Positive Cashflow and the Granny Flat Strategy

  Positive Cashflow and the Granny Flat Strategy
   by Rich Harvey, Managing Director, http://www.propertybuyer.com.au/

 


Investors can find the holy grail of positive cashflow and capital growth using the granny flat strategy.  With recent changes in government legislation, investors are now able to take advantage of a dual income from one property purchase. 

 Positive cashflow investing delivers some great benefits:

  • You can buy multiple properties
  • The rent more than covers the interest and expenses
  • Stable income adds
    to your borrowing capacity
  • No drain on your weekly budget
  • Typically means cheaper properties
    so getting finance is often easier, and
  • It can balance out the
    higher growth, negatively geared properties in your portfolio.

But where do you find these positively geared properties?  Aren’t they just located in the small outback mining towns? Well we are currently sourcing positively geared investment properties for our investor clients in western Sydney and consistently achieving yields of between 9% to 10%+. 

One of the keys to success with positive cashflow investing is that you have to do something to create the additional rental income.  Positive cash flow opportunities are rarely advertised as an off the shelf type product. 

This is where the granny flat strategy comes in.   By constructing a granny flat at the rear of an existing dwelling, it is possible to get two sources of income from the one property and turn a negatively geared investment into a positive cash flow property. 

Tips and Traps for the Unwary
The state government is now permitting the installation of granny flats in residential areas to address housing shortages and improve affordability.  Previously the NSW policy stated that the flat could only be used by a relative, but now it can be rented to anyone.  So does this mean that you can stick a granny flat anywhere? No!  There are still strict guidelines on what is permissible in terms of land size, set backs and the actual size of the granny flat.  Investors need to understand these regulations and how they are applied or you risk buying a site that is unable to be developed.  Planning approvals can be obtained in just 10 days if you have the right paperwork and compliance procedures in place.  The maximum size of the flat is 60 square metres and you can’t subdivide the existing property from the granny flat to sell separately (it would have to be sold as a complete package).

How does it improve the returns?
The cost of construction of a granny flat can range from $70,000 to $140,000 or more depending on the size, number of bedrooms and inclusions.  The rental return on the flat ranges from $220pw to $350pw depending on the location and finishes (there’s no point building a tiny two bed flat that won’t rent out).    This means investors can easily achieve a yield of 16% to 20%. Compare the granny flat strategy to buying a standard investment property offering typical yields of 5% and you will see why savvy investors are lining up in droves to adopt this strategy.

Are tenants hard to find?
Many investors mistakenly think that the flats will be leased out to less than desirable tenants. 
This is not the case. There is high demand from single person households that want to live in suburban areas.  Many tenants
like the security of having someone else in an adjacent house – just to keep an eye on things. And as an investor you should always take out landlord insurance for extra peace
of mind.

Case study
Adrian came to us seeking to buy a positively geared investment property. He had pre-approved finance of $350,000 and was keen to invest.  We sourced an off-market property for $220,000 that needed some minor cosmetic renovation work and with the granny flat Adrian has now ended up with a fabulous yield of just over 9%. 

 

Purchase price

$220,000

Stamp duty

$6190

Legal fees

$1850

Other costs

$1500

Reno costs for house

$21,500

Granny flat

$68,900

Total Costs

$319,940

Rent for house

$330pw

Rent for granny flat

$230pw

Loan amount @ 80% LVR

$231,120

Interest payments @ 7% I/O

$16,178

Annual positive cashflow

$12,942

Yield for Granny Flat

18.1%

Overall yield

9.1%

DIY vs Using Professionals
Like anything in life you can do it yourself, or you can save money, time and stress and outsource to a professional.  At propertybuyer, we provide the complete turnkey solution for our clients.  We have an excellent network of agent relationships to help source the right property (often before it hits the open market).  We know the tricks of the trade to negotiate the lowest possible price and we know which blocks are most suitable for the granny flat strategy.  We also have an excellent team of builders and have negotiated a bulk discount rate for our clients.  Be careful of some companies that load up the cost of the granny flat and get paid secret commissions and kickbacks. 

It makes good sense to have an expert by your side helping you navigate the tricky waters of the Australian real estate market.  If you would like to develop a property strategy and build a positive cash flow property portfolio, then please call us today on 1300 655 615 for a friendly chat with my team or click here to send an email inquiry.

This article was written by Rich Harvey, founder and Managing Director of propertybuyer, Sydney & Australia’s leading Buyers Agents. Propertybuyer helps property investors and home buyers search and negotiate the right property at the right price, everytime. Rich was awarded the 2011 Best Property Finder, and 20 other industry awards including the “Buyers Agent Award for Excellence” by the Real Estate Institute of Australia and the 2007 National Telstra Business Award.  For further details please visit http://www.propertybuyer.com.au/ or call +61 2 9975 3311 or 1300 655 615.

Copyright © 2012 propertybuyer ®

The above information is supplied by propertybuyer.
Disclaimer: while due care is taken, the viewpoints expressed by sponsors do not necessarily reflect the opinions of Your Investment Property

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Comments
  • sodina says on 15/03/2012 04:31:57 PM

    It is really good article, may I ask how did you get Yield for Granny Flat and Overall Yield? thax

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