If you’re interested in buying or building a granny flat for investment purposes, you understandably want to know how it will pay off for you down the line. With rents in San Diego rising steeply year after year, a granny flat can deliver positive returns, stronger rental yields, and additional cash flow from residential rental property – a prospect that’s generated increasing interest among investors recently.
If you’re a homeowner living in a hot rental market like San Diego’s, you might be wondering if a granny flat is even a good investment. Turns out, it is. Building a second rentable unit gives you quite a bit of flexibility and financial freedom, but before you commit to anything, consider the following:
A granny flat is a good investment if:
- You plan to own the home for the long haul and can rent it out for several years.
- You already own the land due to the rent-to-cost ratio being favorable.
- There isn’t an owner occupancy clause that forces you to remain on the property.
- You have access to capital or home equity to build.
- The rental market is hot and is slated to continue that way at least for the near future.
- This type of property is a good lifestyle fit for you.
State of the Rental Market
You’ll first have to estimate how much monthly income you can make off renting a granny flat. Just remember, granny flats that are free standing are usually more desirable for renters, whereby you can charge slightly more than you could for an apartment building. This is especially true if the flat is accompanied by a garden or outdoor living space.
Next, take a look at the rental vacancy rate, which is the percentage of homes for rent that is unoccupied. The vacancy rate dictates factors like rent and prices. For example, landlords can raise their rents in a market where there are very low vacancy rates, such as in San Diego, where the vacancy rate is at 3.3. percent.
Many homeowners underestimate the cost of building a granny flat, but in general, you should estimate $200 to $300 per square foot. If you plan to add a second story or convert a loft into a granny flat, it will be closer to $300 per square foot.
Take the following into account:
- Permitting fees $5-30K
- Design fees ~8-10K (usually 10% of the construction cost)
- Construction cost 80-200K
Fortunately, in San Diego, costs can be reduced dramatically thanks to a recent decision by county officials. It is now cheaper and easier to build granny flats through multiple pre-approved design plans that property owners can use to speed up the permitting process and save thousands on architectural work, according to The San Diego Union-Tribune. The county has also waived $15,000 in permit and development fees for granny flats.
This is in response to a housing shortage that has no signs of improving any time soon. The hope is that this simplified, less costly process will prompt more people to build granny flats in an effort to close the housing gap and assist low-income seniors, veterans and others at risk for homelessness.
Since 2016, approved accessory dwelling units have increased 63 percent throughout the state, and San Diego in particular, thanks to the looser regulations and easier permitting process that has allowed people to maximize their property potential with granny flats.
While they make great cash flow opportunities, granny flats can be tricky to finance. Many of the major banks such as Wells Fargo, Bank of America and Chase don’t offer mortgage products to finance accessory dwelling units, which is what granny flats are. But since this can be a six-figure investment, most homeowners simply can’t pay for the whole project in cash.
You could finance this project with:
- Cash or liquefying investments
- Home Equity Line of Credit
- Home Equity Loan
- Construction Loan
- Cash-Out Refinance
The cost involved in adding a granny flat will depend on the type of granny flat you choose. But you’ll probably spend a minimum of $100,000. If you decide to build, there are many options in terms of design and type of dwelling, from prefabricated and modular homes to dwellings built from scratch. The one you choose will depend on your budget, available designs and desired features.
Adding Value with Granny Flats
Wondering if a granny flat will increase the value of your property? The short answer is yes, but only if it is in compliance with local council regulations. There are many instances where a granny flat can add significantly to the value of your property, but do your homework on the many variables that will play into your return on investment, including size, location and cost.
Contact Agent Prolific
Whether you’re looking to buy or sell, or learn more about cashflowing granny flats as a real estate investing option, contact us in San Diego by phone or fill out our online form.