Should I build a granny flat? Southwest Sydney

I own an IP in Fairfield and I'm at a crossroads of whether to build a GF or not.

The payback period should roughly be 7-8 years conservatively estimating. The asset should yield roughly 10% net sustainably, which is a great yield (what shares can beat that?)

I'm about to make a decision - is there anything I should have a think about before I do?

My land could get rezoned in the next few years but even if it does, I doubt I'd be in a position to build anything meaningful before the GF payback period is up.

Also I don't think it will reduce the rent of the front house because the yard is a weed farm right now and not used anyway, but even after factoring a $20 reduction in front rent the numbers are the same.
I'm about to make a decision - is there anything I should have a think about before I do?

Yes, you need to ask yourself is purchasing this moving me one step closer to my ultimate goal of why you are investing in the first instance. If so, its a no brainer.
I think it's a good option to consider. Good returns compared to other current property investments in Sydney.

Then you have the high long term yield, as well as added property value.
It will be in an affordable end of the market so you can't go wrong with vacancies either.

The only other thing to consider is, is there a better option to do with the cash instead?
Only you can decide if it's right for you.

I've got a property ripe for a GF, and I've had it for over 10 years. During that time I've had more than enough opportunity to put one on, but I needed to work out what I wanted.

Spending the money on a GF can be money that is best spent buying another IP. You've also got the issue of valuations, and if you can extract equity, and/or get a good sale price, which will vary with the market.

Work out what you want, and if the GF fits into that, then do it. If it doesn't, don't.
You need to ask yourself, what does building a GF allow you to do.

If by building a granny flat, it increases your cashflow which then allows you to hold onto this for longer, or allows you to buy another property comfortably, then may be a good option.

For example, say you have $200k in available equity. You use $100k from equity as a 20% deposit, then borrow a further 80%. At an interest rate of 5%, this equates to $25,000 in interest costs. With a rental income of $400 per week, $20,800, you are negatively geared by $4,200 p.a.

Alternatively, you use $100k to build a granny flat (interest cost of $5,000 p.a., receive $400 per week ($20,800 p.a.) from it. Therefore you are positively geared by $15,800 p.a.

Because of the increased cash flow, you use the remaining $100k equity as a 10% deposit, and borrow the remaining $900k on a property that you deem to have good potential for capital growth, but rents at $600 per week ($31,200 p.a.). The interest cost on this $1m loan transaction costs you $50,000 p.a. Meaning you are $18,800 negatively geared.

Therefore your net cash flow negative $3,000 p.a.

Or, do you buy two properties @ $1m each, using $200k equity as the deposit.
So Interest costs of $100,000 and rental income of $62,400, meaning you are negatively geared by $37,600.

When you compare the scenarios, its
Buy a $500k unit and be $4,200 negative geared
Build a GF for $100k, then buy a $1m house and be negatively geared by $3,000.
Buy a 2 houses valued at $2m in total, and be negatively geared by $37,600.

Obviously this is just an illustration, chances are you'll get back $1 for $1 at best for the granny flat, however building a GF is about keeping your cashflow at a level you are comfortable with in my opinion.

If rates change or you get multiple vacancies, this will hurt more, but it is a geared strategy, the harder you gear, the increased potential for LOSS as well as gains.

As Rixter said above,
you need to ask yourself is purchasing this moving me one step closer to my ultimate goal of why you are investing in the first instance.
Great! thanks for the replies

I think you're all saying basically 'go for it, if it's the best use of your money'

The issue is I've paid off my home and I've got access to something like 700k of cash and I can possibly refinance for more (my portfolio LVR is something like 60%) so the issue isn't lack of funds it's lack of opportunities. Also I'm at a serviceability ceiling and struggling to borrow more (actually finding purchasing property to take half the time as settling the finance)

I don't really want to buy another property today in this market. I could put it into shares but long term returns of 7% is less than a granny flat. I'll probably put a bit in shares but not confident in taking all of it out of the offset and putting it into bluechips. Need to do more research here.

The other 'game' I could play is buy commercial property or a development site but with CP it's all my eggs in one basket, and with dev sites, I don't have enough money or serviceability to borrow the needed amount to complete the build. No opportunities, thirsty for ideas!
I've always thought A gf was more cashflow. When it comes to resale you may only get back construction costs at best, however look at comparable sales in the area.