Investors looking to get two rental incomes from one property often look to creating a granny flat, but not all properties are able to sustain this type of addition.
An 8.0 per cent yield and over is nothing to be sneered at, particularly for residential property, and active investors are often looking at how to push their returns far beyond this.
The Department of Planning's Local Development Performance Monitoring Report noted a rise of more than 75 per cent over 2011/2012 of granny flat approvals than from 2010/2011 (following a doubling the year previous).
In the investor favourite area of New South Wales’ Mount Druitt, realestate.com.au currently lists 25 records with the phrase ‘Granny Flat’ for rent, with 52 records in the 2770 postcode. There are 176 total results for Mount Druitt rentals.
Laws vary depending on the state, with Perth now opening up to granny flat investment opportunities, so the first place to check the viability of your investment is through the local Council’s department or in the State’s Planning Policy.
For instance, in New South Wales’ State Environmental Planning Policy (Affordable Rental Housing) 2009 notes the following eligibility requirements:
- Zone R1, R2, R3, R4 or R5
- Maximum floor area of secondary dwelling: 60sqm
- Site area minimum: 450sqm
- Specific setback requirements outlined for front, back and sides of dwelling
These planning requirements are then overlaid by local council restrictions.
However, whether you legally can put up a granny flat doesn’t necessarily equate with whether you should.
The key here is the area's 'vacancy rate’. Remember, in order to make the outlay worthwhile and to bring your yield up above the 8.0 per cent mark, you’ll need to set the rent accordingly. If the vacancy rate of the area is high, chances are there are either too many granny flats already or the demand isn’t there.
The type of tenant looking for properties in that area will also dictate this. If there are predominantly families looking for rental properties, you may find that your 1 or 2 bedroom granny flat just isn’t going to cut it.
Call local property managers and ask:
- What is demand like in the area?
- Who is that demand coming from?
- Which properties are under most/least demand and why?
- What sort of rent is being achieved?
- How many rental increases have been seen over the past year and by how much?
Then ask the questions again, specifically about granny flats and secondary dwellings.
Follow the rental market in the area closely, and if you notice that certain granny flats are staying empty for a while – investigate as to why. Is it the quality of that particular granny flat? Is the rent set too high? Ensure that yours doesn’t end up in the same position by using the mistakes of others.
Property Secrets' Paul Giezekamp explains that there are numerous things that could "throw out the numbers" - these include fire zones and flood zones requiring a different quality of build (such as fire rated walls).
"You might need trees taken down and garages removed that might not make it viable to do a Granny Flat," he says. However, it's a pretty rare situation and, usually, the returns stack up.
Mr Giezekamp points to around $86,000 to $87,000 for a two-bedroom grany flat, with a standard return of around $250 per week.
"I think it would work better in the more affluent areas as it’s still the same price to get it in," he says of lucrative opportunities, pointing to potential rent of around $400 a week. However, the issue is finding a block of land with enough size in these areas at a price point investors will consider.
Overall, he says, the popularity of granny flats is continuing to soar, "We’re finding it to be one of our biggest divisions," he says. "Also, what’s happening now is it is opening up in Perth as well. We’re expecting Perth to follow suit. It really does cater to every person regardless of age. It's not such a big deal to do, as it's not a big development."
From new to seasoned investors, he explains there are opportunities available to maximise their cash flow.