Rental yields have been weak across most of Sydney, but some investors have found a way to boost their returns.
According to the latest Herron Todd White (HTW) residential report, a number of investors are turning to the humble granny flat to maximise their rental yield.
Rental yields have been falling over the past decade. HTW cited research from SQM Research that shows average yields for houses in Western Sydney have fallen from 4.7 per cent in August 2009 to 3.3 per cent in August 2019.
Yields from units in the same period fell from 5.5 per cent to 4.1 per cent.
But some investors are still enjoying strong returns by building a simple detached granny flat on their block that attracts an extra income.
An example provided by the HTW report was of a brick 3-bedroom, 1-bathroom dwelling renting for $430 per week in Colyton with a detached modern 2-bedroom, 1-bathroom granny flat rented for $300 per week.
The property recently sold for $660,000, which reflects a gross yield of 5.75 per cent.
Comparatively, a median price for a 3-bedroom house in Colyton at $577,500 (source: realestate.com.au), that rents at $430 per week results in a gross yield of 3.8 per cent.
With such high comparative yields it’s no surprise that granny flats have become popular.
HTW found that houses with granny flats have become popular among larger multi-generational families as well as investors wanting a higher yielding property.
Mum and dad investors wanting some assistance with paying their mortgage, or an extra income in retirement have also got on the granny flat bandwagon.
Beware of dodgy structures
While a higher yielding property is appealing, HTW warned investors not to turn a blind eye to unapproved structures illegally turned into self-contained flats.
“Unfortunately for them, valuers, don’t turn a blind eye to these modifications and appropriately risk rate and comment regarding these unapproved works”, HTW said.
Dual key units also popular
Another option that property investors are looking to, according to HTW, is dual key units due to their similar potential for a dual income.
Popular in Western Sydney, these types of units generally provide a one or two-bedroom unit upstairs with a self-contained studio downstairs with separate access.
However, HTW notes that the dual key market experiences more limited growth due to the unconventional floor plan, the restrictive lending policies of some banks and changing lending policies towards investment properties by financial institutions.