Do granny flats add value? Some real life figures :)

[neK]

How much value do granny flats actually add

I've seen a few threads pop up lately asking about this so i thought i would share some real data and let everyone draw their own conclusions.

An IP with a granny flat in Sydney had a bank valuation done for equity release purposes:

• Dec 2013: 900k <-- I question this valuation as the valuer never walked into the granny flat for the full valuation, but they did for the main property. Who knows how they valued this one... maybe they took the granny flat into account, maybe they didn't.
• Nov 2014: 1,050k <-- Valuer walked into both properties.

Rental returns are $930 per week combined.
Granny flat cost me $130k all up, landscaping, fencing, blinds, etc in 2009


Now assuming the valuation in Dec 2013 did take the Granny Flat into account (even though they didn't walk into it), it would appear the Granny flat has added value of approximately $130k, so several years after the build, i got a 1 for 1 capital return.

• $744k, Dec 2013 - 787sqm, Cladded home, larger, inferior condition. Terrible layout, 16m frontage
• $830k, Oct 2013 - 700sqm, Cladded home, similar size, inferior interior condition.
• $770k, Nov 2013 - 626sqm, brick veneer, similar size, inferior interior condition.
• $990k, Dec 2013 - 650sqm, Cladded home, larger home, better interior condition

Valuation in Nov 2014 came in $1,050,000 (both properties were inspected).
It would appear the granny flat has added $90-$120k... but it cost me $130k several years ago

• $980k, Jan 2014 - 765sqm, rendered home, similar size, slightly better interior condition, 15.24 frontage, backs parklands reserve
• $840k, Mar 2014 - 650sqm, brick veneer, similar size, similar interior condition
• $850k, Mar 2014 - 746sqm, cladded home, similar size, no pics of interior (assumed to be terrible).
• $930k, Apr 2014 - 650sqm, Brick Veneer, larger home, better interior condition
• $985k, Jun 2014 - 715sqm, cladded home, similar size, better interior condition.
• $960k, Jul 2014 - 740sqm, Fibro house, similar size, better interior condition, 19.2m frontage
• $930k, Oct 2014 - 637sqm, fibro house, similar size, no pics of interior (assumed to be terrible).

All that said, would i sell it? Nope. Its a great cash cow.

 

[skater]

All that said, would i sell it? Nope. Its a great cash cow.

And this is where the value lies in a GF.

Many years ago, I had a valuer value a property of ours. It had 2 x 3bed homes on it. The valuation came back to the average price of a single 3bed home in the area. On questioning the valuer, he said the second one was worthless. Long story was that we were able to get him to value it higher, but it took a lot of work.

We've got another place that's ripe for putting a GF on. We do intend to do it, however have been very conscious that it won't add a lot of value to the property, so have used funds for further purchases instead.

 

[neK]

Just realised i didn't post info about the property the bank valued.

Existing house 3 bedroom, made of monocrete (http://en.wikipedia.org/wiki/Monocrete_construction).
Built in the 1950's, renovations are new kitchen in 2003, polished floor boards, downlights, air con, walls have been painted in 2008 (interior and exterior).
Bathroom is terrible, its old pink tiles that are falling off. Laundry looks ok, still crappy though.

 

[Tonibell]

It would appear the granny flat has added $90-$120k

How did you come to this conclusion ?

There is so much information I was not sure what you found most relevant.

Generally on the comparables it will say whether they think overall your property is superior, inferior or the same - this is the critical piece of information to understand the valuation.

 

[evan1875]

would it be fair to say that in most situations GF does not value add and it only in most cases increases cashflow.

better off purchasing new stock with avail funds until such time no lending from banks, then do a GF construction and continue from there?

 

[belvoir]

Was told very recently I was wrong about this.

See below thread check out post 8:

http://somersoft.com/forums/showthread.php?t=103503

As this is in Sydney and prices have moved 15% from November 2013 - November 2014. Your $130k could have been better spent.

