Reno/Granny Flat/Redevelopment - pros and cons?

[Totaro]

Hi there,
I read some post in this forum that mentioned actively increase property's value, including renovation, redevelopment and building granny flat.
I guess renovation makes sense, it's a matter of how much more value would you get (either through sales, refinancing, or rental increase) per dollar invested on renovation. Would it be correct to say, most of time you would get $1.5 for every dollar invest?

I'm actualy quite intrigued by Granny Flat and is currently looking for properties in Sydney's western suburbs with potential to build GF. Pros: increased cash flow, increase resale value of property. Cons: need around 80k-100k to build a GF, and the value of land does not change. But it looks to me it seems a sweat deal, since the cost would be reflected in sales price should the property sold (not sure what happen with refinance). But then I thought if it's so good why not every one build a GF in their backyard yet, surely I missed something?

Redevelopment, I guess it's kinda not for property beginners? Maybe just for experienced investor and builders?

I'm quite new, so any opinion would be greatly appreciated.

 

[ok180]

http://somersoft.com/forums/forumdisplay.php?f=10

Thread moved.

 

[Rolf Latham]

in lower cost burbs,grannies will retinr 70 % maybe 80 % of the build cost in val.


must keep that in mind if the loans are currently mortgage insured

ta
rolf

 

[RetireRich101]

in lower cost burbs,grannies will retinr 70 % maybe 80 % of the build cost in val.

must keep that in mind if the loans are currently mortgage insured

ta
rolf

Is this still the case, with bank val coming 20-30% under? It was evident a year ago because valuer can't find the a comparable (ie, house + new built granny)...

I guess if you built a GF at the back and change your cash flow positive, you would not think about selling in a hurry, hence lack of comparable in the market.

BUT I find bank valuer still not taking this leap forward even if same/identical comparable exist in the market. They have this magic wand and can only write your property inferior.

 

[neK]

I guess if you built a GF at the back and change your cash flow positive, you would not think about selling in a hurry, hence lack of comparable in the market.

I think this is the key point. Why would someone off load a property when its positively geared?

The ones that are sold are unapproved garage conversions which make it hard to make a proper comparable (if anything these dodgy granny flats devalue a properly built granny flat).

When i had my property valued, the valuer compared it to a 5 bedroom house because thats the closest he could get.

The only time i see someone off loading a positively geared property with granny flat is if they have some financial troubles and need a large lump sum straight away and can't borrow against it. At which point it will probably be sold for less than its worth.

 

[Rolf Latham]

Is this still the case, with bank val coming 20-30% under? It was evident a year ago because valuer can't find the a comparable (ie, house + new built granny)...

70 c in the dollar for the improvement is still typical

ta
rolf

 

[Shahin_Afarin]

It depends on the area - just had one today in Hornsby which came back at the full amount. It will be obviously a different result for say willmot.

 

[Totaro]

I think this is the key point. Why would someone off load a property when its positively geared?

I think it might more to do with refinance? Say start with a IP worth $400k(call it Property A), get another loan for $100k to build GF, then you have a positive geared property, but also have $80k more debt (assume you put 20% for GF cost), which is the same balance sheet position as if lend 80% for a $500k property (let's call it Property B). For now.
However say in two years the property price increase 10%.
now property B could potentially be valued at $550k and you can refinance and get $50k in equity.
however if only 70% of GF cost is reflected, potentially the valuation for property A would only be $400k*1.1+$100k*70%*1.1=$517K, only $17k increase in equity.
Of course A has higher rent then B. But assume the above number, the rent incremental need to be $317 or above to break-even. Whether a GF can rent for that amount will depend on the area, but I guess it's difficult in a lot of suburbs since you probably get slightly less rent for the main house.
Does that mean for people who are just starting ie. more stuggling with equity instead of CF, it's better to use the deposit on property itself instead of building GF??

 

[Finrod]

Totaro, minor point, but your appear to have miscalculated. The equity growth in your above example would be $47K, not $17K. In essence you're comparing the growth of a $500K property vs a $470K one.

The increased rental yield, plus loads of depreciation on the new granny flat may go a long way toward offsetting the $3K loss in CG.

OP, another con might be the reduced rental you may need to offer for the front/main property. I for one wouldn't want to pay the market rate for a 3:1:1 for me and my family if there was a strange old man living in the granny flat in the back garden!

Also if it ever comes time to sell, your target market would likely be the 30% of buyers out there who are investors as opposed to the 70% who are looking for their own home.

 

[moridog]

I'm a bit confused with the numbers too. I have a PPOR currently tenanted and negatively geared, the block is big and the house 7 years old. I want to build a gf on it thereby making the whole property positively geared, I think? I think it is under market rent currently, but I self manage and save 10% by doing so, the tenants are brilliant and I think they would stay, knowing they are on a good thing. the council changed the r code making sub division impossible so this seems the next best option. A gf built by the same builder as the house would cost about 130 k and should rent for 230 a week, could anyone help with advice or comments, I feel a bit flummoxed.

 

[beachgurl]

I had a look at a house plus GF at colyton on the weekend. IMO the property was very overpriced. Based on the rental numbers the agent gave (which I think we're ambitious) the property was positively geared. It is already under offer so someone obviously thought it was worth it. I thought that the rental return looked good but that the val wouldn't stack up at the asking price.

 

[Totaro]

OP, another con might be the reduced rental you may need to offer for the front/main property. I for one wouldn't want to pay the market rate for a 3:1:1 for me and my family if there was a strange old man living in the granny flat in the back garden!

Very true. It's unlike dual key apartment where tenant can live in the 'same' apartment and never see each other. For me I won't be interested unless the rent is around $80-100 cheaper than one with GF. If I live with family, I might not consider rent main house at all if there is a GF at the back.

That said, it seems most ppl here managed to get positive cash flow after building GF. What's the best way to mitigate the above mentioned problem?

 

[thatbum]

What's the best way to mitigate the above mentioned problem?

Design the GFs better to have minimal impact on the main dwelling. I'm doing some GFs now and I don't expect to have to lower the rent on the front dwelling.

At the same time as fencing off the back yard, I will be adding decking which I think will more than make up for the lost yard.