Value adding property investing strategies are an important means of building capital value and increasing cash flow in your investment portfolio. Renovations, granny flats, subdivisions and development projects can all be grouped under the category of Add Value strategies and, when done properly, will indeed accelerate your wealth creation.
It is, however, important that these strategies are done well in order to actually deliver those expected gains to you. In this month’s article, and from a finance point of view, I outline some of the key issues to be aware of when embarking on a granny flat project.
The value adding via a granny flat addition to a property is a fairly easy process to undertake and generally brings a rapid increase in rental income and capital value if done correctly. The increased rental income will assist in maintaining your servicing capacity with lenders and allow you to proceed to the next property acquisition or project more easily. Two incomes from the one property make more sense. Recent changes in the planning guidelines of many local councils encourage dual occupancies and granny flats as a way of increasing population density in an already built up area.
Increasing the value of a property by adding a second dwelling also makes sense. You can add a granny flat to a property you already own (if it meets council requirements) or you can locate a property to purchase that has the land size and features that meet that local council’s planning requirements. These properties are much sought after so consider using a good buyers’ agent who is experienced in sourcing this type of property. They will often locate properties before they are actually officially on the market. Contact us as we can refer you to agents we know and trust operating in the area you are interested in targeting for a purchase.
Finance steps are straightforward but check the warnings on each step below:
1. If you intend purchasing a property with granny flat capabilities then work with our broker/finance strategists to put a finance approval in principle in place for the first stage of this process – acquisition of the property. Do this loan approval process well before you have located a property as competition is hot for granny flat sites at present, especially in the rising market of Sydney. If your finance is not pre-approved you will often not be able to move quickly enough to secure the property you have found before another buyer leaps in before you.
2. Ensure that the lender you are with for the initial purchase will also allow later construction finance for a granny flat as not all lenders do have an appetite for this.
3. Check that you have sufficient borrowing capacity to also borrow for Stage 2 – construction of the granny flat. Ask your broker/finance strategist to calculate this additional borrowing capacity for you before you embark on the initial loan application for purchase. You could of course just use cash and not borrow for the construction.
4. Granny flats vary in size and quality. Be very careful in choosing the builder you use as a poorly constructed or located granny flat may not attract a good rental return or a quality tenant. Remember that your aim is to add value to both your cash flow and the property value. Be willing to spend a little extra to get a good quality product.
5. Do not be tempted to put the granny flat on piers or stilts even though it may be presented to you by a builder as a cheaper option. Most lenders and their valuers will view a granny flat on stilts as a “transportable dwelling”. Their view on this is that it could easily be removed from the property at any time, perhaps by a crane over the side fence, and therefore they are highly likely not to count its worth into your property valuation. Whilst you have added some rental value you have therefore not added capital value. A valuation down from what you are expecting may not manifest in the initial construction phase but almost certainly will occur when you return to a lender later and attempt to borrow more money against the property to use for your next property purchase. The initial granny flat builder may not care about this as he is long gone, but I am sure you will be disappointed.
6. The granny flat builders that we are associated with are committed to establishing longer term relationships with clients and are aware of the current issue with stilts and piers. They will generally build on a concrete slab. An exception to this rule may occur where your property has sloping terrain and some piering may be required to make use of a site like this.
7. A successful add value property strategy is best achieved by engaging a team to help you. A savvy broker, an experienced granny flat property sourcer/buyer’s agent and a builder that can produce a quality product on a reasonable budget. With this experienced support in place you can carry out the strategy and, importantly for long term wealth and financial independence, repeat it again and again.
I trust you have found this information useful and that you use it to build a great investment property portfolio!
Finance Strategist & Partner Chan & Naylor
Disclaimer: The above information is for general knowledge purposes only. Please take advice for your specific situation before investing in property. Every person’s personal situation is different and requires a different solution.