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The most important things to know about investing in a granny flat

While granny flats are typically seen as the domain of teenagers or elderly relatives, they can also make highly successful investment properties.

Marc Terrano

Edited by

Joselle Delos Reyes

Updated

May 19, 2022

Fact checked

Investing in a granny flat feature The humble granny flat is traditionally seen as a way to add more space to your home. Maybe you've got a moody teenager who wants more space (while still enjoying the perks of living at home) or maybe your elderly mum or dad is looking for somewhere to live that's close to the grandkids.

Granny flats can also be used as an investment property to generate rental income for you and your family. They're relatively cheap to buy or build, easy to maintain and can provide a steady source of income. However, buying or building a granny flat as an investment property isn't without risks, so read on to find out more about the benefits and drawbacks of investing in a granny flat.

Buying or building a granny flat

As housing affordability issues continue to hit people hard in Australia's capital cities, it's becoming more tricky to find an affordable, low-maintenance rental property in a desirable location. With this in mind, a granny flat could be a great way to use the space you already own to maximise your income.

Granny flats are typically defined as "secondary dwellings", which means that they're built on the same lot of land as the main dwelling. Granny flats are also "self-contained dwellings" that have a separate entrance and their own bathroom, kitchen, bedroom, laundry and living space.

There are several options for adding a granny flat to your property, such as adding a standalone building in your backyard or building a secondary dwelling as an extension over the garage. Wherever you choose to add the granny flat, it's important to remember that it will need to have its own entrance to meet regulations.

What rules and regulations need to be considered?

Housing affordability issues around Australia have prompted a few state and territory governments to introduce measures that make it easier to build a granny flat. Along with New South Wales, the governments of Western Australia, the Northern Territory, Tasmania and the ACT all allow their residents to rent out a granny flat to generate extra income. Unfortunately, this practice is currently not allowed in Queensland, Victoria and South Australia.

Before you buy a modular granny flat or start building your own, make sure your planned addition will be fully compliant with all the relevant laws. Check with your local council to find out what regulations apply in your area, but as a general rule your granny flat will need to:

Be built on a property zoned for residential use
Be built on a property at least 450 square metres in size
Be the only granny flat on the property
Be owned by the same person that owns the primary dwelling on the property
Have a maximum living space of around 60 square metres (this figure varies and typically excludes verandahs, carports and patios)
Have separate and unobstructed pedestrian access

Once you're sure that your project will meet all the necessary requirements, you can apply for planning approval from your local council.

Further information in each state

New South Wales. You can find detailed information about granny flat regulations in NSW here.
Victoria. Rules in Victoria make it harder to get a granny flat approved, but it depends on your local council. Learn more here.
Queensland. In Queensland it's hard to get approval for a granny flat unless you're renting it out to a family member. Every council has its own rules too. You can learn more about Brisbane city council's rules here.
South Australia. It's hard to get a granny flat approved in South Australia unless you're renting it out to a relative. You can learn more here.
Tasmania. The state allows granny flats but the rules vary by council. You can learn more about Hobart's rules here.
Western Australia. WA made its rules more flexible in 2015. You can learn more here.
Australian Capital Territory. The ACT also made granny flat rules more flexible. Find more information here.

How much does it cost to add a granny flat?

The cost involved in adding a granny flat to your home depends on the type of granny flat you choose. Generally you're looking at a minimum spend of around $100,000 to get the new residence up and running.

If you're looking to build, there is also a huge range of options on the design and type of dwelling you want. From prefabricated and modular homes to dwellings built from scratch, your choice will be influenced by your budget, the designs available and the features you want to include in the granny flat.

If you're thinking of adding a granny flat to your property as part of a renovation or extension, then costs could head north of around $120,000. You'll also need to factor in engineering costs and possibly architect's fees, as well as money for any existing or potential hazards such as asbestos.

Example: Tristan's granny flat investment

Tristan lives in a 4-bedroom home on a 700-square-metre block in Sydney's northwestern suburbs. He has a significant amount of space in his backyard, which is a chore to maintain all year round, so he decides to add a granny flat as an investment that can earn him rental income.

Tristan decides that a modular kit home is the right fit for his property. He spends a total of $100,000 getting the home built and installed onsite, with all the plumbing and electrics connected. As his property is located within 500 metres of a train station, Tristan is able to rent the 2-bedroom flat out to a young professional for $460 a week.

