What You Need to Consider Before Building a Granny Flat
A granny flat is a secondary dwelling on your property, detached or attached to the main house. Granny flats are sometimes built above a garage or in the backyard, and most have a bedroom, bathroom, kitchen, sitting room, and laundry.
Even though the name ‘granny flat’ suggests a place for the elderly, it has now become more than that. Investors are constructing granny flats to enhance their property value and rental income. As the property prices get steeper, more and more young buyers are finding it difficult to enter the market. So some parents are using granny flats to accommodate their adult children.
How does Granny Flat Add Value?
The amount by which a granny flat will increase your home value depends on your property and the type of granny flat you want to build. Based on the 2019 CoreLogic/Archistart Granny Flat Report, it may boost your home value by 30 percent. Also, reducing the construction cost will help you gain more value overall.
However, always be careful that you are using the space aptly. A granny flat should not dominate your land or eliminate all the green space you have. Evaluate whether an internal or external construction will suit your property and work from there. You can also make use of your garage or unused space under the house to build one.
Factors to Consider When Adding a Granny Flat to Existing Properties
First and foremost, you should be sure that you can legally build a granny flat on your property. A granny flat will require council approval, planning permissions and may also need inspections from an engineer and an expert in pest control. Each state and council have their own regulations regarding occupancy and construction, so it pays off to do your due diligence. It is crucial to ensure you have the approval for the granny flat before initiating any construction work - getting approved later can be extremely challenging. The process for approval is much simpler than before as local governments have started to realize the advantages of granny flats for homeowners and renters alike.
Your current loan to value ratio (LVR) plays an important role in building a granny flat because it could affect your borrowing capacity. If your LVR is high, it is best to consult a mortgage broker. You should make decisions for the long run and not only for a quick income.
How is your current cash flow? Is it negative and going backward? Will your assets increase in value in the next five years, enabling you to utilize equity to reinvest, or do you need to stop buying anything anymore? These are the type of things you should consider while evaluating your financial standing.
Demand and Supply
Adding a granny flat could be a great investment as long as there is demand for it, not just for now but also in the long term. It is more affordable than buying a standalone investment property. However, it should be considered only when it’s absolutely necessary and seems promising in the long run. Building a granny flat in an area that already has a lot of granny flats can potentially diminish the value of your property in the future.
Having an extra income source is great, but that should not be the primary motivation for an investor when adding granny flats. The potential for capital growth is far more important as cash flow alone cannot make you a successful property investor. However, if you can improve the value of the asset and get a positive cash flow simultaneously, that would be the ideal scenario.
At the end of the day, property investors should assess and identify their capabilities and limitations to determine their financial goals and come up with a long-term strategy. Investing in a property for a good yield is futile if the properties are not going up. It all hinges on how much extra money you have every single month to cover any negativity in your portfolio.
Another critical thing to consider before building a granny flat is dealing with tenants, which can occupy a significant amount of your time, money, and energy. But, a well-planned granny flat can be a smart investment option for you.
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