Many people in the business of creating wealth through property often build granny flats on their existing real estate assets as an additional source of income, but as easy as it sounds, seasoned property investors know that this strategy comes with its own unique set of challenges.
Buyer’s agent Paul Glossop believes that investors—especially those in the beginning of their journeys— should be careful about these so-called “secondary homes.”
Capacity to borrow
One of the factors to consider when building granny flats is the current loan-to-value ratio of the portfolio, which could affect the lending capacity of the property investor. If your LVR is at a high level, it’s best to speak to a broker or an accountant-buyer’s agent about your serviceability.
“Say, ‘What can I borrow, if anything?" because the rest of it will probably be irrelevant if they say, ‘Look, unfortunately, if you want to build a granny flat or if you want to buy somewhere else, you're not going to either A, have the cash flow or B, get the money,’” Paul explained.
Once you figure out where you stand, find out the best way that your money can work for you in the long run, not just for quick income.
The buyer’s agent said: “What is your cash flow like now? Are you negative to the point where you're going backwards? Are your assets going to go up in value over the next five years to allow you to extract equity to reinvest or do you need to focus wholly and solely on not buying anything anymore?”
Demand and supply
Despite its challenges, Paul still believes that granny flats could be a great addition to a property portfolio, as long as there is demand for it. “You want to make sure that [there is] not just demand in that local market, but also demand long-term,” he said.
Paul added: “Personally, I [don’t] look at granny flats unless they are absolutely necessary—they're sort of the endgame because that's when you might want to reduce debt and go into… a consolidation phase rather than a cash flow generating phase.”
When building granny flats, an investor should not be motivated by the extra income he could extract from it but by the capital growth he can achieve in the future. After all, cash flow alone never made any property investor successful.
“A couple of grand a year is not going to make you any more wealthy over the long term as opposed to potentially improving that asset [from] what it already sits as, or… getting another asset in a different growth market [that is] still providing you cash flow,” Paul said.
“I'd always chase capital growth to have a [positive] cash flow, but ideally, if you can get both, then that would be what I'd be doing.”
At the end of the day, it will do a property investor well to assess his own journey, identify his capabilities and limitations, and determine his financial goals to be able to find the right path towards success.
Moreover, you should always come back to the fundamentals of property investment as your primary guide for the most important decisions you have to make as an investor.
“There's no use investing in property for a good yield if your properties aren't going up… It's all going to come down to how much extra cash you have every single month to be able to cover any negativity in your portfolio,” Smart Property Investment’s Phil Tarrant said.
“Do you actually need to start thinking about yield yet...? If you're in the accumulation phase and you're looking to build a portfolio, often you're not going to be able to turn that into a positive portfolio very quickly because it takes time for your portfolio to mature, so you've got to work out [what is your long-term strategy].”
Tune in to Paul Glossop’s Q&A episode on The Smart Property Investment Show to know more about the right program to keep track of your property without going into depreciation, how to decide where to buy and which investment property is right for you, and how to identify opportunities.