Most of us have heard the phrase cash is king. It’s a phrase you would have heard many times. In the world of property investment “Cash flow” is king, at least to some investors. Perhaps not every property is suitable for a granny flat but those who have done it make compelling arguments in favour of the use of the minor dwelling as an investment tool.

It is not uncommon for granny flats to return 15% gross yield. That is, a dwelling that costs $100,000 to build may rent for $300 per week.

The appeal to investors becomes evident when you look at the cost of borrowing $100,000 in today’s mortgage market. At a rate of 4.8% ( cheaper rate may be available) the repayments would be $4800 per year.

You can see that the gross rent from the dwelling before cost is $15,000 and the interest expense is in this case just $4800.

“Detached” granny flat construction – the most widely used.

Attached granny flat construction – less common option but becoming more popular.

As someone who has been dealing with minor dwelling finance for a significant amount of time I feel like I have seen it all. I have seen do it yourself conversions right through to what are in effect small property developments ( and everything in between). The amount of capital required for each is different as is the correct way to go about raising it.

However, why should we as investors even consider a granny flat and what are the risks involved? At the outset it is important to mention that we are not financial planners and we are not recommending a particular investment.

What we can do is speak from experience and show you some real world examples. In order to do this we will have to use some numbers such as potential rent and projected construction cost.

It goes without saying that these numbers will vary depending on your location and the builder you select.  However, there is one thing that will not change. As brokers we have to deal with the FACTS as they are presented to us on each occasion. When presenting an application to the bank we use real numbers and “supporting documents” or “supporting evidence” to ensure that your application has the best chance of success.

Cost of granny flat per week if construction cost is $100,000. $92.31 per week.

There are many considerations when making investments of any kind. However, without a doubt investors need cash flow (more cash coming in than going out ) if they are to continue to invest in property. Researching ways to achieve this is part of a sound strategy.

Often, customers have sufficient equity in the existing home to finance the construction of a granny flat or minor dwelling. However, when this is not the case a construction loan for the minor dwelling is required.

Your broker can show you which granny flat loans are the most suitable for your situation.

The finance cost of  a granny flat with a construction cost of $135,000 is around $124 per week in this example. What would the rent for a two bedroom granny flat be in your location?