In the last Trilogy Report, we considered the rising popularity of granny flats as an affordable accommodation alternative, across the tightly constrained New South Wales housing market.
It’s not just mums and dads looking to give their kids a foot in the proverbial property door, or house their own ageing parents, that these self-contained units are finding favour with either.
As manager of Sydney based company Ian Cubitt’s Granny Flats and Studios, Mark Moumdjian explains, a growing tide of investors are being lured onto the granny flat bandwagon by significant returns in the region of 15 per cent plus.
In this follow up article, we talk to Mark about the process of acquiring your own granny flat investment and get some insider tips on how to profit from what can be a veritable goldmine, right in your own backyard!
The new black
Once considered a building for Nan and Pop to grow old gracefully in, granny flats have gained a lot of partiality with Sydney property investors in recent times.
Punters considering ways to shore up cashflow and profit from the current heated market conditions, without breaking the bank, are finding it hard to ignore how cost effective these rental cash cows can be in growing and supporting their asset base.
Representing the largest granny flat construction company in NSW, Mark says demand for their product has grown by at least 200 per cent over the last three years alone.
“Before legislation changed in August 2009, we were only able to build in certain areas,” explains Mark. “In Parramatta, Fairfield and Liverpool.”
“But now we can build everywhere, and more people are becoming aware of the potential returns you can make from granny flats.”
Mark knows of the financial benefits investors can achieve with granny flats firsthand, after recently acquiring one in the Sutherland Shire.
For an outlay of $110,000, his investment is earning $435 per week in rental income; an impressive gross yield of 20.5 per cent per annum.
Given that these dwellings are well and truly cashflow positive, granny flats could be seen as a viable alternative to ensuring the long-term sustainability of your asset base.
Not only can you use the profit it generates to pay down the mortgage on your new granny flat within five to seven years, but on other investments within your portfolio as well.
“We hold seminars every eight weeks and invite the general public to come and listen to a free 25 minute presentation on the process and costs involved in buying a granny flat,” says Mark.
“At the start I always ask, ‘who is here as an investor?’ In the last seminar I ran two weeks ago, 90 per cent of attendees were investors, out of a room of fifty people.”
What’s the approval process?
According to Mark, there are two ways of obtaining approval for a granny flat in NSW.
Complying development was introduced with revised 2009 legislation, and allows for a private certifier or council to grant approval within 20 days, whereas standard development approval involves the traditional approach to council and can take between 3 to 6 months.
The first, and obviously more appealing route, generally applies to normal residential allotments that comply with legislative requirements.
Mark says while most suburban blocks in Sydney meet the minimum 450 square metre size constraint and all other legal parameters within that 20-day approval timeframe, there are a few instances where the rules change.
“You might be in a high fire or high flood risk zone for example and will have to go through local council for standard development approval,” notes Mark. “Which means waiting that bit longer.”
For this reason, he advises anyone considering a granny flat investment to arrange a feasibility study before purchasing a potential property, or signing any contracts.
The report should highlight applicable council fees and any foreseeable issues, like sewer mains that could impact site location or mean extra costs to encase the infrastructure in protective concrete, if the only option is to build on top.
Once you’re confident that a granny flat investment is right for you, Mark says it’s a case of signing contracts, drawing up plans and obtaining approval – a process they allow 35 days to complete, before commencing construction.
“We allow 16 weeks for the build all up to account for things like weather interruptions,” says Mark. “But generally our turn around time is eight weeks.”
This short timespan between approval and delivery of a cost effective turnkey product, ready for paying tenants, is another reason a growing number of investors find granny flats so appealing.
“For around $115,000 on average, you’ll get a two or three bedroom, 60 metre square granny flat,” says Mark.
“The return on your investment across say Western Sydney, in areas like Blacktown, Liverpool and Penrith, will be about $350 per week. As you go into more exclusive neighbourhoods though, those yields can rise substantially.
“One of our clients who built a two bed granny flat in Parramatta with us, currently rents it out for $550 per week.”
In other words, granny flats are one of the few residential property investments where you’ll pay the same amount to own it regardless of location, but have the potential to rake in stronger yields in more tightly held postcodes.
Mark warns however, lenders won’t finance pre-fabricated granny flats that are craned onto site as completed units, as this isn’t considered a fixed asset.
He says the most popular structures are fabricated using internal gyprock walls, with external frame and vinyl cladding. Pricing includes fittings and fixtures such as floating timber floors, tiles to all wet areas and aluminium window and doorframes.
The simplicity of construction means holding and maintenance costs for your granny flat will be minimal, while you enjoy maximum cashflow benefit from the rent it generates.
“This is a very feasible option for those who want an investment that will easily pay for itself within seven years, before providing a fantastic gross income every week,” says Mark.
He adds, “Don’t try to build the opera house in your garden, because it won’t make much difference to the rent you can ask. Just do your research, spend a reasonable amount and you’ll achieve very reasonable returns.”
Case studies (supplied by Ian Cubitt’s Granny Flats & Studios)
- Tania’s house in Blackett was valued at $285,000. After paying $124,740 to have a granny flat constructed on the block, a second valuation on the improved asset six months later came in at $525,000. The total rental value she now realises for the house and flat is $630 per week.
- Noal’s Mt Pritchard property was valued at $540,000. He paid $101,909 for the addition of a granny flat in the backyard and the improved capital value came in at $730,000 six months later. Noal’s house and granny flat generate a combined $820 in weekly rental income.
- Sam’s dwelling in Marayong was worth $390,000 before he spent $95,298 having a granny flat erected on the block. Six months later the improved asset value was $650,000 and he was earning $700 per week in rent from both investments.
Of course the most important consideration when determining if any specific type of property will see you realise financial success, is whether it aligns with your overall goals and investment strategy.
As with everything, you need to weigh up the potential of a granny flat addition to your property portfolio based on some serious number crunching and soul searching. But it is hard to argue with those double-digit yields!