Financing Granny Flat - chicken and egg

[BelezaPura]

I've got what I consider a chicken and egg dilemma.

I would like to build a granny flat on the block I have in Western Sydney, however I'm struggling to understand what I can do to finance the project.

I have an LVR of about 90% on the property. That however includes a line of credit of around 25,000 drawn down against this loan. I am planning on using this money to kick off the project.
I've spoken to a bank and a broker. Both tell me I need to have the fixed price contract with the builder so the bank can order a valuation.

That's the chicken and egg situation comes into play. In order to get to this point, I need to confirm the project can go ahead on my block of land AND have the building plan drawn up to get council approval.

All of that before I find out whether the bank will lend me the money.

To get to this point, I believe I would need to spend around $3500 (based on some quotes I got).

For the bank to lend me the money, I assume they expect the valuation of the property after the GF is built to cover the expenses of building the GF. Is this reasonable to expect in Western Sydney (Lethbridge Park)?

I'm trying to get your opinion as to whether I should bite the bullet and spend the money or whether my chances of getting finance are too slim under these circumstances.
Any word of adivice?

 

[macca446]

Hi,
Welcome to the forum I would like to say it is up to the individual to pursue what they want so cannot give you a direct answer to your question but personally myself if you know that you have the disposable income to service the loan and that once grannyflat is built it would provide a further $220 to $260 per week income depending on size and bedrooms of granny flat not much to lose which a percentage is calculated in the loan process but if you can not get finance now once plans are approved you have 5 years to build .
Regards,
Macca.

 

[Propertunity]

I would like to build a granny flat on the block I have in Western Sydney, ..... In order to get to this point, I need to confirm the project can go ahead on my block of land ....

You have 2 issues here. One is finance (which I will leave to the mortgage brokers) and the other is whether or not your block will suit a granny flat build and if it does - whether you will go down the Private Certifier route with a 10 day approval or whether you have to go down the DA route which is a 6 week minimum process with Council.

A guy like brazen from the forum here, who is Serge at http://www.grannyflatapprovals.com.au/ will be able to assist.

....AND have the building plan drawn up to get council approval.

If your block is suitable, then go down the Private Certifier route and stay the hell away from Council.

...To get to this point, I believe I would need to spend around $3500 (based on some quotes I got).

Get some advice first from brazen.

After that, if it looks like a goer, spend the money. Unless you do this much, you do not get to pass "Go".

 

[devank]

Just remember bank may not increase the value of the property by your building cost.

 

[Aaron_C]

Just remember bank may not increase the value of the property by your building cost.

This is the most important point. Single title with 2 dwellings is always a) more difficult to value and b) gives a lower value than the two single dwellings combined value.

 

[Peter_Tersteeg]

At 90% you're going to have a lot of trouble financing a granny flat. Generally you'd pay cash for the GF and then get another valuation after construction to recover your costs via a top-up.

Then you've got the added problem that in the current market, valuers will not recognise any increase in value.

 

[Marty McDonald]

Doing one at the moment. $105,000 GF construction in western Sydney (St Mary's)added about $70,000 to the value. So at 90% you may struggle to get the project to valued up enough.

You should be able to get a valuation done with a draft plans, draft contract and specifications. (as long as things wont change materially).

However your first step would be to see if you qualify for a complying development. If the answer is yes you can explore financing oiptions without incurring too much cost.

 

[Shahin_Afarin]

I've got what I consider a chicken and egg dilemma.

I would like to build a granny flat on the block I have in Western Sydney, however I'm struggling to understand what I can do to finance the project.

I have an LVR of about 90% on the property. That however includes a line of credit of around 25,000 drawn down against this loan. I am planning on using this money to kick off the project.
I've spoken to a bank and a broker. Both tell me I need to have the fixed price contract with the builder so the bank can order a valuation.

That's the chicken and egg situation comes into play. In order to get to this point, I need to confirm the project can go ahead on my block of land AND have the building plan drawn up to get council approval.

All of that before I find out whether the bank will lend me the money.

To get to this point, I believe I would need to spend around $3500 (based on some quotes I got).

For the bank to lend me the money, I assume they expect the valuation of the property after the GF is built to cover the expenses of building the GF. Is this reasonable to expect in Western Sydney (Lethbridge Park)?

I'm trying to get your opinion as to whether I should bite the bullet and spend the money or whether my chances of getting finance are too slim under these circumstances.
Any word of adivice?

If your LVR is currently 90% - what will your LVR be after construction? Also how much are you budgeting for the construction of the GF?

 

[Rolf Latham]

Just remember bank may not increase the value of the property by your building cost.

very very likely, unless the property is in a more upmarket area.

75 to 90 c in the dollar spent is the usual gain with most western burbs.

