With interest rates still at the highest level we’ve seen in a number of years, investors have been understandably concerned about the lack of cash flow hurting their bottom line.
Instead of focusing on the cash flow shortfall, there are options for investors to quickly boost their rental income. However, it might mean taking on some more debt.
Granny flats are a great way to both add value to a property and also substantially add to your overall rental yield.
There are a number of locations across NSW where you can not only build a granny flat, but you can do so without the need for any council approvals. This means the process is a lot faster than a traditional subdivision and it is also a lot cheaper.
To build a granny flat you are looking at paying around $100,000 to $150,000 depending on what you need. All that is required is that you have room in the backyard and enough access that the property can support a second dwelling. You also need to check with the council to see what their policy is on granny flats.
It’s also important to check that there is enough demand for this type of product in the area. Notably, with vacancy rates sitting at the lowest level on record in most states and with immigration now at the highest level in 70 years, there is generally plenty of demand for affordable homes. Granny flats are great for young couples or singles who want something easy to maintain and reasonably priced.
When we look at the numbers, granny flats are even more appealing.
For example, assume you purchase a property for $700,000 and put down a 20% deposit or $140,000.
The property is likely to generate a rental income of $600 per week or $31,000 per year.
When you factor in interest at 6.5% plus the costs of managing the property and maintenance and repairs, you are looking at costs of around $43,000 per year, leaving you with a shortfall of $12,000.
Instead of reaching into your own pocket you could go out and build a granny flat.
It would require you to borrow $150,000 to build it and at 6.5% that would mean you have another $10,000 in interest to pay every year.
However, the new granny flat would rent out at $550 per week, which would bring in an additional $28,000 per year.
That means that after another $5,000 per year in expenses, you would be netting $13,000 from the granny flat.
Across both properties, you would then be looking at a slight positive cash flow over the course of the year.
But more importantly, this is a clever way to purchase property and never have to reach into your own pocket. In this instance, we are taking on more debt and seeing the money we have to pay out of our own pocket actually go down.
A granny flat is a smart way to boost your rental income and it makes it a lot easier to hold onto your properties for the long term.
