TOP MISTAKES TO AVOID with GRANNY FLATS

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Top 13 Mistakes to Avoid with Granny Flats

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Top 13 Mistakes to Avoid with Granny Flats

Before you get started This eBook contains general and factual information only. The Wealth Adviser library (including this eBook) is published by Spring FG Digital Pty Ltd ABN 34 143 840 528, CAR 1237354 under authority from Spring FG Wealth Pty Ltd ABN 23 146 936 763, AFSL 391655 and contains general and factual information only. Before acting on any information contained herein you should consider if it is suitable for you. You should also consider consulting a suitably qualified financial, tax and/or legal adviser.

Information in this eBook is no substitute for professional financial advice. We encourage you to seek professional financial advice before making any investment or financial decisions. We would obviously love the opportunity to have that conversation with you, and at the rear of this eBook you will find information about us and our services and how to go about booking an appointment. If ultimately you decide not to meet with us we still encourage you to consult with another suitably licensed and qualified financial adviser. In any circumstance, before investing in any financial product you should obtain and read a Product Disclosure Statement and consider whether it is appropriate for your objectives, situation and needs. © Spring FG Digital (ABN 34 143 840 528) 2016 This publication is protected by copyright. Subject to the conditions prescribed under the Copyright Act 1968 (Cth), no part of it may be reproduced, adapted, stored in a retrieval system, transmitted or communicated by any means; or otherwise used with without prior express permission. Enquiries for permission to use or reproduce this publication or any part of it must be addressed to Spring FG Digital by email to [email protected].

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Top 13 Mistakes to Avoid with Granny Flats

Letter from Wealth Adviser Dear Reader WELCOME TO SPRING Welcome to Spring Financial Group and to a fresh approach to financial services in Australia. Welcome also to our Wealth Adviser library of educational eBooks. For readers who do not know us well, we are an ASX-listed financial advice business with state capital offices in Sydney, Melbourne, Brisbane and Canberra – as well as an ever expanding regional branch network. We offer financial planning and investment advice; wealth management; retirement and estate planning; insurance and superannuation; finance; and tax & accounting services. We also specialise in self-managed superannuation funds (SMSFs); and direct and SMSF residential real estate investment. KNOWLEDGE GIVES YOU A HUGE ADVANTAGE We believe that knowledge gives you a huge advantage in creating and effectively managing wealth; in planning to reach your goals; and in being prepared for whatever unexpected twists and turns life may present. That’s why our team of experts has created this series of eBooks that seek to inform you of not only the benefits but also the potential risks and pitfalls of various strategies and investments. We trust you enjoy this eBook and find it informative and professionally presented. Of course your feedback is always welcome as we strive to continually offer content in a format that is relevant to you. TAKE THE NEXT STEP We invite you to meet with us on a no-obligation basis to discuss what it was you were hoping to achieve when you downloaded this eBook and to establish if we may be able to help you achieve your goals and objectives. Through our fresh approach our experts have helped literally thousands of people of all ages and all walks of life to build, protect and manage their wealth and financial affairs. So, whether you want to pay down your mortgage faster; you’re just starting out with building your wealth; or starting to plan for retirement; or already retired; or just wanting a second opinion and the peace-of-mind that comes from expert advice and planning based on your goals and your needs, our experts have the knowledge and resources to help. At the rear of this book you will find some information about our fresh approach and what sets us apart. You also find the details of how to book an appointment with one of our experts. We look forward to meeting you soon. Wealth Adviser

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Top 13 Mistakes to Avoid with Granny Flats

