Financing Granny Flat - chicken and egg

[BelezaPura]

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.

Yes, it is fully contained and around 60m2.
I'm talking to my PM about it at the moment and she's given me a rental estimate. Renting it out won't be a problem either. I like the idea of engaging a valuer to get an idea about what to expect.

As you said, that will give me a solid foundation for my calculations.

 

[Shahin_Afarin]

Wow 60smq is great. Sorry to sound like a pessimistic but you just need to ensure you do not over capitalise. Also rental return is one thing, rental demand is another. Remember to try and get the valuer who will most likely valuing the property to value it (either the lender or your broker can confirm this).

 

[BelezaPura]

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

I'm with you Macca, I've decided that I want to hold my property. Therefore I want to make sure it provides the best possible cash flow. That is why I think the GF is a good idea. Unfortunately my equity position is quite tight (hence this thread) which makes the project a bit more challenging.

I hope all goes well with your project! It would be nice to hear about your progress once you get going.

Cheers

 

[macca446]

Hi,
Yes shall do that once things get going, i am a bit more fortunate as I have available redraw to use so do not have to see my bank thank god.

Regards,
Macca

 

[Rolf Latham]

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.

Hi BP

If your total insurred loans with AMP are under 850, and you dont have lot of external Genworth LMI exposure, AMP will assess the deal in house.

If your vals are ok then you should be OK, though be aware, you will need to convert to the higher cost SVR rather than basic product.

We use AMP a bit, and have 2 GFs on the go at the moment.

Your broker will be able to get an upfront val once u have done all the work to get plans and specs AND apprvals etc.

AMP is one of those rare ones where you do need the certifier/council to approve the deal before the lender will provide formal, some lenders you only need certifier / council approval when make the first progress draw.

Look on the bright side, least you arent with ANZ or WBC

ta
rolf

 

[Highlygeared]

Apart from the fact that the equity gained may not even equal the cost of the granny (in suburbs like Lethbridge Park), I can cite several reasons:

- cost of granny is the same whether you build one in say Mosman or LP
- yet, return on the cost of the granny is much larger. A 2 bed granny in LP yields say, $250 pw, granny in Mosman will yield $550-600 pw?
- cost of deposit for construction loan (or worse, cash if you fund it yourself), could be put towards the purchase of 1 or more lower priced properties.

Don't get me wrong there's a place for granny flats (and I have done 1 and approved plans for another) but I think you get more bang for buck in higher priced suburbs for reasons aforementioned.

Just my 2c. Cashflow is important but the habit of spending $1 and getting back at very least $2 in equity shouldn't be ignored.

 

[Rolf Latham]

- cost of granny is the same whether you build one in say Mosman or LP
- yet, return on the cost of the granny is much larger. A 2 bed granny in LP yields say, $250 pw, granny in Mosman will yield $550-600 pw?

k, but can I buy a 600 sq m plot in Mosman for < 300 k.............think not

Scary I know,
ta
rolf

 

[Brady]

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.

Big +1 well put

 

[Highlygeared]

k, but can I buy a 600 sq m plot in Mosman for < 300 k.............think not

Scary I know,
ta
rolf

The general point is consider how much value (and cashflow) the granny flat will add to the property. A $100K outlay for a granny flat on a $250K property, wth an end value of $300K for house/granny is not the best way to spend your hard earned.

I built one in the Hills for $70K (double garage + workshop conversion) and now rents for 420pw...combined with no loss of rent on the main house. That probably makes more sense.

Have a CDC approved for another garage conversion for a house in SW Sydney. Start to finish cost will be $35K (written quote) and corresponding rent of $260-280 pw. And I had to restrain myself bc the house is only worth $300K and $35K is a 10% deposit towards anotehr house in the area. House yields close to 7% as is so whilst still neg, its not a massive shortfall.

 

[Rolf Latham]

The general point is consider how much value (and cashflow) the granny flat will add to the property. A $100K outlay for a granny flat on a $250K property, wth an end value of $300K for house/granny is not the best way to spend your hard earned.

I built one in the Hills for $70K (double garage + workshop conversion) and now rents for 420pw...combined with no loss of rent on the main house. That probably makes more sense.

Have a CDC approved for another garage conversion for a house in SW Sydney. Start to finish cost will be $35K (written quote) and corresponding rent of $260-280 pw. And I had to restrain myself bc the house is only worth $300K and $35K is a 10% deposit towards anotehr house in the area. House yields close to 7% as is so whilst still neg, its not a massive shortfall.

Not negating what you are saying, it does make sense

Isolated ?, hard won deals like the one you mention in the SW for 300k may be a direct comparable, but a Hills purchase isnt.



Id guess many people buy in places like Lethbridge park et all, because thats what they can afford, or what they perceive they can afford (and that indeed is a totally different discussion that I can go on and on and on about)

I have had few come through in the region (more like Blacktown) where the overall numbers seem to work ok for that level of "affordability.

430 val, 640 to 680 a week rent.

Keep the ideas coming, because we do need diversity !

ta
rolf

 

[LisaParker]

I happened to chat with a local valuer in the LP area a few weeks back.

He confirmed what I suspected, that the GF does not add any capital gain and in some instances, particularly in places like, Bidwell and surrounds, they only add $30K value to the property after a GF addition.

