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The rental of investment properties in Perth is about to be irrevocably changed at 3pm on August 2nd 2013; many think these changes are for the better. During the recent elections, the liberals promised to change the granny flat laws and allow them to be rented out without formal subdivision.
Blogger: Jarrad Mahon, Investors Edge Real Estate
While a lot of property owners who didn't have granny flats ignored this aspect of the news, the smarter investment property owners and select builders in, see a lot of opportunity in the new laws.
Many property owners are already looking at building granny flats on their properties to rent them out come the change in legislation, and many are getting ready to take advantage of granny flats already on their properties that have either laid dormant or being used as storage sheds.
A local company that specialises in granny flats reports that their sales have increased by 1000% in five years of being in business, from building one each month in 2008 to building as many as ten every month during 2013.
The new regulations now mean that granny flats can be built and designed in all residential zones as long as there is no more than one main home and one granny flat on the same block of land and that the combined floor area of the main home and the granny flat is not larger than the maximum floor area allowed by the local government in their local environmental plan. The size of the granny flat itself can be no more than 60 square metres or the maximum allowable by the council, if it is different.
As usual, the operative question applies: “What does this mean to you who owns or is thinking of purchasing investment property in Perth?
From an investment perspective, we see this as a great opportunity for those who are planning on holding on to a property long term and deriving income from it. For those who are looking for immediate capital gain, we would recommend that you stick to a more complicated yet potentially profitable subdivision strategy.
The numbers are simple: If you were to build a reasonable size 1x1 on a property with parking provided, it would be possible to rent it for $250 or more a week in most Perth suburbs. It would cost approximately $100-$120k to build. If your existing house is on a property that is too small to be subdivided, this strategy could derive you a much better income.
This strategy, once again, is very good for the long term. The rent will more than take care of the extra money on the loan repayment, and the property will appreciate more in value with an extra source of income or living space. For short term profits, though, it may be difficult to recoup the original cost of the improvements unless you hold on to the property longer.
We talked to Nick Aves from Purely Finance about borrowing to build a granny flat, and he was optimistic about one's chances to get financing approved. Aves feels that there is no reason for lenders not to provide loans for building granny flats. He also feels that the loan could be a separate loan or even an interest-only loan. This would ensure that interest paid is easily tracked for taxation purposes.
The mechanics of the loan would be those of a construction loan. Funds would be released on a progressive draw-down basis as the granny flat building is constructed.
The only issue we can see is the valuation of the property after the granny flat has been completed. Until some homes with granny flats are sold, it will be difficult to obtain comparison sales for valuation purposes.
For example, if the construction cost is $120k, the valuer might estimate that it only adds 90k value to the property. This would mean that the prospective borrower would have to already have substantial equity in the home to have a reasonable chance at getting a loan.
At this point, we feel that the long term rental gains justify building a granny flat. The main reason is that demographics show that granny flats aren't just for grannies any more. Many older couples are letting their kids move their families into the main houses and moving into the granny flats themselves.
Another factor is that granny flats aren't the boring afterthoughts that they used to be. Now, they are new, well-constructed, miniature houses. Many elderly couples see them as a great alternative to assisted living homes. They have their own house, but their families are close enough to help them if they need anything. This can keep the elderly out of assisted living and feeling wanted and productive as they enter the last years of their lives.
In 1999, 39% of Australians aged 85 years and older lived in retirement homes or aged care facilities. In 2011, the number had dropped to 26% for a 33% reduction. This saves money and allows the aged to retain their dignity.
About Jarrad Mahon
Jarrad thrives on helping hundreds of investors every year formulate a clear plan to get the best returns from their Perth property. This requires a carefully thought out and innovative approach to understand your situation and help you to make the right move at the right time.
His renowned personalised "Property Success Plan" takes you step by step through how to make thousands of extra dollars and avoid the costly mistakes that Jarrad has learnt the hard way by investing himself all around Australia.
Over the last five years he has used his engineering background to build and refine a unique property management, sales & investing process that is sure to impress while getting you real results.
A sales and marketing expert, Jarrad combines the latest technology and cutting edge sales strategies to sell homes across the whole of Perth metro area.