Ken Ong: Safe 18% yields through granny flats


With training as a financial planner, Ken Ong certainly knows the value of a safe strategy when it comes to his own investments. But after nearly a decade of renting out his Parramatta-area investment property at a mediocre yield and achieving less than stellar capital growth, he wanted to shake things up a bit.

“I sat on it for like seven years or so, and it barely moved,” he says as he runs through the numbers. He bought the 3 bedroom house on a large corner lot back in 2003 for $500,000, just before prices took a dip. By 2010, they had come back up and a bank valuation put the house at $600,000. But at an average of just 3% annual growth, that just does not make the grade for Ong.

Ong admits he was getting frustrated and figured he needed to find a way to increase the return on his investment. He knew his large lot and the strong rents in the area gave him a great opportunity to manufacture value, but most options for developing the block looked to be a far cry from his desire to stay safe in his investment strategies.

He looked at subdividing, but Parramatta council nixed that plan because his lot was a good deal too small. Each resulting lot would have to be 500sqm, and his lot was only 650sqm so that plan was out. The council would let him build a duplex, but Ong says there were some very ‘unsafe’ elements of that plan as well.

“They said you can still build a duplex or dual occupancy, however it needs to be joined so I would have had to demolish the existing house and then put something new on the back,” he says. “The issue that I had was that I’ve got a perfectly good house and I’ve got this land in the backyard that is not being used.”

He says it just seemed silly to him to knock the house down in order to add on. Sure, he would be able to probably double the rent he was getting, he says, “but the problem is that I would have had to borrow another $450,000 to $500,000 in order to achieve that. So, that’s when I started looking online and thought, ‘ok, what are my options?’

A ‘no-brainer’

Ong says he quickly learned about the new rules in New South Wales that allowed for streamlined approvals for granny flats, or secondary dwellings. He says it was easy to figure out that his property qualified, and after he did the math, he says, this strategy appeared to be the epitome of ‘safe’.

“It simply was just good math,” he says. “I just looked at it like, ‘where else can I put in around $100,000 and walk away with 15%?’ It was just a no-brainer.”

But Ong warns that there is a little more to it than that. That 15% return depends on him being able to command strong rents from the new granny flat and in order to be sure about that, he did some basic market research to make sure a two-bedroom granny flat would be in demand in Ermington.

“So basically I was comparing what the market in Ermington was in terms of the demographics. Are we looking for your typical family with your husband, your wife and two kids at which point the 2- bedroom [flat] would be too small?

“But in Ermington,” he says, “you have a lot of young couples renting and also single parent families and even a family with a husband and wife and one small child.” 

Ermington is a strong market for few quality units and townhouses, and Ong says he liked the idea that his new flat would be competing primarily against them, but have the added draw of extra space.  

“You see my plan was always to make it look like a freestanding house,” he says. “People wouldn’t associate it with being a granny flat because it was on a corner block, it had its own street frontage and it would have its own backyard.”

“I looked at how can I give someone the same feel when they walk in that they think you know this looks and feels just like that unit that we just saw down the street, except that I’ve got no neighbours right next to me and I’ve got my own private backyard.”

Double the rent in three months

Not long after looking into the granny flat option, he got in touch with Cid Daher at Granny Flats Australia, and says their designs stood out for him because of how little they looked like ‘secondary’ units. Coming in at over just over $100,000 for a 2-bedroom 60sqm unit, Granny Flats Australia is a little pricier than some of the other options, but Ong liked the high-end designs and the fact that the company took care of everything from start to finish.

“It was like a one-stop shop,” he says. “I go in and I say this is my block, and they say, ‘no worries we’ll measure it up, we’ll design the floor plan for you we’ll submit it to council and then we’ll build it’.”

Ong says he ended up spending about $130,000 after deciding to throw in a few upgrades, landscaping and fencing that created what now look like two completely separate blocks. The unit was ready to be rented barely three months after Ong first called Granny Flats Australia.

Ong says it is now almost impossible to tell which house is the ‘main’ house on his plot, and that shows in the fact that the 2-bedroom granny flat is actually commanding higher rent ($450/week) than the original 3-bedroom house ($430/week).

One complication Ong encountered was what to do about his current tenants? He was going to offer to drop the rent by $50 while construction was underway, but they moved out for unrelated reasons. So then Ong was faced with figuring out how to rent it out while the yard was a construction zone. Dropping the rent by $20 to $410 per week did the trick and a year later he says he had no problem bringing it back to $430. He probably missed out on a few rent increases over the years, but that amount pales in comparison to the added revenue he has managed to safely pull out of the new granny flat.

And, Repeat

After the builders put the finishing touches on the flat and Ong saw the rent checks come flowing in, he started looking into seeing whether he could employ the granny flat strategy in his next property purchase. He had already been looking at the suburb of Castle Hill, just north of Sydney, where a new train station is likely to open in the next few years.

But he says after looking deeper at the demographics of the area, he judged that renters there were looking for larger homes and that a small granny flat might not be as easy to rent out. So, Ong says he’s turning his attention to other suburbs for his next investment.

But the next  safe bet he makes with a granny flat probably will not be for his benefit - he has already helped his parents get some plans drawn up to install a granny flat on their Sydney-area property.

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  • Narelle says on 03/07/2012 06:52:13 PM

    What happens when it comes to selling the property?

  • Ness says on 04/07/2012 07:13:38 AM

    Thanks for sharing your story, it was very interesting. I believe in Queensland, the laws require you to have a covered passage way between the properties - is this not required in New South Wales?

  • anne says on 27/07/2012 12:05:02 AM

    I looked at adding a 2nd dwelling to one of my properties but Council would not allow the classification to change to "duel occupancy". They would allow the same building as a "granny flat", which meant it could only be rented to a blood relative of whoever lived in the existing house. Even if they did not police this, your insurance company will probably not cover you if the granny flat is rented to a person unrelated to whoever lives in the main house. Stupid but true.

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