Contents Before you get started ..........................................................................................................................................1 Letter from Wealth Adviser ..................................................................................................................................2 Introduction ..........................................................................................................................................................4 Mistake #1 Assuming a Granny Flat Will Increase the Value of your Home.........................................................4 Mistake #2 Assuming the Granny Flat can be Rented out to Generate Income ..................................................5 Mistake #3 Potentially Reducing the Rental Income Potential and Occupancy Rate of an Investment Property 5 Mistake #4 Not Understanding the Tax Implications ...........................................................................................6 Mistake #5 Not Obtaining the Best Loan Finance ................................................................................................6 Mistake #6 Not Considering the Impact of Potential Family Breakdowns ...........................................................7 Mistake #7 Not Understanding Different Permits and Approvals Are Required ..................................................7 Mistake #8 Not Appreciating that “You Get What You Pay for” ..........................................................................8 Mistake #9 Not Ensuring that your Granny Flat Builder has Adequate Insurance ...............................................8 Mistake #10 Not Understanding the Access Required for Granny Flat Construction ..........................................9 Mistake #11 Not Appreciating the Future Loss of Privacy....................................................................................9 Mistake #12 Not Understanding the Potential Impact on Government Benefits ............................................. 10 Mistake #13 Not Considering Alternative Income-Generating Investments ..................................................... 10 Conclusion.......................................................................................................................................................... 11 Reader Notes ..................................................................................................................................................... 12 Take the next step.............................................................................................................................................. 14 Our fresh approach to Financial Services ........................................................................................................... 15 Appointment Booking Request form ................................................................................................................. 17

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Top 13 Mistakes to Avoid with Granny Flats

Introduction Granny flats are increasingly being constructed in Australian backyards. There are a number of reasons for this trend: •

property owners wanting to convert their backyards into extra living space

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property owners wishing to increase their rental income potential

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property owners wishing to increase the resale value of their asset

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property owners taking advantage of tax deductions available for granny flats

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property owners catering for younger family members who are remaining in the family home longer before moving out

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the rise in the number of full-time working families, with grandparents assuming increasing child-minding responsibilities

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government desires to limit urban sprawl

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people are living longer, with the average life expectancy for Australians now over 80 years. Australia’s ageing population means there is an increasing need to care for elderly family members.

Mistake #1 Assuming a Granny Flat Will Increase the Value of your Home There is no guarantee that a granny flat will necessarily increase the value of a home when the time comes to sell, despite the considerable cost of constructing it. Considering that a house is the major asset for the majority of Australians, this is an important consideration. A granny flat may increase a house’s value, but the fact is that sellers of homes with granny flats will only attract potential buyers that are looking for (or would be willing to consider) a house with that feature. For many buyers, a granny flat in the backyard will not be a feature that they want or need. Some granny flats end up as nothing more than storage sheds. Granny flats are not permitted to have a separate ownership title from the property they are constructed on, which means they also cannot be sold separately.

The purpose of this eBook is to provide information on the potential pitfalls to avoid if you are considering constructing a granny flat on your property. In addition, as with any sizeable investment, we recommend you seek financial advice before constructing a granny flat on your property. This advice will help to determine if it is appropriate for your personal and financial circumstances.

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Top 13 Mistakes to Avoid with Granny Flats

Mistake #2 Assuming the Granny Flat can be Rented out to Generate Income Under current legislation, granny flats cannot be rented out in Victoria, Queensland and South Australia. They can only be rented out in New South Wales, Western Australia, Tasmania, the Northern Territory and the ACT. The planning and environment departments in these States and Territories can provide information about eligibility and any restrictions. Even in States and Territories where granny flats can be rented out, there is no guarantee that they always will be. For example, during the mining boom in the first decade of the 21st century, the demand for any sort of accommodation in Western Australia was high, but this has since slumped dramatically with the subsequent downturn. Many rental properties are now vacant, and rental yields have dropped accordingly.

Mistake #3 Potentially Reducing the Rental Income Potential and Occupancy Rate of an Investment Property Before you add a granny flat to an investment property, you need to consider that the rent you charge for the property will likely need to be reduced with the addition of the granny flat. This is because tenants will typically expect a rent reduction in exchange for having another person or other people renting out the granny flat in their backyard. Although you will be able to charge rent for the granny flat, which combined with the reduced rent of the original property may result in a higher overall yield, there is no guarantee that both will easily be able to be rented out.

