Granny Flats are quite popular in NSW since the Govt changed the planning laws in an attempt to solve the housing shortage.
However, as popular as they are, the construction cost rarely adds the same amount in value to the House/ GF combo.
What I mean by this is if your GF costs you $120,000 it may only give you an additional $100,000 in value on the property. That said, the reason someone puts the GF on is to increase the aggregated yield on the two; it’s not uncommon to spend $120,000 on the GF and receive $450pw in extra rent, this is a 19.5% return on investment.
So if you’re going to overcapitalise how do you finance that?
There are three options.
1/ One way is to use a line of credit secured against another property to fund the whole $120,000. Probably the easiest way, but not widely used as most investors don’t have access to the $120,000 immediately.
2/ Use a conventional construction loan with progress draws and meet the possible shortfall ($20,000) from a line of credit or redraw that you have secured against another property. This is really only available to those that have multiple investment properties or a surplus of equity in their home.
3/ Being a little more creative. In this scenario I will assume that you haven’t purchased the property yet and are looking to buy and then construct the Granny Flat. I’m also going to assume that you will outsource the purchasing to a Buyer’s Agent.
By using the buyer’s agent you give them a brief to buy a property that needs some mild repairs so its bought under value. Since they’re experts in that area, they will tell you what the property is worth before and after, and the cost of the works. So if you’re going to overcapitalise by $20,000 with the construction then you’re looking for a net gain after the works of ~$20,000. This may mean purchasing for $30,000 below market and spending $10,000 on repairs. By using a buyers agent this is a great way to cover off on the overcapitalisation issue, and that’s if you see it as an issue?
On top of this if your renovation work includes a small amount of structural changes you can use a construction loan to help you too. If the work is just a lipstick makeover then the bank won’t fund that in a construction loan. Once completed, have the property revalued and then commence with the Granny Flat construction loan.
One of the great things about using an experienced buyer’s agent is that all of these figures can be worked out before you even make an offer.
If you’re thinking of the Granny Flat option and would like to know how the maths / loans would work for you, call my office on 1300 657 132 and talk to one of my brokers.