Western Sydney House + Granny Flat

[devank]

I have a bit of different views.
1. Doubts always creep in before you sign. I'm glad my 'worries' didn't hold me back from buying.

2. I think it is better to buy a house with already built GF instead of you building it by yourself in the name of 'value adding'.
Firstly, you avoid the headaches of building.
Secondly, the new valuation generally increases by about 75% of the granny flat build cost.

 

[Spades]

Hi devank,

By your post you wouldn't build a granny flat to value add?

Which is aok,some thrive at it,some don't.

At the end of day it comes down to what you are willing to do and take on.

Horses for courses.

Ps.Have you read lazy mans to investing lol?

Pss.

Seinfield-Not there is anything wrong with that!

Being smarter,not working harder that is.

 

[travelbug]

Great points made already.

Just to add- get a depreciation report done. If it's been renoe'd you should get a decent return.

 

[nhg]

Hi devank,

By your post you wouldn't build a granny flat to value add?

They don't really add value, they add cashflow. I would only put them on current land owned, I wouldn't use it as a strategy on Sydney properties I'm looking at purchasing. I would be surprised if the number stack up.

 

[menty]

Big fan of granny flats (as it's worked in the past for me), but I think the time is past.

I think the granny flat idea would have been a good idea a year or 2 back, but if the figures stack up , go for it.

I work in Fairfield and have seen it change so do see the potential for CG in the future. Walk out at lunchtime and the place is quite busy. (granted there are a large number of unemployed immigrants there).

What sort of yield are you looking at?

edit: found your property. Looks nice and you could certainly do some work. (eg fencing, clothelines, sheds etc). The granny flat looks to be a shed conversion. being a 1 BR, Im not sure how much value this would add on top of similarly priced house without a granny flat (perhaps 30-50K at a guess?)

 

[devank]

Hi devank,

By your post you wouldn't build a granny flat to value add?

Which is aok,some thrive at it,some don't.

At the end of day it comes down to what you are willing to do and take on.

Horses for courses.

Ps.Have you read lazy mans to investing lol?

Pss. "Seinfield-Not there is anything wrong with that!"

Being smarter,not working harder that is.

Spades,
I would rather use the money & effort to purchase another IP. Like ngh said GF is for cashflow game.

Here is an example from year 2012 GF built:
Draftsman - $3,380.0
Private certifier - $2,021.0
Builder fixed Cost - $97,668.00
Additional Soil removal - $2,146.54
Electrical Board upgrade - $2,200.0
Landscape & other - $4,612.00

Total Cost= $112K.

New valuation was increased by about 70 K I believe. Kind of 42K is lost in that process. I was ok because I already had the property. Otherwise I would rather use that 42K as a deposit for a new IP.

However the cash-flow was good.
Rent reduction from the main house = 500-480 = $20.00 per week
New rent from granny flat = $350 per week

Right now we are getting $520 & $370 per week.

BTW it is "Not that there's anything wrong with that"

 

[nhg]

I would rather use the money & effort to purchase another IP.

Amen.

Think of house with granny flat potential as land banking. Build on them when there's nowhere else to invest your cash.

 

[Beau Lyon]

As far as the 'rent guarantee' goes, the owner may be willing to guarantee the rent for a year by covering the difference if it rents for less than the guarantee amount in order to get a higher sale price. After the guarantee ends, you don't want rent to drop, better to compare the house & granny flat to othe places currently available to rent, and see how much rent it should be worth that way.

 

[neK]

These rent guarantees just don't sit right with me.

Scenario #1
Purchaser finds tenant, rent is much lower than anticipated. Owner makes up for shortfall. What if the tenant is actually a mate of the purchaser and the purchase deliberately rents it lower?

Scenario #2
Vendor finds a tenant, vendor doesn't care the history about the tenant, as long as they pay the expected rent so the vendor isn't out of pocket. Problem is tenant is a dodgy as hell and trashes the joint. Not the vendor's problem, its the purchasers problem.

