How to yield income from a granny flat
If you are fortunate enough to own land, adding a granny flat is a sure-fire way to start generating some positive cash flow to your property.
Helen Collier-Kogtevs of Real Wealth Australia recommends aiming for a 10% gross yield on your property.
According to Rich Harvey, managing director of propertybuyer.com.au, a new granny flat in Sydney’s West costing $60,000 to $80,000 should bring in about $250–$280 a week in rent. That’s a 24% yield, and some seriously positive cash flow.
Location, location, location
Adding a granny flat to an inner city property may generate higher rental income, but with property prices in the city high, and land sizes small, regional areas may present a better opportunity. “We’re currently putting units or a duplex in the back yard of larger properties in mining towns,” explains Collier-Kogtevs. “You don’t need to spend more on the land as you already own it, and you can potentially double or triple your rental income. I tend to target 800sqm blocks or bigger.”
27-year-old engineer Simon Green was initially planning to buy in Sydney’s Eastern Suburbs, but instead opted for a 700sqm block in Colyton in Sydney’s West. He plans to build a one-bedroom granny flat on the property at a cost of about $70 000. With market rent in the area at about $245 per week, Simon is looking at a rental yield of at least 18%. If rental prices in the area continue to increase at a rate similar to the previous decade (on average, 7%), Simon’s granny flat should yield $25 000 a year. “If I can have four of these properties in ten years’ time, there’s $100 000 in cash flow,” says Simon.
Things to consider
Harvey suggests buying a granny flat that can be moved in the future. “We use a custom-designed modular home that’s built on a certain kind of piering that enables you to pick the whole flat up and move it again,” he says. It may sound strange, but you never know what might crop up in the future! Make sure you find a good builder who knows your budget – construction shouldn’t take more than 10 weeks. You should check your council’s zoning regulations to see if it is possible to take out a strata title deal on completion of construction, as this will also provide capital growth benefits.
If the rental income generated by your investment
property is not enough to cover interest payments and other ongoing expenses, your property is negatively geared. This means your interest payments and ongoing expenses are tax deductible. If your property is not negatively geared, only your ongoing expenses are tax deductible. If your property is positively geared pre-tax, you will pay tax on your overall rental income. If your property is marginally negatively geared pre-tax, you may be entitled to a rebate. Make sure you are aware of any tax deductions or rebates you are entitled to, as these could mean the difference between shelling out cash and generating positive cash flow.
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