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Top 13 Mistakes to Avoid with Granny Flats

Mistake #4 Not Understanding the Tax Implications

Mistake #5 Not Obtaining the Best Loan Finance

For granny flat expenses to be tax deductible, the income generated needs to be regarded as a commercial transaction. The rent received from a relative who is only paying a nominal amount of rent (i.e. well below commercial rates) would not be regarded as a commercial transaction. While this means that this nominal rental income would also not be taxable for the granny flat owner, it means that any granny flat expenses cannot be used as tax deductions. Tax deductions are only allowable against assessable income. This means the homeowner must charge commercial rates of interest to relatives or third parties to be eligible to claim tax deductions for expenses such as:

As with any loan, you should obtain the most favourable interest rate available to construct the granny flat if required. There are several different financing options available, including:

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interest on the loan for the construction of the granny flat

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a proportion of utility bills (e.g. electricity)

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a proportion of land rates for the property.

An additional potential taxation issue associated with granny flats is Capital Gains Tax (CGT), potentially making an otherwise exempt family home subject to CGT if it is used to produce assessable income. CGT on the eventual sale of the home will be based on the floor space of the granny flat and the time period this was rented out generating a commercial rent.

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a home equity loan

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refinancing your existing property loan (including the addition of the granny flat) with either your current lender or an alternative lender if you can negotiate better terms

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taking out a separate loan for the granny flat on the most favourable terms available.

Although the loan for a granny flat is likely to be much smaller than the loan for your main property, it is still a significant investment. For example, to pay off a $90,000 loan over 20 years at an interest rate of 6.6% will result in a total repayment of approximately $344,000. It is therefore worth shopping around for the best possible deal. Even a small reduction in interest can make a sizeable difference to the total repayments ever the life of a loan.

Assuming no commercial rent is received from the granny flat, there will be no loss of the CGT main residence exemption on the subsequent sale of the whole property.

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Top 13 Mistakes to Avoid with Granny Flats

Mistake #6 Not Considering the Impact of Potential Family Breakdowns

Mistake #7 Not Understanding Different Permits and Approvals Are Required

As mentioned in the Introduction, people are living longer and Australia’s population is ageing. Granny flats are increasingly being used as accommodation for elderly relatives, with their proximity making it easier for other family members to help with their care, as well as allowing these elderly family members to assist with child minding responsibilities in families where both parents work full-time. In these circumstances, consideration should be given to the potential for family break-ups.

Different States and Territories in Australia have different planning permit and approval processes. Depending on the location, there are varying restrictions on living, patio and veranda space. Granny flats all require local council approval, with most applications generally requiring at least the following:

For example, a wife’s mother may move into a granny flat on the husband and wife’s owneroccupied property. What will happen to her if the husband and wife subsequently divorce and there is a forced property sale? Ideally, the potential for this situation to occur should be discussed and a written, legally-binding agreement should be prepared outlining what will happen in such situations, prior to the family member taking up residence in the granny flat.

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surveyor’s plans

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architectural drawings

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structural engineer’s drawings.

In general, granny flats can only be built on residentially zoned property, with only one allowed per property. Granny flats cannot exist on subdivided, strata title, or community property.

In addition, such agreements should outline the financial obligations and expectations of all parties in relation to the granny flat. This is especially important if the family member who is residing in the granny flat has contributed to the cost of its construction.

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Top 13 Mistakes to Avoid with Granny Flats

Mistake #8 Not Appreciating that “You Get What You Pay for” The cheapest granny flats are DIY construction kits. The next step up is pre-built granny flats from kit home builders. The most expensive option is a custom designed granny flat. As with any purchase in life, you generally get what you pay for. The higher the quality of materials and builders used in construction, the higher quality the granny flat is likely to be, and the longer it will likely last before needing any costly repairs or maintenance.

Mistake #9 Not Ensuring that your Granny Flat Builder has Adequate Insurance Always remember that a granny flat builder will be constructing on and around your existing property. They should be able to produce a certificate of currency on request to demonstrate that they have adequate insurance coverage for the construction work.

With any construction project, you should feel comfortable in asking the builder to supply you with examples of similar previous work they have done. In addition, they should be able to provide testimonials from previous customers regarding their ability to do the work on time and on budget. With the increasing demand for granny flats, many builders specialise in their construction these days. It is a competitive industry, so you should be able to shop around to find the best deal in terms of both quality and value.