Is there a middle ground? Yes, but it requires trust from both parties.... everyone is greedy.

This property has obviously marketed in a manner designed to up the sale price for those who base the sales price off "expected" rent.

 

[Dualitii]

Just an update on what's been happening: so I found out probably the real reason why this property has been on the market for so long; the bank val came back very, very low. Almost 100k lower than listed price. Most likely due to a comp as the property next door was bought at 450k (unrenovated 3 bedder, otherwise essentially the same) and that it was bought last year at under 400k.

So, I think I probably will not go ahead with this property unless vendor is prepared to start accepting offers a lot lower.

Regarding a few other things some posters asked:
1) Gross rental yield is 6.15%. After taking into account landlord's insurance, water, council, and property management at 5.5%, and 105% mortgage (using equity for this purchase), the property is still cashflow positive although very minimally so ($1k/year).
2) As per above, I found the minimum rental for this property comparing like properties to be ~$630/week.
3) Given it's been on the market for nearly 2 months now, offloading it if required is a big concern, and now I have the val as well, it's making this a lot less appealing.
4) I figured that the vendor would offer a rental guarantee knowing that it would be worth about $10k or so, in order to secure the sale. So yes, the property has been marketed in relation to expected rent.

However it's not the cashflow status of the property that's making me think twice, more the fact that it's been on the market so long and the vendor expects an almost $150k gain on the property in less than a year, merely by doing a renovation, converting a garage into a granny flat, and capital gain. Apparently the vendor has also rejected offers of $540k, and won't settle for $545k - so maybe this vendor is just completely unrealistic?

 

[monalisa]

Well I am glad you got some feedback from SS and got a valuation. It definitely doesn't make sense. I am not against GF...but here you would have just paid for the vendor's profits.

 

[devank]

However it's not the cashflow status of the property that's making me think twice, more the fact that it's been on the market so long and the vendor expects an almost $150k gain on the property in less than a year, merely by doing a renovation, converting a garage into a granny flat, and capital gain. Apparently the vendor has also rejected offers of $540k, and won't settle for $545k - so maybe this vendor is just completely unrealistic?

Lets see how the numbers worked out for the seller (all assumptions)..
Purchase Price = $400,000
Fairfiled Growth in last 12 months= 14% =$56,000
Purchasing cost = 5.0% = $20,000
Renovation = 10% = $40,000
Granny flat conversion = 10%= $40,000
Holding cost =2% = $8,000

That is already 564K

 

[monalisa]

Lets see how the numbers worked out for the seller (all assumptions)..
Purchase Price = $400,000
Fairfiled Growth in last 12 months= 14% =$56,000
Purchasing cost = 5.0% = $20,000
Renovation = 10% = $40,000
Granny flat conversion = 10%= $40,000
Holding cost =2% = $8,000

That is already 564K

Sales commission too... 2% $11K

May be the vendor didn't do his/her numbers to begin with

 

[DaveM]

Obviously an astute investor

 

[rohan22no]

Spades,
I would rather use the money & effort to purchase another IP. Like ngh said GF is for cashflow game.

Here is an example from year 2012 GF built:
Draftsman - $3,380.0
Private certifier - $2,021.0
Builder fixed Cost - $97,668.00
Additional Soil removal - $2,146.54
Electrical Board upgrade - $2,200.0
Landscape & other - $4,612.00

Total Cost= $112K.

New valuation was increased by about 70 K I believe. Kind of 42K is lost in that process. I was ok because I already had the property. Otherwise I would rather use that 42K as a deposit for a new IP.

However the cash-flow was good.
Rent reduction from the main house = 500-480 = $20.00 per week
New rent from granny flat = $350 per week

Right now we are getting $520 & $370 per week.

BTW it is "Not that there's anything wrong with that"

I have to say, (btw sorry for slight thread derail) I don't really get your thinking here. 42k is lost? Really? For me, money is not money unless its in my hand (so to speak)...which rent is...to me, a valuation is hardly worth the paper its written on.

