As a property investor the main aim of the game is to continually build wealth. One way to achieve this is by constructing a granny flat to an existing investment property. But before rushing out to do this, it is important to work out whether this is the right option for you.
Here are four things to consider:
- Will it increase my cash flow?
When thinking about granny flats most property investors think cashflow increase. To ensure this is the case, you need to take into consideration all costs involved. Munzurul Khan, Principal of Keshab Chartered Accountant and a seasoned property investor shares his insights: “If there is a granny flat potential to an existing investment property, one needs to consider what the construction cost is. For example, if the construction cost is approximately $125,000 to $135,000 depending on what and where you construct and your rent increases from $300 to $320 per week, then there may be a business case for going ahead from a cash flow perspective.”
- Is there a demand for this type of property?
Another consideration for property investors when thinking about constructing a granny flat to an existing investment property is whether there is a demand for this type of dwelling and what this means for the capital growth of the property. On this point, Munzurul says,” There are suburbs where granny flats have quite a bit of interest and then there are suburbs where granny flats are not so easily rented out. Also, the end value of the property may not increase with the level of the additional construction cost. Hence, as a property investor, the question here is, if I am constructing a granny flat, is my benefit increased cash flow or is it the long-term capital growth?”
- Can I get finance?
Planning to increase your cash flow or aiming for long term capital growth on an existing investment property is great but can you get finance? When considering how a lender would look at valuing a proposed granny flat construction, we asked Scott Le Quesne, Director of Aussie Parramatta and Rouse Hill and an experienced property investor, “A lender would consider the current value of the property, review the plans and specifications of the proposed granny flat and then work out an end value. The end value won’t necessarily be 100% of the construction cost but it would certainly increase in value.”
- If there is a shortfall of cash should I spend it on the granny flat or another investment property?
If there is a shortfall of cash and you need to inject into constructing of the granny flat, you need to consider whether to go ahead with the construction or purchase another investment property. Jeremy Iannuzzelli, Partner of Keshab Chartered Accountant and a sizable property portfolio owner explains, “Do you want to get that compounding asset where there could be a greater return from a growth perspective? Or do you want that extra cash flow now? It really depends on what stage of life you are at. You may be starting a family soon and you want that extra cash flow to give you more financial security. Or you may be chasing that capital growth which will allow you to secure your next investment property.”
Adding a granny flat to an existing investment property can add significant cashflow or serve as an excellent capital growth vehicle. In any case one must always consider their personal circumstances and overall long-term property investing goals. And always seek advice from qualified professionals such as mortgage brokers, accountants and solicitors.
For a full podcast on granny flats click here https://australianpropertyeducators.com.au/property-construction-bug-to-construct-or-not-to-construct/