At most in those areas they will add $70K bc they know that is what it costs to build a 60sqm granny flat.

If you are chasing yield (need yield), I would probably do it if it were me, it makes sense. However, if I didn't need the cash flow, I would be putting the $25K into another property. It depends on your goals and strategy at the end of the day. You have to choose the option that best serves your "end game'.

With the GF's, I do agree with Highlygeared, the GF costs the same regardless of where you park it, however the rent return does vary a great deal. You also have to do the numbers on the entry cost and rental return on the original house though and take the entire pictue and rate of retun into consideration.
There are areas for $280 - $350K where you can put the same GF on the back and get $360 - $380per week.

Regards Lisa

 

[Rolf Latham]

ll and surrounds, they only add $30K value to the property after a GF addition.

At most in those areas they will add $70K bc they know that is what it costs to build a 60sqm granny flat.

part of the challenge with valuers in this regard is that there is a distinct lack of comparable sales of similar stock, which means that opinion, NOT market evidence forms a view.

Instead of trying to use NON comp stock to form a view on value, valuers should simply say , no Im sorry, im out of my depth here, I cant get accept this job..................

And even when you can find similar stock, for some reason its NOT comparable.

Youd really struggle to build a turnkey 70 k 60 sq m granny unless its at the very very end of very ugly.

ta

rolf

 

[Aaron_C]

Best solution is to find a good valuer that knows how to value properties with granny flats. Then use a lender where you can pick your valuer. Done.

 

[BelezaPura]

I happened to chat with a local valuer in the LP area a few weeks back.

He confirmed what I suspected, that the GF does not add any capital gain and in some instances, particularly in places like, Bidwell and surrounds, they only add $30K value to the property after a GF addition.

At most in those areas they will add $70K bc they know that is what it costs to build a 60sqm granny flat.

If you are chasing yield (need yield), I would probably do it if it were me, it makes sense. However, if I didn't need the cash flow, I would be putting the $25K into another property. It depends on your goals and strategy at the end of the day. You have to choose the option that best serves your "end game'.

With the GF's, I do agree with Highlygeared, the GF costs the same regardless of where you park it, however the rent return does vary a great deal. You also have to do the numbers on the entry cost and rental return on the original house though and take the entire pictue and rate of retun into consideration.
There are areas for $280 - $350K where you can put the same GF on the back and get $360 - $380per week.

Regards Lisa

Yes Lisa, I take your and Higlygeared's point about getting a better return elsewhere and that is definitely something I need to consider carefully. I don't need the cash flow as such as my property is cash flow neutral at the moment, but would like to increase the return if it makes sense.

The problem with buying another property is that it will most likely be negatively geared and that is something I would rather not hold at the moment, considering the general uncertainty in the market and my personal circumstances. That leaves me without many options. I either go ahead and build the GF, despite the good points you've raised, or maybe be patient and sit tight waiting for my equity position to improve...

 

[Highlygeared]

If it were me and its just my opinion, get the approval via a draftsman and a PC (cost $3K or so), keep it in your backpocket and build in the next 5 yrs when youre in a stronger position.

IF you have access to $30-40K now, find a neutrally geared/positive cashflow prop in a good location and try to rack up anotehr prop.

Al up to you though and there is no 'wrong' decision.

 

[devank]

I agree. By building a granny flat you are basically using up all your deposits/equity. If you are not in need for cash flow then why go into something which will limit your future options? In an year time, you will even have equity in the same property which you can use!

 

[Nathan]

Build a cheap one, buy it cash using a personal loan is an option? I have seen people do this but important to do ALL of your due diligence and understand the pros AND cons of adding the property.

I would agree private certifier is the way and important to make sure you are adding value not just overcapitalising.

Good luck!

 

[Aaron_C]

It's a decent idea if you are trying increase cashflow and not using the granny flat property as security. Problem is everyone wants to get 100% finance on the GF construction (who doesn't?) but fail to see that dual occupancies always have a reduced value and are not good for capital gains or leverage unless cut up and subdivided into smaller chunks. However, if you have some spare cash/equity from other properties, by all means go for it as it is a good RoI from a cashflow perspective which aids in servicing for other, non-related purchases.

 

[Rolf Latham]

dual occupancies always have a reduced value and are not good for capital gains or leverage unless

Dont disagree in general but object to "always".

There are circumstances where a dual occ works out just fine,and yes compared to a strata subdiv, they arent comparable in all the points you mention.


ta
rolf

 

[Newbieatlife]

i managed to secure over 120% construction finance (on build cost) on my granny flat in Blacktown through homeside (the extra "20%" included removal of a large amount of asbestos on site which only ended up costing $10k). This was with almost 85% LVR so I also had to pay LMI

House value was at purchase price of $377,000 and somehow they valued the house + granny flat at over $480,000??

They only did one inspection when the slab was down and one when it was completed. They released the funds in 7 stages with 0 fuss at all which kept the builder happy.

Westpac and AMP were only willing to lend about 80% of the build cost only

All in all a good experience from a finance perspective and a bit of cash at the end to go in my offset/next purchase

Although property currently leased at $710 pw combined, I wouldn't do something like this again unless I was cashed up and bored...Way too much time and frustration spent on the project with minimal equity gains if any at all.