Why I Wouldn’t Build A Granny Flat
Dilleen Property Group 2021
Many property investors choose to build granny flats to help increase the value of their property. It will usually depend on the state they’re investing in, their property investing goals and what they want to achieve. At the end of the day, there is no wrong or right answer. I aim to shed light on two different scenarios; choosing to build a granny flat with $100,000, or choosing to buy multiple properties with $100,000.
Scenario 1
You have a $500,000 house, $100,000 in cash, and you want to build a granny flat to increase the value of your property. Let’s say the cost to build the granny flat is $100,000. You now have $600,000 worth of property (or more depending on how much it is valued by the bank). The granny flat is rented out for $350 p/w which is a great return, and your house is rented out for $400p/w. Your total rental income now is $750p/w and you are looking at a 6.5% rental yield.
Scenario 2
This scenario is the road I have taken multiple times to grow my portfolio. Let’s say it’s the same situation, you have a house worth $500,000 and you have $100,000 in cash savings. What I would do in this situation is, I would split the $100,000 in cash savings and purchase two different properties each, below market value.
If you buy two properties worth $200,000 each, and rent them out for $330p/w, you will have an 8.5% rental return. In this scenario, what you’ve done is turned $100,000 into $400,000 worth of property. In total, you will now be holding $900,000 worth of property, as opposed to $600,000 with a granny flat build.
Benefits of Scenario 2
There are many benefits that come with scenario 2 in my opinion. For example, you may decide to purchase one of the properties in Brisbane, and the other in South Australia. This means that you are diversifying your property portfolio into different markets, as well as diversifying your risk. On top of this, over the next 15 years these properties will double in value (conservatively). These properties will go from being worth $200,000 to $400,000. You now have $800,000 in property, plus your other property is now worth $1,000,000.
With scenario 2 you have $1.8 million worth of property, whereas in 15 years for scenario 1 you will have $1.2 million worth of property. You have an additional $600,000 of net worth from diversifying your portfolio and not putting all your eggs into the one basket. You also have higher rental returns. Previously you would be receiving $750p/w with scenario 1, but now you have $1,060 in rental income p/w.
Another benefit of scenario 2 and buying below comparable sales is, if you get these properties revalued in 6-12 months, you can pull $100,000 in equity out and buy two more properties for $200,000-$250,000 renting out for $330 a week. You now have 5 properties, rather than one house with a granny flat. You could use this second scenario a few times by leveraging your money.
For me, its about building an asset base of how many properties you can hold over the next 10-30 years as a compound effect. If you have $5,000,000 worth of property today, can you hold that for 20 years? It's essentially inflationary over time. I'm not a big fan of building granny flats and spending a large amount of money. Instead, you can leverage your money and buy a few properties with the same amount of cash and receive greater returns.
Disclaimer: This is not intended as legal, financial, or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature, you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.
