By now you are well aware that Granny Flats will offer a return investment – and can do so reasonably quickly due to their short time to build, and their popularity as a housing option. In this article we look at the ways that clients are financing their Granny Flats
Granny Flat finance: borrowing against home equity
With the recent boom in the Australian housing market, borrowing against equity in the home is one of the most common ways people are funding a Granny Flat purchase – even as interest rates start to change. With a high-quality Granny Flat able to be built from around $250k, homes that have been bought even as recently as 3-4 years ago often have equity in them ready for investment in building a Granny Flat
Home equity is the difference between your property’s market value and whatever is left of your mortgage – if the value of your home has increased over the years you have built up more and more equity. Working with a lender or broker, you can calculate the accessible equity you will have in your property and draw down on those funds in order to pay for a granny flat.
Borrowing for a granny flat is a clever strategy for investors, because of the high returns. With Granny Flats returning over 10%, even loans at 5 and 6% can still make sense – and of course, interest costs are often tax deductible.
Granny Flat finance: construction loans
A construction loan is another way to borrow in order to build a Granny Flat. When you don’t have assets to borrow against, a lender will look at your earning potential – including the future earning potential of a Granny Flat – and lend you as much as they feel you’ll be able to pay over a specified loan term
It may involve refinancing your current loan to include the construction loan amount for the build of the granny flat but in any case it will work a bit differently to a home loan, with the lender normally making the funds available in stages as progress payments to be made to the builder – possibly even checking at each stage the build is at the stated stage.
Constructions loans are very common in Australia and offered by many lenders, it wont be difficult at all to talk to a lender about borrowing to invest in an income producing asset, like a Granny Flat
Granny Flat finance: downsize and cash in
Depending on your investment strategy and size, if you are downsizing your own home, equity may come out of the house to buy a home with space for a Granny Flat – and you can start your new home search with that in mind.
For example, John and Marta, in their sixties are ready to downsize from a two storey home. They’ve owned their home for over a decade and its worth about $1.2 million. As part of their investment plan, they will look for a suitable property in a new area in the $800k range. They will reserve $300k to build a top of the range Granny Flat that matches the aesthetic of the main house. They are hoping to buy in a coastal area popular with tourists in summer, and earn income from the Granny Flat as a short term let during the busy periods.
Granny Flat finance: pooled investment
Investing in a Granny Flat takes many forms. The low financial barrier to entry compared to getting on the housing ladder means pooling funds with family is real possibility to beat the property ticking time bomb.
For example, with rents soaring, Ken and Mandy are worried their kids will spend all their post uni job income on somewhere to live – but their kids 23 and 21 are keen to establish their independence. Having worked part time jobs since they were 15years old and with a good investment mindset, young adult has saved about $40k each, making $80k. The parents take $120k from their retirement savings and together they pool $200k to build a Granny Flat on the family property. The budget is firm but gives them plenty of options. They make sure to establish a formal agreement with a family lawyer, writing a contract that details the ‘rent’ the young adults will pay that will pay down the parents’ loan so that each child eventually owns the Granny Flat 50/50. The parents have pledged to leave the home equally to them both in any future will
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