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Mary has emailed me with a really interesting question this week, and I’m excited to dive into the nitty gritty with you, so I can show you how I evaluate deals and potential investments.
From the information I’ve been given, it seems that Mary is an established investor. She’s recently finished building a property, at a total cost of $450,000, and she wants to know:
“Should I build a granny flat at the back of my new investment property, to rent out in order to increase my returns?”
Her current investment property is returning $430 per week. She’s done the sums and worked out that the granny flat will cost another $160,000 to construct, but she’ll be able to rent it out for an impressive $360 per week.
So far, those figures seem pretty good.
In this scenario, I ask: What do you want to achieve out of your investments? Do you need to add more rent and cash flow to your portfolio as your next priority? Will constructing a granny flat add capital growth? Will it potentially give you access to more equity for future investments?
When we look at the facts and figures, it shapes up to be quite a good deal.
If she goes ahead, her cost is going to be $610,000 with a new rental income of $790 per week, or $41,000 annually (before costs). That’s a good cash flow and a strong yield at 6.73%.
But how can Mary work out whether this is the right way to go?
It all comes back to her investment strategy.
If it’s cash flow she needs, then maybe it’s a good idea.
If it’s going to give her capital growth as well, maybe it’s a good idea.
If it’s going to be easy for her to exit out of when she goes to sell, then perhaps it’s a really good idea.
If a granny flat is the type of property that tenants want and it’s going to be able to easily be rented out… then it could be a great idea!
On the surface, when you crunch the numbers, it may look really good, but there is so much more due diligence that needs to be done.
For instance, having a granny flat can make your exit strategy so much harder. If the property is located in a market where granny flats are not very common, not very sought after and not very easy to rent out, then it may be more difficult for you to sell it down the track.
You also need to consider the opportunity cost of what you’re doing.
Let’s say Mary has $160,000 in equity that she plans to use to fund the construction of her new granny flat.
I would urge Mary to consider: could you get a better return and better capital growth, by putting that money towards another two investment properties? With $160,000 you could split that in half and use it as deposits and buying costs on two traditional investments. Is that going to be a better use of your funds?
To find out the answer, you really have to check with your strategy and your long term goals. There’s not enough information provided by Mary for me to give a clear answer for her specific situation, but I do know there are some areas where granny flats are fantastic investments, and some areas where they really do not suit the market. Your research and due diligence will help you work out whether this type of strategy works for you.
I loved this question from Mary because it really shows how much people are willing to think ‘outside the box’ to make a really strong profit from their investments. If you have any questions about your investing goals or decisions, especially if they’re a little ‘out there’, we’re always on hand to guide you in the right direction; so contact our team here.
We love getting your Burning Questions too, so please click here and submit your question. No matter how big or small, how straightforward or how complicated, I’ll give you a straight answer with no BS – guaranteed!