Renovations with a twist

This 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.

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 $270 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 $92,000 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 $260 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%?

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. So if you want clarity on this go to: http://go2020.com.au.tmp.anchor.net.au/index.php?pageID=10#sectionStart

In the meantime, if you think you may be interested in a granny flat development then let me know and I can provide more details on the property we uncovered this week. 

Dual Occupancy - Strata vs. Torrens Title Subdivision; and the winner is...

Last week I presented the pros and cons of Strata vs. Torrens Title subdivision for a dual occupancy project. 

For this project, we are building two free standing homes. The land is not a corner block, so one home is positioned behind the other and they will share a common driveway.

Our first response was to try and achieve a two lot Torrens Title subdivision because it’s what most people understand when purchasing houses.  Strata subdivision tends to be associated with multi unit developments, rather than house and land projects. 

But, when you think about it, if you have two houses sharing a common driveway, then there should be some formal arrangement on who is going to pay for the upkeep of the driveway.  A strata subdivision covers this off whilst a Torrens subdivision leaves driveway maintenance up in the air or for owners to fight over.

We asked our surveyor to set up the Strata Plan giving each house its own land on title, minimising common areas to the driveway and the dividing fence between the two houses.  Being a small, two lot strata subdivision; it means that we’d be exempt from the more formal strata management of larger schemes.  As the houses are freestanding and have their own yards, it is quite a simple process. 

If our client, on completion of the development decides to hold both houses, they may also decide not to even register their subdivision immediately. We would have the approval in place and this has no shelf life, so they could register the subdivision years down the track when and if they decide to sell.

If they decide to sell one house and keep one, after registering the subdivision, all costs for managing, maintaining, repairing and insuring the common property are shared by the owners in direct proportion to their lot's respective unit entitlements. In this case it is an equal share; each lot has one unit entitlement, so it is very straight forward to manage. Each owner is responsible for 50% of any costs to repair or maintain the driveway/common area.

Small Strata Schemes (2 Lots)

The special provisions for 2-lot schemes are:

·         the 2 owners automatically form the Executive Committee removing the requirement for an election

·         a quorum for all meetings is when the 2 owners are present

·         Building insurance is not compulsory where the two buildings are detached and there are no additional buildings on common property. However, both owners must decide to forgo insurance cover by unanimous resolution at a meeting. Each owner may then insure the structure on their own lot.

·         If the buildings are detached, the owners can decide not to have a sinking fund provided there are no additional buildings on common property. Both owners must decide this by unanimous resolution at a meeting.

With the advent of the compulsory 10-year sinking fund plan legislation, 2-lot schemes managed to get special consideration. Essentially, a 2-lot scheme doesn't need to have a sinking fund.

Finally, there are no requirements for two-lot schemes to have any audit of accounts and financial statements.  Reference: www.strataman.com.au

Property Bloom found by setting up the strata title subdivision in the right way that it was the better way to subdivide. Not only does a small strata subdivision (two lots) cost a lot less in development costs than a two lot Torrens subdivision, it is also a much quicker process.  

The winner is, in our books is a Strata Subdivision for a dual occupancy where there is a shared driveway.

State Policy Will Help Empty or Feather Your Nest

In 2009 the NSW Government released a new policy that has been well accepted by most property owners; including investors and owner occupiers alike. The Affordable Rental Housing - State Environmental Planning Policy (SEPP) is encouraging people to build more granny flats and Property Bloom has introduced this as an affordable development strategy that may help you to grow your property portfolio.

Property Bloom™ finds properties suitable for a complying development.  This means we do not need to go to council for our approval. We can use a private certifier and fast track the approval process.  We’ll then manage all the fine details to create a cash flow positive investment for our clients.   A granny flat development is a really quick process as we use a builder who prefabricates the walls of the flat in a factory.  From the time the slab is laid, the flat can be fully completed within a few weeks.

The new policy introduced by the NSW Government is a fabulous strategy as it allows more property owners to add value to their homes or investments in the short and long term.  From a development perspective, it can be a quick and easy way to build your property portfolio and create high rental yields. Owners can benefit from cash-flow from the rent on two dwellings and also receive good depreciation benefits on the new flat.  This means people can keep moving forward with their investment strategy.  Unlike buying a single apartment for instance, which is likely to be negatively geared, adding a granny flat to a property that already has an existing dwelling can result in a cash-flow positive situation.

In the past granny flats were only permitted in certain residential zones, but this SEPP has opened up a whole new real estate door. The aim of the granny flat is to boost the supply of affordable rentals by providing housing for the elderly so families can support each other, as well as the younger generation who are living at home and are not in a position to move out just yet.

 Government projections show us that single-person households are likely to be the fastest growing sector over the next 20 years, so demand is definitely there.

Small secondary dwellings are an attractive option for singles and couples who don't need a lot of room and are the most likely people to be under rental stress. Young people are also staying at home longer and granny flats can provide extra space for them and be a lifesaver for Baby Boomers who were hoping to empty their nest some time soon.

This policy means that if you have a block over the size of 450sqm you are able to build a granny flat no larger than 60sqm on your existing property; you may get approval in approximately 10 days as long as it is complying with the council’s regulations. Not only will this add value to your home, but you can rent out the flat and do your bit to assist the chronic rental shortage we are seeing not only on the northern beaches but across NSW. 

Property Bloom™ focuses on developing property, including granny flat developments, in the Hunter Region due to its affordability and strong, diverse economy.  The area is earmarked for long term growth in the NSW government’s Lower Hunter Regional Strategy. The 25 year plan, provides for 160 000 new residents and 66 000 new jobs. With the existing mining, retail, construction, tourism, low unemployment rate and low rental vacancy rates, the Hunter Region ticks all the boxes for a strong region to be investing in.

We are finding properties for around $220,000 that may need a small cosmetic renovation of around $5,000. With the addition of a 2 bedroom granny flat which we can build for around $90,000; it’s a really affordable investment and a great way to dip your toe into development.  These projects are creating a 9-10% gross rental yield.  This type of development suits someone starting out in developing or an investor looking to create a cash flow positive investment.

To take advantage of the NSW Government’s Affordable Rental Housing - State Environmental Planning Policy (SEPP) the regulations include:

·         Granny flat must be no more than 60sqm in size

·         Land must be more than 450sqm

·         Can only be one house and one granny flat on the land

·         The land cannot be subdivided

·         Will need to comply with LEP of your council (contact council re building
 requirements)

·         It meets the requirements of the Building Code of Australia

For more information go to:
www.planning.nsw.gov.au