Larger home versus smaller home + granny flat

We have a 940sqm block of land that we're planning to build on. We're buy-and-holders so our primary goal is rental yield, but we don't want to disadvantage ourselves if we ever need to sell, either. This is one of our risk management strategies as we are highly leveraged, over 90% across the portfolio at present.

It's relevant to mention that this particular block is in a regional town where good houses go fast, average houses go in 3-6 months, and bad houses sit for a year or more. That said - we do have other houses that would sell very easily, so we could probably live with one that was a little harder to move.

I should also mention that despite the block size, subdivision is not an option at present. The three barriers are a council minimum of 1000sqm, very high council contributions ($30K+ for the new property), and a council sewer easement in an inconvenient spot. We could possibly ask for leeway on the minimum block size, but we'd also have to move the sewer line at our own expense and I suspect in the end we'd be overcapitalising.

We have narrowed it down to two options, plus a variation of the second.

First is your standard glossy 4br/2 bath project home, 250sqm. The loan (including the land we already have) would be about $340K, and we'd get about $400pw on it. So nearly 6% gross yield to start with, not counting depreciation. It would be easy to sell it if we ever needed to, and the capital growth is something we can make some reasonable guesses about based on past years and some leading indicators in the area (we estimate 7-8% pa averaged over ten years).

The second is a slightly less glossy 4br/2bath project home, 196sqm, plus a 58sqm 2br granny flat under the new NSW SEPPs. The loan would be about $370K, and we'd get about $540pw rent, so over 7% gross yield. However, the impact of the flat is hard to guage. Our resale prospects might reduce - our market would be mainly investors and maybe people with elderly family members. We might also get interest from FHBs who see the flat as a nice extra, but they wouldn't pay much extra for it, and some might actively dislike it (because they'd rather a bigger yard). In other words - we might be selling a slightly less desirable main house to a reduced market who wouldn't necessarily pay the full premium for the flat. I don't think we'd actually lose money (unless we had to sell in the first year, but we're not so tightly leveraged as that and we do have income protection) but I suspect over time the 250sqm house would gain more.

There is also a potential variation on the second idea here. The granny flat could be a transportable rather than a built home. It wouldn't be any cheaper this way and the yields would probably stay the same. However, come resale time, if the potential buyer didn't want it and wasn't prepared to pay its value, we could move it to a holiday block I own. So we'd have flexibility to appeal to FHBs and investors alike, and could continue to get some benefit on something that might otherwise become a "sunk cost." On the downside, I suspect that even a good transportable might depreciate faster than a built home in terms of its appeal to buyers.

What do you think?
 
You will reduce your target audience with a house + granny flat down to investors and people with an aged relative or an offspring returning to the nest after a relationship failure.

However, if you are long term buy & holders as you say, then the rental yield from a dual income set-up has to be attractive, and if you never sell then who-cares about reducing broader market appeal?
 
It also depends on how your land is laid out. Is it a corner block with two frontages or a standard block with 1 frontage?

Corner block means you'll be able to put the granny flat on its own frontage so it looks like two separate houses.
 
Thanks all so far.

It also depends on how your land is laid out. Is it a corner block with two frontages or a standard block with 1 frontage?

Corner block means you'll be able to put the granny flat on its own frontage so it looks like two separate houses.

Good point. It's single frontage. It's wide but the easement cuts into it, so it would be arranged battle-axe style.
 
Whats the dimensions on the block like?

Also being such a big block is it possible to do two detached houses on the one title? Failing that why not a duplex where the only joining section is a garage?
 
It's 24m wide by 40m long, in rough figures. However, the sewer easement is a problem - it cuts the block off at the 17m mark, leaving only 5m of usable space after setbacks. We're enquiring with council about whether the main could be moved at our expense.

The block is smaller than council's requirements for a true dual occupancy, even on one title, although we're asking if that can be waived if the neighbours agree.
 
It's 24m wide by 40m long, in rough figures. However, the sewer easement is a problem - it cuts the block off at the 17m mark, leaving only 5m of usable space after setbacks. We're enquiring with council about whether the main could be moved at our expense.

The block is smaller than council's requirements for a true dual occupancy, even on one title, although we're asking if that can be waived if the neighbours agree.

Similar set up to me my block has a house with granny and I'm building on the back. I have a sewer pipe right under the new house. It will cost about $10,000 to encase it. Not that bigger deal so I would consider it if it allows you to make better use of the block
 
Does the sewer line run parallel to the side fence (ie the 40m)

or does it run parallel to the frontage (ie 24m), if so, is it 17m to the front or rear of the property?
 
devo76 wrote:

Similar set up to me my block has a house with granny and I'm building on the back. I have a sewer pipe right under the new house. It will cost about $10,000 to encase it. Not that bigger deal so I would consider it if it allows you to make better use of the block

Now that you mention it, I do recall Council talking about encasement a couple of years ago as an option - thank you. I didn't realise it was that (comparably) cheap.

Does the sewer line run parallel to the side fence (ie the 40m)

or does it run parallel to the frontage (ie 24m), if so, is it 17m to the front or rear of the property?

It's parallel to the fence. In other words (dodgy ascii drawing alert):

Code:
      24m approx frontage
     6             18
|------|------------------|
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | (40m approx length)
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | 
|      |                  | 
|------|------------------|
     6             18

Thanks all for the replies.
 
Assuming you have to leave 1m between dwelling and a boundary, have you considered the following:

1. Build a big house that is up to 16m wide and has its own street frontage.
2. Build a granny flat that is 5m wide and 12m deep and also having its own street frontage.
3. Put a fence roughly where the sewer pipe is.

Granny flat would have its entrance on the side, therefore allowing you to have one room that can be as wide as 5m.

You could almost think of you having two blocks.
1. 17x40 = 680
2. 7x40 = 280

You can then have a small yard at the back for the granny flat, or if you want a yard that goes the entire length of 40m.

Taking a guess, I would say most people dont like the idea of having a house behind them and having a passage way on their side of the property. Whereas if both have street frontage then its not really a problem at all. Most people wont even realise its one block with two houses unless they look closely.
 
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