Lets say you purchased a 2 bed $600,000 unit in Newtown using the $130k in November 2013 it would now easily be worth $800k.

In Sydney, granny flats are a waste of money if you can deploy the money elsewhere. Justifying it with 'cashflow' is just a lie. That $200k you have in equity from the second purchase is actually 8.5 years worth of cashflow if the rent is $450 a week for the granny flat.

You actually lost $130k on your granny flat quest because you have not included price inflation or opportunity cost in your numbers.

Only do a granny flat if you can't do anything else with the funds.

 

[nhg]

Only do a granny flat if you can't do anything else with the funds.

Agreed.
With the exception being, building them cheaper than market rate...

 

[neK]

How did you come to this conclusion ?

There is so much information I was not sure what you found most relevant.

Generally on the comparables it will say whether they think overall your property is superior, inferior or the same - this is the critical piece of information to understand the valuation.

Hi Toni, I think you misunderstood the data i posted.

The bank valuation came back as $1,050,000.
Within the valuation, the properties that it was compared against were 5 bedroom homes. The valuer will not look up 3 bedroom homes then "estimate" a granny flat value to add on - (as far as i am aware that's not how it works).

The properties I posted, these were actual sales in the same area that had a similar criteria to my house (but without a granny flat built).

The reason i used this methodology is because if I saw a property with a granny flat for sale, I would price it based what I can buy (and what has been sold recently). Then I would add the cost of the granny flat to it. Now if the cost of buying a "house without out a granny flat and then building a granny flat" is greater than the "house with a granny flat" for sale, then i would consider buying the existing "house and granny flat".

So with the value of $90-$120k, based on recent sales in the area around in 2014, my house in its CURRENT state WITHOUT the granny flat would probably sell for $930k-$960k. Given the bank has valued it at $1,050k (it would probably fetch more on the open market), the granny flat has returned a value of $90-$120k even though it cost me $130k to build.

So from a bank valuation point of view, a granny flat probably would not add a $1 for every $1 spent - my opinion only.

So on one hand, while I would not sell this property for anything less than $1.2m, if this exact property came on the market, I would NOT be willing buy it for anything more than $1,060,000, because i know that I could buy another block and build my own granny flat and it would be cheaper.

Now this is just ONE property. I have another one that is being valued (granny flats can be difficult to value IMO due to tenants and valuers being inflexible), once that comes back, I'll post details on that too. I daresay the renovations I did to the existing house would have a larger impact on the valuation than the granny flat did.

 

[neK]

Was told very recently I was wrong about this.

See below thread check out post 8:

http://somersoft.com/forums/showthread.php?t=103503

This is the exact reason why i made this thread....
Granny flats are great cashflow cows.... just don't expect the granny flat to add onto the valuation.

The problem is that people mix organic growth and manufactured growth and claim what makes them feel happy.

As has been demonstrated in my calculations, the granny flat did nothing to the valuation. Everything was organic.

What a granny flat did do was increase my cash flow which allowed me to purchase more properties.

Overall a granny flat is only a logical upgrade if you can manage to get the cost incorporated into a future valuation or, if you are going to hold the property for a long time and are a passive investor.

You hit the nail right on the head with that one.

 

[neK]

In Sydney, granny flats are a waste of money if you can deploy the money elsewhere. Justifying it with 'cashflow' is just a lie. That $200k you have in equity from the second purchase is actually 8.5 years worth of cashflow if the rent is $450 a week for the granny flat.

You actually lost $130k on your granny flat quest because you have not included price inflation or opportunity cost in your numbers.

Only do a granny flat if you can't do anything else with the funds.

The granny flat was built in 2009. Therefore for the valuation in Dec 2013 it already existed. Same with the valuation in 2014.
In Dec 2013 the numbers indicated I got $1 for every $1 spent. However applying indexation of 3% to the numbers, $130k = $146k. So in actual fact i lost money on the valuation. Where i lost money, I gained back in income multipled by increased servicability.

