This session is part of a series of sessions of Finance for Pensioners and solutions to the Housing and Rental Crisis
See also session 10, 27 and 30
You own the land and you are considering building a granny flat to give you some extra income. But is it a good investment and is it safe?
Weekly rent should be 1/1000th of the value of the property. For instance a $300,000 property should have a rent of $300 per week and a $500,000 property a rent of $500 per week.
On a $180,000 property , which is probably the maximum you can spend on an ancillary dwelling, the rent would be $180 per week
This is a gross return of 5.2% (52 weeks in the year divided by 10). If you borrow the full amount of the property this would also be the interest you had to pay to the bank to break even ( interest only).
Depreciation allowances will give you extra income. Often not understood , the biggest advantage of investing in property is depreciation allowances
Division 40, is short term depreciation of carpets, air conditioning blinds etc.
These items are normally depreciated over a 10 year period but if you use the diminishing value method of valuation you half that period and full depreciation is over 5 Year. We assume that this applies to 10% of the cost of the building or 2% for the first 5 years
Division 43 which is depreciation of the remaining 90% of the building over 40years or 2 ½ % per year . Because it only applies to 90% of the building this depreciation amounts to 2.25% of the building
Add the two and for the first 5 years depreciation is 4.25%.
This and interest on a loan is a tax deduction and is different for the different tax brackets
In Sessions 10 you can see the effect in the varying tax bracket. Pensioners affected under the income test benefit most from depreciation allowances as effectively they are saving 74.25 cents for every dollar in tax deductions.
In the first instance we assume that rent @ 5.2% equals interest payments @ 5.2%.
These cancel out, but you will still have the depreciation allowance.
Yes, as long as the return is in excess of the interest on borrowings, the investment is profitable and safe.
The above figures are independent of the cost of the building.
As we said before, rents per week should be set at 5.2% of the value of the property
Which is $180 per week for the building. But that does not take into account the land that you already own
If the granny flat costs you $180,000 , the interest on the loan is paid by your tenant and you are just making yourself an extra income of $2,486.25 per year or $47.81 per week..
Note that we have not taken into account the land component as you already own the land. But if we take into account the cost of the land at say $100,000 which @ 5.2% means another $100 per week, the total return to you will now be $147.81 per week.
So the rent should be $280 per week ( 5.2% of $180,000 + $100,000 land) .
Your net income return after paying interest on the loan will be $147.81
If you live in a capital city your return will be higher as rents may be in excess of $280 per week.
And now I will let you into a secret
The only condition of an Ancillary dwelling is that it is less than 60m2.
We assumed the cost of the building to be $180,000 or $3,000 m2.
The actual cost of the building is irrelevant as long as you charge rent in $ per week equal to the value of the property in thousands.
The secret is that you can build 2 x 1 Bedroom units on top and independent of each other. If you were to build on strata title then that would be regarded as 2 buildings and you must have a minimum land size of 975m2.
As an ancillary dwelling, as long as it is less than 60m2 (2 x30m2), it is regarded as a single dwelling.
And you can build on any size of land as long as you can fit it in. Also a highset building only has a footprint of 30m2 whereas a single dwelling has probably a footprint of 60m2.
You can rent out the second unit @ $280 per week, so your total return is $7,686.12 + 14,560 = $22,246
See Session 10
Rate rises, management and rates are all tax deductable.
WE have assumed that you are in the 32.5% tax bracket
1% rise would be $1800
After tax deductions $1215
Management 10% of $560/week $2912
After tax rebate $1965
Rates and Insurance $3,000
After tax $2025
Total after tax costs $5205
So your net income has been reduced from $22,246 to $17,041 8,238 or $327.71 per week.
Our aim was to solve the Housing crisis so the fact that you always can build a highset, being 2 buildings instead of one will increase the supply of housing.
60% of all rental demand is for 1-Bedroom houses
I should not have told you all of this because we are in the business of providing Affordable Rental Accommodation and you will become a competitor. However, our overall objective is increasing the supply of housing , so we are quite happy with competition.
But do me a favour that if you have enough equity in your residence, borrow the lot. The only way to become rich (see sessions 3 and 6) is if you borrow as much as you can.
Also remember borrowing for investments is good
Borrowing for a roof over your head is bad
Building on leasehold land
We see a nice House, bus stop at the front, shopping centre around the corner, close to schools, sea views in an expensive green suburb.
We could approach the owners to see if they are interested in doing a joint venture. It would be easy to build an ancillary dwelling on the property.
The footprint is only 30m2 so you should be able to fit it in anywhere on the property at a spot that least interferes with normal living.
There is no cost to the owner.
The owner leases the land to us we will pay $180/week or $9,360 per year.
We will fund and construct the property. The property on the land belongs to the owner but the lease will be recorded on the title and if the owner sells the lease transfers to the new owner.
The purchaser will be delighted , because as well as buying their new residence they will have free income of $180 per week which the bank will take into account if the new owner wants to get a loan to purchase the property.
See also session 30