his week I was really excited to find a fabulous property that we could add value to. Add value?…in what way I hear you say. Perhaps you are thinking through renovation…new kitchen, new bathroom, paint throughout, perhaps a deck out the back or even maybe add another bedroom? Yes, this kind of work would usually add value to a property. But actually, I was thinking along other lines and two words had sprung to mind….GRANNY FLAT.
Double Rental Return
By adding a granny flat to this property, we could literally double the rental return. This four bedroom house, in a Hunter Region of NSW town, was renting at $260 per week. But as soon as I saw it, I knew it could achieve much more. It is a large block, over 1000sqm with dual access. By building a 60sqm, two bedroom granny flat on the property it could be rented for around $280 per week on its own, just for the flat. But it does get better….the house is way under rented. You see, I’m finding right now that as rental markets have continued to tighten over the past few years, there are some owners and managing agents who haven’t bothered to increase rents. This house was being rented by a long term tenant and quite frankly, she is on a very good wicket! The market rent in this town for a four bedroom house is actually up to $350 per week. So the house is under rented by a whopping $90 per week.
So if we spruce up the house a little, and this one only needs a paint and new carpet, we can increase the rent to $350 per week. The purchase price is $250,000 and we may spend $8,000 of a cosmetic reno, so already that’s gives us a 7% gross yield. Not a bad return when the average yield for houses in Sydney, for instance is 4.18%.
The granny flat will cost us $94,000 to build, this includes the design and complying development application fees. It also includes separate service connections for the flat so that we can rent it to a different tenant to the house if we need to. Remember, the flat will rent for $280 per week. If we add the cost of the flat to the purchase price of the house plus the small renovation costs, and include purchasing costs of stamp duty, legal fees, reports etc then we end up with a gross yield of around 9%.
Did I already mention that the average rental yield on houses in Sydney is around 4.18%? We are finding more and more clients are looking for cashflow positive investments and these projects also deliver some decent depreciation. Property Bloom manages the entire process right up to finding tenants and negotiating management fee discounts for our client with local agents. There is a massive demand for the new and low maintenance flats in the Hunter Region right now.
Ok here is the twist. If you have a Self Managed Super Fund or are thinking of setting one up, you may be able to do all this from within your fund. On 14 September 2011 the ATO released draft Ruling SMSFR 2011/D1 clarifying its views on key issues surrounding borrowing arrangements (Limited Recourse) as they apply to Self Managed Super Funds (‘SMSF’), allowing fund monies to be used to renovate property.
Importantly the ATO has given clarity to concerns of fund trustee’s in regards to repairs, renovations and improvements to properties held in SMSF’s under Limited Recourse borrowing arrangements. It is clear these can now be done within such arrangements. Borrowed monies cannot be used in all cases for such work; however other monies within the SMSF can be utilized.
This information comes from Nic Ellis, Director of The 2020 Group, who tells me he’s had more enquiry than ever on this topic. People want to utilize their Super to not just invest in property but to renovate and add value. With such a volatile global situation and stock market, Australians want more security around their retirement funds. Nick says he’s happy to see the draft Ruling as it falls in line with his company’s interpretation. The SMSF Limited Recourse borrowing for purchase of property has seen significant growth in recent years and this draft ruling will help turbo charge this sector of the market.
However, the area remains complex and care needs to be taken to ensure expert advice, appropriate structures and experienced administration of this process.