I have a similar example - IP purchased for 400k, in 2012 did GF build in backyard for 120k all up. Did my valuation go up by that much? Probably not, I never got one. The "value" in the property to me is the fact that its giving me $830 (450 + 380) p/w REAL money in my pocket. If I get a valuation... some guy comes round for 10 minutes and has a poke around, writing what colour my walls are in his clipboard or whatever...and then what...? Do I care how much he thinks my place is worth? Not in the slightest.

Ok, so I do get that there are a few other considerations, using a valuation when considering a loan application for a new IP etc, but all in all I think valuations are overused and overrated. Eg for my last purchase, the bank literally asked me "how much are your places currently worth", and I gave them rough figures on the high side, which they never even checked. To me, the important figures are how much the property is costing you, or how much income its giving you, and how much income is it likely to give you in the future.

As you can almost certainly tell, I'm an almost 100% cashflow investor and am well aware I'm probably in the minority on these forums. Not trying to start any arguments here, there's no right answer and everyones got to find their own method etc etc...just throwing out my 2c about how things look from my side of the fence.

 

[devank]

Roman,
Good valuation is important during accumulation phase. That extra equity can be used to expand your portfolio.
Say you use that 50k to buy a 400k property. Assuming 7% growth, your property may gain 400k in 10 years time. Now, match that with the positive cashflow you get from GF.

 

[menty]

The reasoning I used was, a granny flat would be useful in periods of low to nil CG. Obviously this can't be predicted, but it gave me more security (or so I thought) as a first investment.

Yes, I could have used the 50-70k loan to buy another property and it would have also increased by 20% in the last year, but one cannot really predict the market.

 

[travelbug]

Rohan I see your point but as devank pointed out if your equity is going backwards so is your investement journey.

I too love cashflow and as I'm getting close to retirement that has been my focus but my buying guide has been that I MUST be in AT LEAST the same equity position when buying.

I know I want it all CF plus equity. I admit I have been lucky, and with a quick reno all my last purchases were both cashflow neutral to positive and with positive equity from day one.

 

[ToGetProperty]

All points are valid to me.

I did what Devank suggests when I start to accumulate properties which was most likely in the bottom of the market.

Now, I am a friend of Rohan and determine to be a cashflow (CF) investor by building GF or dual occupancy. I think without proper CF to fund CG, CG could be fragile.

With strong CF, few years later, I might switch back to CG investor again.

And I will never sell unless I develop a block by myself many years later. The knowledge of building GF and dual occupancy can help me for the development as well.

 

[rohan22no]

Another thing is I should mention that severely contributes to my thinking. I dont work. Well, I consider looking after tenants work, but that doesnt take up too much time. I play in a band on weekends for $$ and fun, but thats hardly work either. I have no desire to do a 9-5 again, I'm very happy living off cashflow and maintaining my no-job lifestyle, and therefore I wouldnt buy a place if it wasnt at least neutral cashflow- to become positive very quickly.

All good and valid points by all posters in this thread, good discussion.

Devank - fair point, but do you really need 50k equity to buy a 400k property? You can still buy a 400k equity with less or no equity (made easier by showing extra income I might add). Another thing - even you say a new property "may" increase 7% over 10 years. Lots of assumptions there. All well and good if it does, but I certainly wouldn't be backing myself to pick the market over such a small amount of time. And, by going down a cashflow route, you're certainly not stopping yourself from buying new places, I think its the opposite.

Travelbug - increasing cashflow (significantly) by taking a small loss in equity is hardly "going backwards" in an investment journey. Being able to service future loans is equally important as being able to get them. For instance, I took a 30k equity loss (theoretically) 2 years ago. Now I've got that back almost twice over via my choice of extra cashflow, AND the kicker is, that I will have the extra cashflow for my lifetime.