Granny Flat Strategy: Top 7 Considerations
There is little doubt that Granny flats have become a popular real estate investment strategy in Australia. When executed properly, the investor can realize a significant profit from the strategy while making increased headway on their mortgage. However, those who fail to consider all of the factors that come into play, do so at their own financial peril.
In case you are not familiar with the term, a Granny flat is simply a portion of an existing home or property that has been made into a self-contained residence. Granny flats come in two types. Those that have been built as a separate structure on a property with an existing house, or, as part of a house that is already constructed.
Given as this situation creates another residence on the property, it also means the ability to charge and collect rent from tenants. This is a very attractive option for both serious real estate investors and those people who just desire a second income stream to offset some of their property costs.
This article is focused on the investor scenario of purchasing a property to rent and then constructing a granny flat as an add-on. If you keep the following considerations in mind, you will be well on your way to creating a successful granny flat strategy for your next real estate investment.
- Know the Rules. Many a project has failed due to rushing in too fast and poor research and planning. Take the time to contact your local council and find out exactly what is allowed and what is not. Some of the concerns that could come up are distances, frontage considerations, and local zoning restrictions.
- Supply and Demand: This is obvious but sometimes overlooked by overzealous investors. There is little reason to consider a granny flat if the market is already saturated with affordable rental options. This situation can very well leave you with a freshly constructed vacancy, so do your homework before you charge ahead. Along with this, consider what kind of rentals are in demand. Are your potential tenants looking for a refined, luxurious flat or are they more concerned with cost? A good way of determining this is by doing a quick drive around the block and getting a feel for the neighborhood.
- Decreasing Value: This is a black hole that you do not want to enter. Consider the fact that you are adding another residence to what may be a relatively small piece of property. Relative proximity to each other, noise, and privacy factors all play a part in the value of the primary dwelling along with the rental capacity for both properties. There are situations (plenty of them) when you are financially better off without a granny flat because the decline in value is just too impactful with the addition of the second home.
- Separate Entrance: No matter how nice you make your Granny flat, one of the requirements that must happen is a separate entrance. It must also include its own bathroom, kitchen, etc. No shared residential elements are allowed.
- Budget Yourself: We all know that a little number crunching is always a good idea, but you need to really do your work with this stage. Take into consideration all of the financial impacts before you move forward. A good rule of thumb for Granny flat construction costs is around $100,000 in total. Much more than that and you will be hard pressed to make your money back in any timely manner.
- Use a Specialist: With the increasing popularity of granny flats, there are several builders who have decided to narrow their focus in construction. Because there are some things like shared utilities and zoning issues to contend with, specialist builders are a great way to ensure everything is covered.