You really need a little bit of hurt money into the deal begin with and if you can raise the equity to get to a fixed price contract, its probably to skinny for you at this time.

Providing the equity is there in the VAL or you have cash, a 90 % build for a Granny isnt a problem as long as you choose a lender that doesnt have underlying policy exclusions ( ANZ LMI and also WBC LMI with detached grannies as 2 obvious ones)

ta
rolf

 

[devank]

ANZ wanted 75% LVR for dual occ. Finally my mortgage manager gave me 50% of the building cost arguing it was an extension to the main house.

 

[Rolf Latham]

ANZ wanted 75% LVR for dual occ. Finally my mortgage manager gave me 50% of the building cost arguing it was an extension to the main house.

most brokers would be aware that ANZ isnt a good fit for that.

if you are already there.........then there isnt much you can do about it.

Thats why, its important to plan WELL ahead.

Not much fun paying a BIG lmi premium, and then to find out you need to move lenders.........


ta
rolf

 

[Highlygeared]

IMHO
its not worth building a granny in Lethbridge Park, irrespective if you can finance it.

 

[Rolf Latham]

IMHO
its not worth building a granny in Lethbridge Park, irrespective if you can finance it.

the yields seem to work though

ta
rolf

 

[scha9799]

Thank for above info.

if lethbridge park is not suitable.

so which area or what type of suburb is more suitable for granny flat strategy ?

 

[BelezaPura]

IMHO
its not worth building a granny in Lethbridge Park, irrespective if you can finance it.

Why do you say that? My house at the moment is cash flow neutral. By investing in a GF, assuming it rents for about $240 (possible according to my PM) it will put some money in my pocket every week. The yield seems quite attractive IMO.

Could you explain your reasoning?

 

[BelezaPura]

Just to clarify, my mortgage is @ 90% LVR including $25,000 cash drawn from the loan.
If I use this money in the project, that would leave about $75,000 to be financed.

Assuming the bank comes to the party with that amount, which by what some of you have said would be probably around the increase in value of the property, the project could go ahead.

As you can see, I'm trying to make it work

 

[Shahin_Afarin]

Just to clarify, my mortgage is @ 90% LVR including $25,000 cash drawn from the loan.
If I use this money in the project, that would leave about $75,000 to be financed.

Assuming the bank comes to the party with that amount, which by what some of you have said would be probably around the increase in value of the property, the project could go ahead.

As you can see, I'm trying to make it work

Technically if the LVR is 90% at the end of construction then you are fine. What I have found is that if the investor spends say $80k on the GF, the value of the property does not increase by $80k. So my question is that if you are able to use some of the construction costs to get it to or keep it to 90% then it will work. I personally used my credit card (but I had adequate cash-flow to pay it back within say 30 days) and I also negotiated with a few trades people that I knew to pay them a little later than usual. 2 quick questions - will the GF be fully contained and who is your current lender?

 

[BelezaPura]

Technically if the LVR is 90% at the end of construction then you are fine. What I have found is that if the investor spends say $80k on the GF, the value of the property does not increase by $80k. So my question is that if you are able to use some of the construction costs to get it to or keep it to 90% then it will work. I personally used my credit card (but I had adequate cash-flow to pay it back within say 30 days) and I also negotiated with a few trades people that I knew to pay them a little later than usual. 2 quick questions - will the GF be fully contained and who is your current lender?

What do you mean by "fully contained" ?

My lender is AMP.

I can see I'll need to use some of my own money on the project. I just can't figure out how much at this stage.

 

[Shahin_Afarin]

Fully Contained = Kitchen, Bathroom, living areas, etc. Basically means that they can do 'everything' within the dwelling, i.e you don't need to go into your neighbours house for shower. I am sure this is what you are doing but just double checking because it is very important.

You are on the right track but if I were you I would get some valuations before embarking down the PC route. I would talk to some agents about resale value, rental value, rental demand, etc and then I would speak to a valuer and get them to give you a valuation. If you are going with say AMP or whichever lender then preferably use that lender's valuer. This is obviously not concrete as things (market, the valuer themselves, etc) may change but it will provide you with some solid foundations for you to do the calculations.

 

[macca446]

Hi BelezaPura,
I am going to build a granny flat at my property in Tregear the front house will rent $280 to $290 and the granny flat $250 to $260 , vacancy is tight but doing research building a 2 bed 60sqm flat is the way to go, larger and more appealing ,yes the cost is higher but easier to rent. I have tenant in house now but they were not happy in losing their space so their moving on I have to wait up to 90 days for them to leave before construction starts,but going to get everything approved before hand. Everyone has their own ideas in investing personally for me regarding my property its about increasing my cash flow and long term hold.

Regards,
Macca