Before building a granny flat you want to know; does a Granny flat add value to a property?
Yes, in short. However real gains are made if you can add ‘sweat equity’ and take on the building yourself. If hiring a building company to build for you, the cost of construction may not add value to the property at all.
Then there is the ‘value’ question regarding rental income.
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I discuss this and more with the help of a trusted real estate agent.
Stone takes care of sales and property management on the Central Coast, NSW. Especially around Ettalong and Umina Beach.
These two suburbs have more Granny Flats than the average NSW suburb so digging into Christel’s experience was invaluable.
So, Are Granny Flats Worth it?
Christel mentions that there is a common misconception that property owners can buy a property and add a granny flat, therefore making a neat profit by doing so.
During our discussion Christel mentioned a common thought property owner have:
“Okay, the granny flat’s going to cost me $100,000, but the property’s going to be worth another $200,000,”
However, because the next buyer can go and spend $100,000+ and build the same granny flat this thought is quickly dis-proven.
The real way to gain value to any sale price is reducing the construction cost
Christel continues to mention more money could be made if you construct as an owner builder.
Rather than it costing them $150,000 with a granny flat builder, they might do it for 100,000. Then they realise some profit.
Or in many cases profit is realised if the property is purchased by a builder themselves. Having the skills to construct a granny flat, generally means you can construct faster and it will cost you less.
My follow up questions dug a little deeper:
Can you do anything to add value to the granny flat and the land value?
“I think just being really mindful of some things that might be obvious to some and not to others such as:
All those things will help rent a property or not rent a property. And then obviously in turn, sell or not sell well”
Christel continued to explain:
“we’ve had people put granny flats in backyards that haven’t factored in how is this person going to get to the backyard?
Are they going to park on the street or am I giving them parking spot? And are they looking down into my backyard? And am I looking into them?”
Apart from these critical factors to consider, there are also other considerations with landscaping and questions you need to ask yourself:
Where is the clothesline going to go?
Grass is great, but do you or your tenants want to mow it?
Standard fencing is easy and maintenance free, but will hedging look better?
Will modifications need to be made to the main house for access?
An interesting point was brought up during the interview:
Tenants can choose to live in an apartment or a granny flat.
Since in many cases they are of a similar foot print.
And in some markets if your plan is to rent the granny flat out, nearby apartments will be compared by potential tenants.
This being the case; as a granny flat owner you have a great opportunity to make your newly built granny flat stand out from the flats out there.
So, what could you do to make you Granny flat feel more like its own house, as opposed to a stack of flats on top of each other?
Christel explained, it would be ideal to create some space around the granny flat, to make it inviting.
More importantly; to ensure it won’t be compared to an apartment in a compact complex.
Distinguishing your Granny flat from a unit, means (in general) there will be a bigger pool of potential renters looking to move in.
Investors will be the target market when selling a property
The target market for a property with a granny flat will limit families looking to buy.
My chat with Christel highlighted the fact that many families might prefer to put a pool in or extend a deck.
As opposed to having a Granny flat on site.
Unless they are looking for a ‘teenagers retreat’ or want to help older members of their family.
For example; If you have a 3-bedroom house with a 2-bedroom granny flat, you can’t compare your property value to that of a 5-bedroom house.
A 5-bedroom house is in a completely different market to 2 separate dwellings on one plot of land.
The main reason is that families want to live under one roof. Unless a family has a nanny or grandparents who lives with them and they want their own space. The issue is this circumstance is not common.
And by-in-large 5 bedrooms split across a backyard is as pleasing as an outside toilet that houses had in the 1940’s.
Creating Value by Focusing on Rental Income
When you ask the question does a Granny flat add value? This value can come in two distinct forms:
What you can sell the property for once the granny flat is built
What income you can generate once the granny flat is built
So far, this article has been focused on the value equation, realising a profit after selling your land.
However, what if you are not interested in selling your land and are keen to drive as much cash flow as possible?
If this is the case, then we need to consider some simple math’s.
Lets say you build your own granny flat as a “owner builder” and build it for $100,000. Now for the purposes of illustrating the return on investment.
Let’s continue with this example and say you rent it for $400 a week, therefore in a year you earn 52 x $400 = $20,800. However, costs need to be considered for maintenance and repairs each year. ($1,800 is a conservative figure for this).
So, in a year you earn $20,800 – $1,800 = $19,000.
Therefore in 5.26 years you will have made your money back.
After this time the $19,000 earned each year will be yours. It is wise to speak to an accountant about this income of course.
If your focus on value created is in terms of cash flow, then a Granny flat is a great idea.
There are few opportunities in Australia, where you can acquire any property for $100,000 and earn $400 a week for example.
Using Airbnb to create value
Let us say you want to rent your granny flat out, but are prepared to do more work.
If you consider your granny flat as a business as opposed to just a place to rent out; a greater opportunity can lie ahead.
The biggest factors with making a higher income using Airbnb is location and presentation.
Areas with higher populations or areas that have higher peaks of tourism will do better.
Such as Sydney or Melbourne. However, you will be surprised how well areas such as Terrigal on the Central Coast or Mollymook on the South coast of NSW do.
If your granny flat is in an area that is popular with:
Most people are pleasantly surprised how well these areas can do on Airbnb.
It is important to note, that you will have more expenses including; cleaning, changing sheets, maintenance and greater upkeep with landscaping.
There are ways to manage all of these things as I have discovered.
And if the simple equation of money coming in is far greater than money going out, it may be worth considering.
Let’s say you have a great location suited to short term rentals. And are keen to use this platform.
The next important aspect to consider is presentation.
Your bookings will depend on how your listing on Airbnb is presented. And that is made up of:
Having professional photos taken of a fully furnished granny flat, will separate your listing from all the others in your area.
Being very specific with your listing description and having what you say backed up by real-world reviews will be the 3 most important factors to your success.
My Granny pictures for short term rental
Get these things right and you could be making much more than the average rental makes in your area.
So, do Granny flats create value to your property?
Yes, if you can realise a less expensive way of constructing them.
Or, you are looking for cash flow and a greater yearly return on investment? The answer to this question will mean a completely different outcome to what will work best for you.
Be sure you are dialed in on the market and the type of clients who would want to either rent your granny flat or purchase your property with the primary and secondary dwelling combined.
It is also worth noting you cannot subdivide a granny flat and sell it off separately. This is against local government regulations.
Therefore, you won’t be able to realise a profit by simply ‘selling off the granny flat’.
This doesn’t have to stifle your creativity on how you can create a lot more value than the average granny flat owner.
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