Increasing rent and return – minor dwellings
18th February 2014
Average property investments receive around a 5% Gross Yield. This is not a great return as the interest costs alone are normally above 5%. You are probably having to put in money for rates, insurance and other costs, so this means you are losing money.
If you have a large section, an option to improve cashflow might be to build a minor dwelling.
What is a minor dwelling?
Different councils have different rules on the size a minor dwelling can be but this is generally around 60m² excluding any garage.
The Minor dwelling is on the same land as the main house, so you have two houses on one section. The properties are not subdivided or unit titled, so they must be sold together.
Minor dwellings are often 2 bedrooms, but some investors do manage to squeeze in 3 bedrooms.
The Numbers
A minor dwelling typically costs around $145,000 (GJ Gardner have options for around $145,000 including council fees, carpets, tiles and appliances).
These will often receive $330 per week or more, depending on your location.
The Gross yield based on 50 weeks is, $330 *50 / $145,000 = 11.4% Gross Yield.
This return is obviously a lot better than a standard rental returning 5%!
If the original house cost $300,000 and was rented for $300 per week, that would be an initial Gross Yield of 5%.
Adding on the minor dwelling, the total cost is $445,000 and returning $630 per week. The Gross Yield overall would be 7.1%, which would be close to break even when interest rates are low.
Cashflow
Based on simple numbers the original house is losing $5,000 after tax benefits per year.
By adding the minor dwelling, the cash position after tax has changed to a loss of $220 per year. So after tax benefits, the addition of the minor dwelling would save $5,000 cash per year, or save you $100 per week.
Capital gain downside
A possible downside with minor dwellings is how well they will gain in value over the long term. This topic is often debated by property professionals and there are differing views on this.
By having two houses on one section, you are limiting your potential buyers to investors or large families. Also the sale price will be higher, further limiting the number of buyers. Having less buyers could impact on the price achieved if you wanted to sell.
If you are building the minor dwelling yourself, you should be able to do this for a reasonable overall cost and therefore leave room for future growth. But if you buy this as an existing property, be very careful that the property is not overvalued.
Due to the amount of work required to see if these plans can work on individual sites, GJ Gardner usually charge a small fee ($800) to conduct a site appraisal and to measure and produce a custom design to work for the sites. As a special offer exclusive to Coombe Smith clients, they are happy to offer a site appraisal and produce a custom designed plan for your consideration at no cost.
Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?
