Is this money well spent? (numbers included inside)

[Tenex]

First of all I must say these forums are amazing. They have definitely opened my eyes to a lot that I did not know before and I have also met and spoken to a couple of really good people from here.

I am only new to this so I hope I can get some information on further cost spend that I am about to make.

I have purchased a property in Hills area NSW that has a 3 bedroom as the part of the main house and an existing extension on it with a large bedroom, shower and toilet which has about roughly 78 SQM living areas as the extension.

In it's current format it is costing me about $3620 monthly interest repayment, plus about $125 monthly insurance plus about $300 per month for water and council. That does not include the costs incurred while the property is vacant which is roughly about 3 weeks before I can tenant it. Now the rent for the property is $660 per week. Therefore per month I am roughly minus $1405 which we then divide between myself and my wife's income for tax purposes.

Now I may potentially be able to turn this attached extension into a dual occupancy (I have done some basic homework / enquirers). This costs a bit higher than a granny flat to get approved and build but allows me to turn the extension into a 2 bedroom self-contained independent living area with it's own post box and bin etc. This gets better rent and longer tenants compared to a situation where I turn it into a granny flat.

I anticipate in a bad scenario I may need about 80k in order to draw plans and get approval from council and also put in a new kitchenette, get the walls up and running, do the required plumbing etc as most of the structure is already there.

This 80k then takes my monthly (interest only) repayments to $3940 and may also increase my council rates and insurance rates (lets say double) to $250 and $600 per month. However in this scenario I can then get at least $500 for the main house and $320 for the second occupancy. (These numbers are according to the current rental market which is not a great market for this area.). So my rental is then at $820 per week and I anticipate as the rental market improves I may be able to achieve $900 per week.

Obviously a lot of the above numbers are bad case scenarios. For example I may only need 35k to get the second occupancy up and running and the rates may increase but not double.

The plan is then to keep the property for the next 6 years before assessing the market again and potentially selling.

But my questions are, is this a worthwhile spend or should I keep everything as is?

Secondly from people who have experience in dealing with attached occupancies / granny flats, can this increase the amount of vacancy per year due to tenants not getting along or not liking the lack of privacy? (the obvious plus is that it makes the whole thing more affordable)

I would appreciate any detailed comments.

 

[vaughan]

... I may only need 35k to get the second occupancy up and running ...

The second occupancy will need to be fire-walled, which is expensive.

You will also need to budget for separate water, gas and electricity meters for both tenants. Unless the utilities are separately metered, the landlord needs to pay them for both tenants.

 

[knightm]

The second occupancy will need to be fire-walled, which is expensive.

You will also need to budget for separate water, gas and electricity meters for both tenants. Unless the utilities are separately metered, the landlord needs to pay them for both tenants.

Agreed - I would stick closer to your first cost estimate as it will cost a bit and their will be contributions to council along with actuals.

As to the OP's question about dual occs, they are everywhere, and widely accepted as a way of living. However you should consider whether the amenity suits the LOCAL area (micro) and the kinds of people you want to target. EG if everyone in your street is families with 3 kids and 2 cars wanting a big 4x2 then you might be stuck with an "undesirable" property type for your area.

In general I am seeing high levels of demand for dual occ and gf properties due to both blended families and investors wanting multiple income streams.

 

[knightm]

I would add (to answer the question in your post title)

To make a dual occ development "money well spent" I would want to know the development was profitable. By this I mean after all costs (total input costs) I had a measurable equity gain. Many developers want 20% or so for the work and risk involved. You might be happy with a little less as you already own the house for but a dual occ to be worthwhile (even an internal one) there should be a lift. The rental gain is important too but if you end up in negative equity then you will be cranky.

 

[Tenex]

Thank you for the replies. A couple of things that may be worthwhile to mention to make it more clear.

In terms of tenants, I have asked a few agents in the area. From what they are telling me, the rents are high and not everyone can afford the rents (and this is while the rental market is down due to the fact that most people are buying rather than renting).

So according to the agents, anything I can do to reduce the rent such as dividing the area and renting each of them at a lower rate will attract people because it brings the property within their affordability range. But I don't have first hand experience with this to know what are the potential problems I may face.

In terms of the dual occupancy costs, majority of the infrastructure is already there and I am not adding to it. The main part of the house is brick veneer and if I close off the main entrance from the main house into the extension with brick and perhaps a fire rated sheet thats most of the fire rating done.

There is already a bathroom and shower built so I need to redo some plumbing for a laundry / hot water system and put in a Kitchenette. I think a realistic number including council levies to turn this into a dual occupancy is around 35k to 40k.

Trouble is when I bring people in for quotation they normally dont give any numbers at all or an accurate number, so thats why I have not been able to get a proper quotation.

The other factor is as rents go higher this property can become a more attractive rental option.

I suppose I am trying to wrap my head around costs vs benefits and trouble is I dont have very reliable numbers at present even though I have tried to get a few quotes. Maybe I am not going about it the right way.

 

[vaughan]

... The main part of the house is brick veneer and if I close off the main entrance from the main house into the extension with brick and perhaps a fire rated sheet thats most of the fire rating done.

There is more to firewall than a couple of sheets of fyrchek. The wall needs to go from foundation to roof (through the floor and ceiling) without a break so that a fire on one side cannot pass through, above or below to the other side.

There are quite a few threads on firewalls, and in many cases the cost of doing the firewall makes the dual occ project infeasible. Which is why detached dual occupancies are popular: they are usually cheaper than doing a conversion of an existing building.

 

[Tenex]

There is more to firewall than a couple of sheets of fyrchek. The wall needs to go from foundation to roof (through the floor and ceiling) without a break so that a fire on one side cannot pass through, above or below to the other side.

There are quite a few threads on firewalls, and in many cases the cost of doing the firewall makes the dual occ project infeasible. Which is why detached dual occupancies are popular: they are usually cheaper than doing a conversion of an existing building.

You are right but it appears that I am in a fortunate position that most of the original house is brick and most of the extension is built on a slab rather than being elevated and the extension also has a flat colorbond roof and the floor of the extension is made of tiles.

So in terms of fire-proofing although I still will need to run a few sheets here and there and ensure it is connected from the roof to the ground, I don't anticipate it to be the biggest issue.

Also even if I wanted to make a granny flat the fireproofing would still need to happen.

 

[knightm]

You are right but it appears that I am in a fortunate position that most of the original house is brick and most of the extension is built on a slab rather than being elevated and the extension also has a flat colorbond roof and the floor of the extension is made of tiles.

So in terms of fire-proofing although I still will need to run a few sheets here and there and ensure it is connected from the roof to the ground, I don't anticipate it to be the biggest issue.

Also even if I wanted to make a granny flat the fireproofing would still need to happen.

So it sounds like there might be demand and it seems the biggest issue is lack of firm tradies costs. I would call the ones who have visited back and ask for a written quote. You could also get a draftsman/private town planner etc to quote project managing the DA if you don't feel confident handling this on your own. Serge from Granny Flat Approvals does heaps of this kind of thing for Granny Flats no idea if he also handles Dual Occ applications. You still need a rough idea of the end value too if you go ahead and do the conversion. The difference between the cost base and the end value is your equity gain, this is what helps make the final decision.