NSW Affordable Housing Scheme aka Granny Flats

[RazzaDazzla]

I feel like I've had my head in the sand.

It's recently come to my attention that under the NSW Governments Affordable Housing Scheme; provided your block of land is larger than 500 and something m^2 and the granny flat is less than ~64m^2; you can get an approved private certifier and build a granny flat on your property.

There is no DA, no possibility of objection from neighbours. This seems too good to be true! Spend ~$60K on a granny flat, rent it out for $150/week and you're yielding 13%.

What's the catch?
Obviously rental return on primary dwelling would decrease as their land size decreases.

I assume Granny flat's can have separate tenancy agreements? So one agreement for main dwelling and a second agreement for granny flat?

Seems to good to be true.

 

[Aaron_C]

The catch is that you may not get the increased value above the $60k you spend on the granny flat.

 

[MsAli]

This is the potential catch: http://somersoft.com/forums/showthread.php?t=79403

 

[DaveM]

Another catch is the rentability of the front property may also decrease depending on how well separated the two dwellings are. If they are totally private its generally OK, if its a typical box on sticks in the backyard GF, some families with kids dont like the idea of a stranger living in the back yard.

 

[devank]

Few other problems:
- Some banks have lower LVR (70%) for dual occupancies.

- If it is considered as 'extention' to the main house then value increase is lot less. It is almost 50% of the granny flat cost in my case.

- Generally we need to pay the water bills if they are not metered separately. Getting a second meter is too expensive.

- It is not that easy to find a property which can look after itself.
I have attached an Excel working to see what sort of property I need to buy from building a granny flat point of view. I hope I made a mistake in my calculations as things aren't that great

 

[john72]

Further

Further to this the cost of the granny flat itself may be 60k but there may be issues with council approval and also access for the build itself.

In terms of rental return you can't beat a granny flat but rental return is just one factor to consider.

 

[RazzaDazzla]

Few other problems:
- Some banks have lower LVR (70%) for dual occupancies.

- If it is considered as 'extention' to the main house then value increase is lot less. It is almost 50% of the granny flat cost in my case.

- Generally we need to pay the water bills if they are not metered separately. Getting a second meter is too expensive.

- It is not that easy to find a property which can look after itself.
I have attached an Excel working to see what sort of property I need to buy from building a granny flat point of view. I hope I made a mistake in my calculations as things aren't that great

Thanks Devan for the detailed reply and the peek at the spreadsheet.
Some questions: the percentage figures you used are your own personal rule of thumb percentages I assume?

Also, IMO I think $100K for a GF build is pretty excessive. I tipped the GF build down to $60K this gave a 5.1% nett yield.

Regarding yields, I prefer to think of my returns this way:
- What are my total closing costs (deposits, legals, building the GF if it can't be financed) for the whole project.
- What is my net return after costs (interest, council, insurance, etc.)
- My yield is then: net returns/total closing costs.

I choose to view investments like this as I am only putting up the closing costs. It doesn't matter where the underlying value is $300K or $3M; what matters to me is how much am I going to get back VS the cost of me purchasing that asset.

In your supplied spreadsheet, with a $60K GF build, this gives me a return on closing costs of 20.2%.

So with that in mind I'd be better off investing ~$105K in deposit and closing costs for a granny flat project and receiving $21K net in returns (20%) than putting $105K in the bank at 6% or buying $100K of TLS shares.

20% on capital seems very acceptable to me. Though as pointed out above, it is not entirely without it's risks.