Granny Flat Finance Boost

[tcocaro]

People,

I have been approached by a small group of investors to build several Granny Flats but they are yet to even own a block of land\house.

Their plan is to buy blocks with houses (as cheaply as they can) e.g. $380k-$420k type range in the western suburbs of Sydney and then build a granny flat for improved rental yields making the combined HOUSE + GRANNY, cash positive.

Nothing new here but the difference and the point of my post is this. They already have several investment properties each (units etc) and are hitting a finance wall preventing them to easily finance more purchases.

Their idea is as follows;

I prepare a building contract with plans to build a granny flat for a house they are looking to buy. The combined rental appraisals from local agents is used to justify the purchase is cash positive and thus getting finance approval for the whole deal which they otherwise couldn't if they were just buying the house??

Will this approach work? Fundamentally using the "potential" rent of a Granny Flat that is yet to be built as a justification for "serviceability" on a loan application for a house purchase? I could assume the same approach could be applied for people wanting to buy their own "dream" house but cannot service the loan, would building a granny flat sway the banks to extend such people a loan?

Keen to hear brokers views.

Thanks.

 

[pinkboy]

If they are struggling to get funds for a $400k house alone, how are they going to fund the build of the 'proposed' GF? Makes you wonder?

pinkboy

 

[Shahin_Afarin]

People,

I have been approached by a small group of investors to build several Granny Flats but they are yet to even own a block of land\house.

Their plan is to buy blocks with houses (as cheaply as they can) e.g. $380k-$420k type range in the western suburbs of Sydney and then build a granny flat for improved rental yields making the combined HOUSE + GRANNY, cash positive.

Nothing new here but the difference and the point of my post is this. They already have several investment properties each (units etc) and are hitting a finance wall preventing them to easily finance more purchases.

Their idea is as follows;

I prepare a building contract with plans to build a granny flat for a house they are looking to buy. The combined rental appraisals from local agents is used to justify the purchase is cash positive and thus getting finance approval for the whole deal which they otherwise couldn't if they were just buying the house??

Will this approach work? Fundamentally using the "potential" rent of a Granny Flat that is yet to be built as a justification for "serviceability" on a loan application for a house purchase? I could assume the same approach could be applied for people wanting to buy their own "dream" house but cannot service the loan, would building a granny flat sway the banks to extend such people a loan?

Keen to hear brokers views.

Thanks.

You need not only DA but also CC approval on the granny flat before a lender lends money against the granny flat portion. As you don't have the DA and CC the lender will only take into consideration the house and the rental from the house.

How do you know they have hit the servicing wall?

 

[Rolf Latham]

Will this approach work? Fundamentally using the "potential" rent of a Granny Flat that is yet to be built as a justification for "serviceability" on a loan application for a house purchase? I could assume the same approach could be applied for people wanting to buy their own "dream" house but cannot service the loan, would building a granny flat sway the banks to extend such people a loan?

Stepping back for a minute, What has been said makes a lot of sense, most lenders wont take into account rent that may never eventuate.

In addition, you might find that Servicing isnt their issue per se. Its probably a stretched LVR as well, which may make any "servicing fix" dubious in any case.

We have found that if you spend 110 k on a turn key granny in a burb where there isnt much comparable stock in terms of recent sales, the value increase will be 70 to 80 % of the money spent. If you have a client on a tight LVR, that may blow things out.

ta
rolf

 

[tcocaro]

Rolf,

I agree. The fixed price contract will solve the banks fear the rent wont eventuate however I will be placed in a position were I need to enter into a building contract for a deal that might not even go ahead. I feel a "subject to settlement of property X by on or before X with any deposit refundable" would suffice to relay any of my own concerns and that of the banks.

The LVR isnt the issue as they save 20% for each purchase so rather its servicing however my understanding the banks have a concern when the rental received in total becomes more than your primary source of income meaning there is still a cap that exists.

If managed well and the investors are switched on rather than sheep following a get rich quick scheme I feel it can work well i.e. one-two years saving 20%, buy & build granny and repeat.

I feel it achieves capital growth and yield. Previously people have to buy 150k dwellings in the middle of no-where to achieve +ive cashflow but now this is a good balance (imho).

I will see how the process goes and keep you up to date with the outcome.

On paper it works but It relies on every-ones goodwill and common sense to make it happen and there is a lack of both nowadays.

Stepping back for a minute, What has been said makes a lot of sense, most lenders wont take into account rent that may never eventuate.

In addition, you might find that Servicing isnt their issue per se. Its probably a stretched LVR as well, which may make any "servicing fix" dubious in any case.

We have found that if you spend 110 k on a turn key granny in a burb where there isnt much comparable stock in terms of recent sales, the value increase will be 70 to 80 % of the money spent. If you have a client on a tight LVR, that may blow things out.

ta
rolf

 

[tcocaro]

Aside from the technical hurdles fundamentally there is "servicing" and "lvr" and I have been told they are borrowing 80% so I can only assume its servicing.

This makes sense because even if you are buying property (resi) at yields of 5% eventually you will be getting tight. Having a granny flat will solve this issue.

They can even improve their LVR by renovating the existing house etc etc and other arrangements with me as the builder to make it all work.

However I just wanted to throw the concept out there to see the issues in terms of financing it.

CC and DA is an issue but one that can be solved but will need a slightly longer settlement period in order to give me the time to get that.

Thanks for the points you raised.

You need not only DA but also CC approval on the granny flat before a lender lends money against the granny flat portion. As you don't have the DA and CC the lender will only take into consideration the house and the rental from the house.

How do you know they have hit the servicing wall?

 

[Propertunity]

You need not only DA but also CC approval on the granny flat before a lender lends money against the granny flat portion. As you don't have the DA and CC the lender will only take into consideration the house and the rental from the house.

Unless the granny flat build is on a property that will not suit the rules as set out in the Affordable Housing SEPP: http://www.legislation.nsw.gov.au/fragview/inforce/epi+364+2009+sch.1+0+N?tocnav=y
you don't need a DA in NSW to construct a granny flat.

 

[Shahin_Afarin]

Aside from the technical hurdles fundamentally there is "servicing" and "lvr" and I have been told they are borrowing 80% so I can only assume its servicing.

This makes sense because even if you are buying property (resi) at yields of 5% eventually you will be getting tight. Having a granny flat will solve this issue.

They can even improve their LVR by renovating the existing house etc etc and other arrangements with me as the builder to make it all work.

However I just wanted to throw the concept out there to see the issues in terms of financing it.

CC and DA is an issue but one that can be solved but will need a slightly longer settlement period in order to give me the time to get that.

Thanks for the points you raised.

Get them to speak to their broker - a lot of people are surprised by how much the 'real' servicing is.

 

[tcocaro]

I was using DA\CC and CDC interchangeably but I take your point.

Unless the granny flat build is on a property that will not suit the rules as set out in the Affordable Housing SEPP: http://www.legislation.nsw.gov.au/fragview/inforce/epi+364+2009+sch.1+0+N?tocnav=y
you don't need a DA in NSW to construct a granny flat.