Now i agree with your sentiment of capital growth, in fact if i used the $130k to buy another house in 2009, it would be worth substantially more. However what you failed to account for here is the servability wall and also the Sleep at night factor. A bank does not lend on equity without the backing of income. Try going to bank on a $0 income and ask for a loan because your property has increased in value (not saying thats my case - but merely an example to highlight the point).

The property without the granny flat was bleeding out money on a monthly basis. For an investment of $130k, I was able to return 18%. This turned the negative cashflow to a positive cashflow, which in turn allowed me to live comfortably and also acquired another property which within 3 months of settlement, increased in value by $290k.

If i went back in time to 2009 and chose to purchase say the newtown property with the $130k (which mind you was borrowed funds anyway) and say the newtown unit cost $450k back in 2009, it would be worth $800k now (using your numbers provided). That would have impeded on my ability to buy a PPOR (me and my wife were planning our nesting phase) as two negatively geared properties would have reduced my capacity to borrow. Therefore meaning i would have missed out on 340k since 2010.

Therefore using such numbers, buying in newtown would have increased my net asset by 350k ($800k-$450k). However by choosing not to buy an IP in newtown and investing the funds into an existing IP for a granny flat, it enabled me to buy two properties instead due to the increased cash flow it provided, each property providing a gain of $290k and $340k (total $630k).

Add to all that my wife probably would left me and hated the life i would have had to make her life (we live comfortably and can provide financial aid to her immediately family at presemt - which has allowed them to purchase property themselves) and been really stingey people throwing all the money down into negatively geared properties hoping for the pay day to come, meanwhile convincing ourselves that getting a nice big tax return at the end of the year due to negative gearing makes it all worth it.

Its easy to look a lever in isolation, put it in context with the rest of the moving parts.... its a completely different story.

That said, granny flats are not a get rich quick scheme either, from inception it requires planning, how you intend to use the cash flow and when.

 

[Tonibell]

Was told very recently I was wrong about this.

See below thread check out post 8:

http://somersoft.com/forums/showthread.php?t=103503

As this is in Sydney and prices have moved 15% from November 2013 - November 2014. Your $130k could have been better spent.

Lets say you purchased a 2 bed $600,000 unit in Newtown using the $130k in November 2013 it would now easily be worth $800k.

In Sydney, granny flats are a waste of money if you can deploy the money elsewhere. Justifying it with 'cashflow' is just a lie. That $200k you have in equity from the second purchase is actually 8.5 years worth of cashflow if the rent is $450 a week for the granny flat.

You actually lost $130k on your granny flat quest because you have not included price inflation or opportunity cost in your numbers.

Only do a granny flat if you can't do anything else with the funds.

Getting a relatively secure 15% on your equity is not a bad investment - you might do better with a focus on capital growth, but you could also do a lot worse.

It is a little too easy to run the numbers in hindsight - you should also run your example based on investing in say, Gladestone, over the same period.

For us, we had a property at North Ryde that was so negatively geared that we were ready to sell it in 2012 - putting a granny flat on it meant that we could hold it and benefit from the growth period. It also gave us a little faith that property holdings did not have to have a big impact on our lifestyle. The funds invested in the granny flat will be recovered if we sell - even if it is not fully in the bank valuation.

However, we did pass up on a further purchase in Western Sydney because we built two granny flats instead.

 

[neK]

To me this is a prime example. The granny flat is about cash flow, cash flow that can help you sustain the property. We all know property growth isn't linear. It goes through its peaks and troughs just like anything else does. We just need to hold it for long enough to make that growth.

Belvoir, its very to easy to say what if you bought in XX Year with hindsight. What if instead of buying in 2013, you bought in 2003? What good would it have done for you then.

 

[paul81]

if i had high income then i would be more aggressive in buying and when reach borrow limits, i would then add granny flat.

But my strategy is to buy property and add a granny flat for cash flow. im low income so need saftey net for rainy day or rate rises.

