Granny Flat -Profit, Loss or Risk
Are you thinking about adding a granny flat in the backyard and want to invest in a property with a granny flat to get more rental income?
This is topic of discussion in western Sydney region where this trend is very Hot among investors and home owners as well, because legislation in NSW allows a granny flat with up to 60 sqm without a formal approval for development (although still some policy approvals are required)
Majority of people who think about granny flat is for the purpose of increasing rental income, it is a great move to yield good rentals and enjoy a positive cash flow property however in general the cost to build a granny flat will Outweigh the value in bring to the property.
Lot of different ways are available to add a granny flat some prefer to have a shipping container converted to a granny flat, some add a demountable structure in the backyard, some prefer a lightweight construction material and some build from the ground up with bricks around.
“Cost of a granny flat can range from $55,000 to $200,00 depending on the material used and overall quality of granny flat, however poorly constructed granny flats are becoming more common in western Sydney since the builders try to reduce the cost of the construction to the lowest in order to get better rental yields and make it more lucrative for the investors.“
From valuation prospective this poorly constructed or low quality construction makes it very difficult for a valuer to support the construction contract or at a later stage give high valuations to the house having a granny flat compared to the cost incurred to build the granny flat. Hence the cost to build is usually more than the value it adds to property. The Main reason for this is people who build granny flat are not concerned or generally ignore the overall valuation aspect rather focus only on the rental income, for some investors it works as they are way ahead in their investment journey but for those starting their journey and look out for capital gains suffer at a later stage when wants to move forward with their next purchase.
Construction cost is $1200 to $2500 per sqm usually higher than normal new build.
There’s also a possible risk of incurring capital gains tax on the main residence, which is normally exempt if a granny is built on it, Also for tax benefits please get an advice from a tax accountant on how much benefits it will give you as an investor.
Privacy issues – for some owners it feels odd that someone else is also living in their backyard, how hard you try to separate them but they become a part of your property and routine.
Reduced rent on the main house – Tenants will demand a lower rent on the main house if they are forced to live with other tenants in their backyard.
Longer vacancy periods – Even with a reduced rent there is often a longer wait on finding tenants at a house with a granny flat. Many people simple won’t do it due to concerns about neighbor disputes and loss of privacy.
Summary – if you plan to go for a granny flat and want a capital gain as well then do it in an area where there is a limited supply or ability to build granny flats and build with a high quality.
Which will help your property to stand out and create a uniqueness.
However if you choose to build in a suburb/Region with there are already a lot and more are constructed or have a large capability for more construction, it will however has a potential to diminish the value of your property in long run, and the reason being granny flats have low rents and not necessarily promoting the highest caliber of tenants.
Also since there are lots and lots of granny flat in that area it increases the density of that area putting high pressure on roads, shops, commute, sewage, water and other facilities which are not capable of handling this increased pressure and hence turns that area value down and not so desirable to live decreasing the over value of the suburb and your property at last.
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By Home Gate
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