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The cost of building an income-generating garden cottage

Posted  February 22, 2018

Considering building a garden cottage to generate an income? Here’s what you need to know. 

A garden flat or “granny cottage” is an asset that you can use to generate an income – and in these tough economic times, who doesn’t want a way to earn more? Of course, this all works out beautifully if you have an existing cottage – but if you don’t, will the income justify the cost of building one? We investigated.

Calculating the costs A new building costs between R8 000 and R10 000 per square metre, says Helen Counihan-Greene, an architect who practises in Kalk Bay. This takes into account all aspects of the building, from the foundations to the fittings.

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You can spend R100 on something like a tap or a showerhead, or you can spend R1 000.

“Granny cottages tend to be at the higher end of the cost range, because everything is more compact – so you’ll have more walls, plumbing and countertops per square metre,” Helen says. “This estimate is for standard fittings like affordable taps and melamine counter tops, bearing in mind that you can spend R100 on something like a tap or a showerhead, or you can spend R1 000. If you want to go with high-end fittings, it will obviously cost you more.”

So multiply the building cost per square metre by the size of your building area. Helen says a granny cottage is often the size of a double garage, which is around 40 square metres, so we will use that for this example:

40 square meters X R10 000 = R400 000.

If you are renovating an existing cottage or converting a double garage, the costs will be lower, as you will probably be able to use some existing walls, foundations, electrical and plumbing points and so on.

Calculating the returns  A building bond for a garden cottage is calculated in the same way as a regular bond. Therefore, on R400 000, with no deposit, at the current prime interest rate of 10.25% paid back over 20 years, your monthly bond repayment would be R3 926.57.

Separate garden cottages can bring in anywhere between R3 000 and R10 000, depending on the area, how nice the cottage is and what features it has. For the purposes of this calculation, we’ve worked with an average of R5 000 as the rental you can earn. If you are doing your own calculation, search on local real estate sites to get a sense of the cottage rentals in your area.

The difference between your bond repayment and your income would therefore be just over R1 000 per month.

Remember that rental income increases by between 6% and 8% annually, while your bond repayment will be affected by fluctuations in the interest rate. Chances are you will be able to increase your rental income annually, while your bond repayment will remain fairly static.

Adding value?According to Chris Hajec, Seeff’s MD in Randburg, when you are selling a property, the presence of a cottage or granny flat is often a draw card.

“There is a rule of thumb in the real estate industry that an extra room will add between R100 000 and R150 000 worth of value to a property. However, a property can reach a price ceiling in an area and adding a cottage will not necessary make the property worth more,” he says.

So the bottom line is, don’t invest in a building project unless you are planning to keep the property for some time so you can benefit financially from your investment.

Bear in mind There are many things to consider when you are building a cottage for income-generating purposes – some of which will add to or detract from the costs. Some of these are:

  • Will you include electricity in the rental price or install a pre-paid meter?
  • Will you be able to provide a separate entrance and parking for your tenant’s car?
  • Will it be furnished or not?
  • Will you include an alarm or other security features?

What about the Airbnb option? Another way of generating income with a cottage (or even a nice room in your house) is through Airbnb. The benefits of going this route over a full-time rental are that you can decide when your cottage is available for rent and you are not tied in to a tenant. Of course, on the flip side, there is more management involved in short term rentals and you will have to deal with the demands of “guests” rather than tenants. You are also responsible for the cleaning and servicing of the room.

Other than the costs of setting up the room, it costs nothing to list a property on Airbnb. Airbnb takes 3% from your fee as well as adding 6% to 12% to the guest’s fee, and holds your money till the guest arrives, then pays it to you – that way you are both protected from dishonesty or cancellations. And you can decline a booking should one come through that you are unhappy about.

A cottage that will be successful on Airbnb should have all the positive features of a rental flat, but should have an added “something special” – it should be attractive and stylish, well furnished, and in an area that would be appealing to a visitor.

You can charge anything you like for an Airbnb rental or you can let Airbnb benchmark your cost against other similar properties and adjust for demand. The frequency of bookings will depend on how competitively you are priced, and whether you receive good reviews from previous guests – but if you charge R300 a night for the room and have guests 15 nights a month, you’ll make R4 500.

Before you consider this option, investigate what other Airbnbs are listed in your area, what they are like and what they charge, to assess whether this is a realistic source of income for you.

The bottom line Renting out a cottage is a great way to earn some extra income. If you build one from scratch, you will probably be able to cover your costs in the long term, but do your research carefully first. Who knows, this could be the first steps you take towards building a property empire!

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