If there’s one thing which this country doesn’t have a shortage of it is property schemes and ‘gurus’ who promote these schemes to the vulnerable property investor. The defence housing scheme and National Rental Affordable Scheme (NRAS) now has competition from another scheme. This scheme is sweeping places such as Sydney, Adelaide, Perth and Ipswich. It’s the granny flat (yes, the granny flat!); the next epidemic that will give plenty of property owners grey hair.
The logic of the granny flat goes like this: “Pick an area where the local government zoning permits granny flats, buy a house, spend $120,000 to build a granny flat on it, rent out both properties, and bring in a double-rent bonanza!”
Clever, right? Wrong!
I see it a lot where property investors get caught up in the higher than normal rental return of a property at the expense of the ultimate potential for capital growth. Don’t get me wrong, the rental income has importance however let’s not lose sight of why we are actually investing. For a majority of people, they invest so that one day they will have the financial freedom to exit the workforce with an income stream that will give them a significantly better lifestyle than they’d get on a taxpayer-funded pension.
At first glance, you’d think a granny flat with its capacity to bring in more rent from one property would be the perfect way to ratchet up those retirement funds. How close will you be to retiring by owning a property that is cash flow positive to the tune of (say) $2000 per annum? How many granny flat properties will you need to acquire in order to sail the Bahamas? And, how will you fund future dual-living duds like this?
Sure, the granny flat property will grow in value over the years, but its growth will be directly influenced by the buyer demand for it. And this is where the rubber really hits the road.
Think about this scenario logically: who wants to buy a granny flat property? It has to be a buyer who doesn’t mind someone else living in their backyard and the various annoying behavioral traits of each new tenant. That buyer probably is not a young family, a baby boomer, or a young professional couple.
Most often, granny flat properties only appeal to investors. The number of owner-occupiers choosing a granny flat property over any other more conventional home is minuscule. According to the latest Census data, only 25% of all properties are investor-owned. So, to invest in a granny flat property is to sink a heap of money in to an asset with a very small basket of future buyers and to ignore the much bigger basket brimming with first home buyers, renovators, upgraders, downsizers and investors (75% of the market actually)!
Granny flats fall under Propertyology’s category of ‘specialised properties’: properties which only appeal to a very select population segment. These properties have lower demand than a more conventional property.
There’s been a rise in the number of property valuers not supporting purchase prices for properties with a granny flat. Spending $100,000 to build a granny flat on an existing detached house block rarely adds an extra $100,000 in value. Why? Because granny flats aren’t pretty and there are far less teetotalers than willing grannies (buyers).
There is a growing number of ‘property consulting’ companies out there spruiking new houses with granny flats on them to investors. With the gift of the gab and more glossy brochures than you can poke a stick at, these are often the same ‘consultants’ who ran out of NRAS stock and / or are suddenly struggling to make a buck from selling defence housing.
The extra rental income isn’t everything that’s it made out to be either. There is often a longer vacancy period between tenants because a lot of people are turned off at the thought of having a stranger live in their backyard. And those tenants who are interested will demand a lower rent. Property management and letting fees will be applicable to each dwelling and there is increased potential for tenant conflicts.
Banks have a more conservative credit policy for granny flats. When assessing a borrower’s affordability banks will often significantly discount the potential rental income. They often will also limit the amount that they will lend against granny flat properties. Think about why banks would do this.
If you are still um-ing and ar-ing about whether the cash flow positive granny flat is an ideal strategy for stopping work one day, think about this:
Property investor ‘A’ and property investor ‘B’ both have $500,000 to spend. Investor ‘A’ spends his money on a specialised property while investor ‘B’ spends hers on a conventional property. Ten years pass and the conventional property has grown in value in line with the broader Australian market at 6% a year and will then be worth $895,000. The smaller buyer pool for the specialised property has resulted in an increase in value by 4% a year for an end value of $740,000. It’s not rocket science figuring out which property will make a bigger contribution to that retirement nest egg.
On the surface, the dual rental income creates an allure that granny has become youthful again. But, take off the rose-coloured glasses and you’ll discover that, beneath all that botox and bottled-blonde hair is the genuine granny. My advice: keep your granny, but ditch the granny flat. It’ll save you years of grey hair!
About Propertyology Head of Research and REIA Hall of Famer, Simon Pressley
Simon Pressley is a 3-time Australian Buyer’s Agent of the Year, an REIA Hall of Fame Inductee, a tertiary-qualified Property Investment Advisor, and a graduate of Australian Institute of Company Directors. His reputation as a thought-leading property market analyst is unparalleled, including correctly forecasting Hobart’s boom, Sydney-Melbourne’s last downturn, numerous regional star performers, and Australia coming out of COVID with the biggest boom in more than 15-years.