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Top 13 Mistakes to Avoid with Granny Flats

Mistake #10 Not Understanding the Access Required for Granny Flat Construction Homeowners need to consider the ease of access to their property for delivering the necessary building materials to construct the granny flat. In some circumstances, cranes may be necessary to lift building materials over the existing home. This will add to the cost of the granny flat construction.

Mistake #11 Not Appreciating the Future Loss of Privacy Whether your granny flat is used for family members such as grandparents or third parties, there will be an inevitable loss of privacy. For example, there are likely to be shared spaces between the granny flat and the owner-occupied property, such as patio areas. There is also likely to be some additional noise, with potentially additional vehicles and people accessing the property. In addition, if you are an owner-occupier of the main property residence, you literally will have tenants in your backyard, unlike other rental property arrangements. This means they can potentially knock on your door at any time for maintenance or other issues. In addition, consideration needs to be given to the potentially uncomfortable situation where the tenant is in arrears with their rent, and how you as the owner will handle that situation with the tenants being so physically close to you.

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Top 13 Mistakes to Avoid with Granny Flats

Mistake #12 Not Understanding the Potential Impact on Government Benefits Before considering constructing a granny flat you may need to check with Centrelink about the potential impact on current or future government benefits on the property owner and/or the occupant(s) of the granny flat. The standard Centrelink income and asset means tests for determining pension or allowance eligibility: •

Rental income less allowable deductions would ordinarily be counted as assessable income for means testing. Note that deductions allowed are not the same as those allowed for taxation purposes e.g. depreciation.

•

For the principal home to be exempt from the assets test, the principal home and adjacent land, up to 2 hectares, must be on a single title block and the land must not be used primarily for commercial purposes

Mistake #13 Not Considering Alternative IncomeGenerating Investments If your primary goal is to generate income rather than provide accommodation for a family member, there are numerous other income-generating investments to consider, such as managed share funds and trust funds. The major advantages of these forms of investment vehicles are that your funds are more liquid and you are able to diversify your asset portfolio (i.e. not rely too heavily on one property). And unlike a granny flat, these investments won’t have any potential negative impact on your existing residence.

In relation to retirees there are specific concessions and detailed rules associated with •

aged care means testing

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the creation of life interests (the transfer of an asset to another person but retaining an interest in the asset).

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Top 13 Mistakes to Avoid with Granny Flats

Conclusion This eBook has outlined the most common mistakes to avoid with granny flats. In addition to the information contained in this eBook, consultation with an experienced financial adviser is recommended to determine if this form of investment is appropriate for your personal financial circumstances. If you subsequently decide that this is an investment you need to make, a skilled financial adviser will also be in a position to put strategies in place to help you avoid these potential granny flat mistakes. It is our hope that the information presented in this eBook has set you thinking about planning your financial future. We urge you to continue your explorations by making use of some of the other resources and eBooks from the Wealth Adviser stable. We also stand ready to serve you with holistic and professional advice, so please do not hesitate to contact us if we can be of further assistance.

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Top 13 Mistakes to Avoid with Granny Flats

Reader Notes

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Top 13 Mistakes to Avoid with Granny Flats

Reader Notes

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Top 13 Mistakes to Avoid with Granny Flats

Take the next step We trust you enjoyed this eBook and found it informative and professionally presented. Of course your feedback is always welcome as we strive to continually offer content in a format that is relevant to you. We now invite you to take the next step and to meet with us on a no-obligation basis to discuss what it was you were hoping to achieve when you downloaded this eBook and to establish if we may be able to help you achieve your goals and objectives. Through our fresh approach our experts have helped literally thousands of people of all ages and all walks of life to build, protect and manage their wealth and financial affairs. Next you will find some information about our fresh approach and what sets us apart. You also find the details of how to book an appointment with one of our experts. We look forward to meeting you soon. Spring Financial Group

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Top 13 Mistakes to Avoid with Granny Flats

