a bit.

Also another Sydney property means more land tax again. I am just under the land tax threshold and if I can save a bit there by putting up a granny flat Im more than happy to do that.

Have you been looking to build any new granny flats Nek?

 

I had a regional one that I sold that I don't regret. Valuation was poor, hard to attract a decent tenant too. I think they work really well in Sydney and Newcastle though.

 

@menty
Personally no. I don't have any land to build it on
Helped a friend finish one in Jan this year. By help I mean i drew the layout on very little space that existed and helped co-ordinate a few things.

That said, i do wish i bought 2 more places in 2014 and plonked granny flats on them.... I'd be retired now!

Actually i wouldn't be as I would be paying child support as a result of buying 2 more properties.

 

I would guess that's the angle @Greyghost is coming from. Why sink $100k when the property is worth $300k - the money is probably better spent on buying a 2nd place. But the entire equation (sacrifice vs lifestyle vs family etc) needs to be taken into the consideration, not just the numbers factor.

I do have to question Euro's Dual Occupancy in Orange / Bathurst though. They seem pretty expensive and do have a reliance on depreciation to make the numbers work.

 

I sense a wall of text incoming.

 

Anyway back on topic,

If I was to construct a new granny flat Iv priced it to be $140K (including knocking down of a garage, new driveway and landscaping).
Return would be approx $400/week. Only about a 15% yield, and would take 6.5years to pay off.

This is in comparison to 4 years ago where I built one for $120K all up, returning $430/week (different location though). 18.5% yield.

Anyway, Im still working out the numbers, as I had originally budgeted $120K for a $400/week return. I do know by looking at comparables, I could most likely get a 1:1 Return on the valuation if not a bit more.

My last question is whether I fund this all with equity or some with cash. I am able to save approx $5500 on the build by using part cash, but only save $1875 in deductions per year (assuming 5% interest)

 

Expensive how?

 

For me Granny flat #1 has already paid itself off. $26k free money (before taxes).

Granny flat #2 has about 2 more years before it's paid itself off.