With the exception being, building them cheaper than market rate...

yes, another reason i opt for granny flat. i can get them built below market by about 25k, even cheaper if i do owner builder but havnt got the courage yet.

btw if i provide figures would anyone be able caculate if my granny flat added any value to my property?

 

[neK]

btw if i provide figures would anyone be able caculate if my granny flat added any value to my property?

Sure, happy to have a crack.
But what exactly do you mean by "add value" - in what areas?

 

[paul81]

im wondering if the cost of my granny flat cost (100k) is reflected in my current valuation.

area is Blacktown 2148
it has 2br house on 920sm land
purchased for $400k and settle in 01/01/12
built granny flat 01/06/13

just did a valuation last month with ANZ, its now 640k

so is there a way to tell what part of 640k is capital gains and granny flat value?
sorry if that dosnt makes sense...

 

[james55]

Paul, probably the best way is to compare it with similar properties without a granny flat. Ie 2 bedrooms on 920sqm with similar quality of accomodation and street appeal. Assuming the valuer has valued it correctly then the difference would then be the value of the granny flat.

 

[neK]

im wondering if the cost of my granny flat cost (100k) is reflected in my current valuation.

area is Blacktown 2148
it has 2br house on 920sm land
purchased for $400k and settle in 01/01/12
built granny flat 01/06/13

just did a valuation last month with ANZ, its now 640k

so is there a way to tell what part of 640k is capital gains and granny flat value?
sorry if that dosnt makes sense...

Pretty much what James has said. Short of you posting you the actual address, your best bet is look up sold properties.

Easiest way is to use the domain app, look up 2 bedrooms in blacktown, then click on market insights and check out the sold properties.

From there you can gauge what your IP would have sold for if it didn't have a granny flat.

X = Valuation less Value of your IP without granny flat

For example, based on your findings, you estimate your IP without the granny flat is valued at $550k.

Valuation ($640k) less Your estimated value ($540k) = $100k.
Say you spent $100k on the granny flat, then the granny flat added zero value to capital growth.

Therefore the difference between $540k (your estimated value) and $400k (your initial purchase price) = $140k (this I would deem to be organic growth - ie growth that would have occurred without the granny flat).

I've illustrated using numbers because its easier, I do not know the blacktown area, so the figure of $540 is entirely made up.

 

[RetireRich101]

Lets say you purchased a 2 bed $600,000 unit in Newtown using the $130k in November 2013 it would now easily be worth $800k.

You would need $130K in cash plus stamp duty of $23k to fund the Newtown purchase.

The 130K GF flat build would be borrowed money typical 20% which is 26k and no stamp duty required.

An added benefit of the GF is you virtually increase very minimal or NIL on the land tax threshold.

I always think the bank valuation for House+GF is 10% conservative, and 5% conservative for a normal house. The real downfall for house+GF is in the bank valuation, but not in the open market.

Like the example of the Blacktown property with GF bank valued at $640k. with such an attractive large block, I would think this to be closer to 700k or over if this was sold in open market...

 

[devank]

I totally agree with you neK on practically all your points.

I think just the building value is added to the total value (Not the paper costs).

Positive cashflow from our granny flat simply compensated 3 other negative cashflow properties. This let me sleep peacefully at nights.

 

[RetireRich101]

I totally agree with you neK on practically all your points.

I think just the building value is added to the total value (Not the paper costs).

Positive cashflow from our granny flat simply compensated 3 other negative cashflow properties. This let me sleep peacefully at nights.

Wasn't this Helen Collier-Kogtevs (who?) strategy? ie to buy 10 regional properties that are positive cash flow, and buy 10 capital growth properties. The 10 high yield allows you to keep 10 CG properties.

When you look at it, the House + GF is similar to her strategy.

The Front house is the CAPITAL GROWTH property, while the GF ( may or may not increase in value) is the YIELD property to keep your portfolio in equilibrium