Our fresh approach to Financial Services Whether you have a very specific need such as looking for a better rate on your home loan or making sure your insurance cover meets your needs; or you’re considering how to develop and implement a tailored retirement, wealth creation or wealth management plan, when you deal with Spring Financial Group you can expect a fresh approach. That’s because instead of focusing on products we focus on helping you to develop and implement outcomes that are based on your specific goals. Why do we call it a fresh approach? Financial advice and financial planning in Australia has its origins in the early 1990s with the birth of compulsory superannuation. Prior to this we had stockbrokers, life insurance agents, accountants and bank managers. As the planning and advice (or “wealth management”) industry grew it was eventually controlled by the big banks and insurance companies keen to sell an expanding range of financial products, including of course their own managed superannuation funds. Fundamentally, that’s how it remains today. Banks and other major financial institutions now control not only the majority of product “manufacturing”, they also control or directly influence the majority of advisers. Recently we have even seen “industry” superfunds move into financial planning; as well as banks take part or full ownership of larger mortgage brokerage companies and mortgage “aggregators” that smaller brokers rely on to access a range of loan options.

How our fresh approach is different At Spring Financial Group we have built our organisation to be different. Our fresh approach is about you and putting your interests first without any institutional product agenda. We don’t manufacture our own products and we don’t answer to an institutional master about recommendations we’re able to make. What this means for you is that if a particular loan (for example) is right for you and it’s not available from one lender, we’re able to source it from another. Same can be said for insurance policies, and different investments options. And when it comes to investments we recognise there's more to the world than just the sharemarket; and more to it than just managed funds run by the banks and major institutions. We believe that finding a balance between a variety of asset classes including property, shares, fixed-income and other markets is prudent in the long term. We also believe it’s naïve to think that the future will be any different to the past. All markets rise and fall and those trends can take years to play out. Your financial life will travel over all these different terrains and the structures, investments and vehicles you use need to be compatible to these different climates. In our view, there is little point improving your financial position during a bull market only to watch it dramatically deteriorate during a crash, in particular if a crash comes on the doorstep of, or during, retirement.

This ecosystem of institutional control by financial product manufacturers has led to widespread adoption of practices that can be at odds with clients’ interests and objectives.

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Top 13 Mistakes to Avoid with Granny Flats

A team - rather than an individual

Peace-of-mind

In a financial world of increasing complexity there’s too much to know and too many regulatory and legislative issues to consider for one person to master. And your financial well-being is too important to be left to a “jack of all trades, master of none”. Similarly, relying on multiple experts working in silos, without the right hand knowing what the left is doing, can lead to costly mistakes, missed opportunities and even having structures working at cross-purposes.

We correctly value psychological outcomes for our clients more than other organisations. A particular product, plan and strategy may be technically brilliant in the mind of a qualified adviser, but if it leaves you unable to sleep at night, then it is the wrong product, plan or strategy for you!

That’s why our fresh approach is built on the team ethos that none of us is as good as all of us. It may be that you want to pay down your mortgage faster; or get your insurances, tax or estate planning needs in order; or that you’re considering a specific investment. Perhaps you’re just starting out; or starting to plan for retirement; or already retired. Regardless, our team of highlyqualified advisers will serve you without the pretence that one adviser alone knows everything.

Your peace-of-mind and financial well-being are always at the forefront of our considerations when we work with you. Let us help you to meet your financial goals and objectives by booking an appointment with one of our experts today. Call us on: 1300 4 SPRING Or send an email to: [email protected] Or use the Appointment Booking Request form on the following page.

As and when needed we’ll marshal a group of professionals that includes finance, superannuation and insurance experts; property, sharemarket and alternative investment specialists; accountants and tax and legal advisers; and veteran financial advisers. And they are supported by our team of graduates who bring fresh ideas and the latest thinking from their recent tertiary study in finance, economics, business, accounting and law to the table, as well as a highly experienced and dedicated team of administrative personnel. And rest assured, if we don’t think we can add value or help you achieve the outcomes you desire, you’ll be the first to know. We’ll never try to make a square peg fit in a round hole!

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Top 13 Mistakes to Avoid with Granny Flats

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