Factoring in a budget of $2,000 per year to cover maintenance costs, let's take a look at how long it will take Tristan to pay off his investment.

Rent: $460 a week

Total annual rental income: $23,930

Annual maintenance expenses: $2,000

Total income generated each year: $21,930

Time needed to pay off granny flat: 4.56 years

As you can see, at the current rental rate, Tristan will be able to pay off the cost of his investment in just over 4.5 years. He can then start using his granny flat to generate disposable income.

Keep in mind that this is just one scenario and there may be a range of other factors to consider. For example, if you have to borrow money to fund the addition of a granny flat to your property, it may take longer for your investment to generate positive cash flow.

* This is a fictional, but realistic, example.

What are the tax implications of a granny flat investment property?

Investing in a granny flat If you rent out a granny flat to generate extra income, remember that you will need to pay tax on the rental income you receive. The amount of tax payable will depend on your income tax bracket and marginal tax rate.

The tax deductions you are eligible to claim will depend on whether your granny flat investment is positively or negatively geared. If the rental income generated by the granny flat is not enough to cover the cost of maintaining it (with loan interest payments and other ongoing expenses), then your property will be negatively geared and you can claim your loan interest payments and ongoing expenses as tax deductions. However, owners of properties that aren't negatively geared will only be able to claim their ongoing maintenance expenses as tax deductions.

You can also claim the depreciation in value of your granny flat investment as a tax deduction each year. Just be aware that a capital gains tax (CGT) liability usually applies to the portion of your property that you rent out.

How to minimise your CGT liability

Will a granny flat add value to my property?

Yes – but only if it complies with all local council regulations. If you think your house will be more practical and better to live in with an extra independent living space out the back, chances are a potential buyer will think the same thing.

In many cases, a granny flat can add significantly to the value of your property. However, you'll need to consider a range of variables when calculating your return on investment, including the size of the granny flat, its location and how much it costs to build.

Pros and cons of granny flat investment properties

Pros

Affordable investment. Buying or building a granny flat is usually cheaper than buying a standalone investment property, allowing you to start your investment portfolio without borrowing a huge amount of money.
Rental income. Depending on where you live and the size and features of the granny flat, your investment could provide several hundred dollars of rental income per week.
Adds value. A legally compliant granny flat will add to your property's total value.
Handy addition. If your circumstances change and you need somewhere for a relative or friend to live, your granny flat can provide the necessary accommodation.

Cons

Tenants. You'll need to be prepared to deal with tenants living on your property, which could lead to some tense and awkward situations.
Cost. The cost of constructing a granny flat may be more than you expect and the expenses can quickly add up.

Tips for getting the most out of your granny flat investment

Do your research. Before adding a granny flat to your property, find out whether it will be a viable investment. Consider council regulations, the demand for rental properties in your area and the cost of installing a granny flat before you make your final decision.
Get quotes. Get accurate quotes from builders and contractors to form a clear picture of exactly how much the build will cost.
Loan options. If you need to borrow money to finance your granny flat investment, speak to a mortgage broker about your borrowing options. If you have sufficient equity in the property, you should be able to get the money you need by increasing or refinancing your existing loan.
Adding a granny flat to an investment property. While the most common approach is to add a granny flat to your own property, you can also build a granny flat on an investment property. If this is the case, you'll need to consider the cost of maintaining both properties, the potential rental yield, and the effect that adding a granny flat might have on the demand for the main dwelling.
Be consistent. If you want the granny flat to add value to your property, make sure it matches your existing home and doesn't look like an afterthought. The granny flat shouldn't dominate the garden or take up too much outdoor space.

If you've got enough space and the right property, a granny flat can be a sound investment. Just be sure to research your options and learn more about the risks involved before deciding whether it's the right investment opportunity for you.

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Marc Terrano

Marc Terrano is a lead publisher and growth marketer at Finder. He has previously worked at Finder as a publisher for frequent flyer points and home loans, and as a writer, podcast host and content marketer. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help everyone get value for money.

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The most important things to know about investing in a granny flat

While granny flats are typically seen as the domain of teenagers or elderly relatives, they can also make highly successful investment properties.

Buying or building a granny flat

What rules and regulations need to be considered?

Further information in each state

How much does it cost to add a granny flat?

Example: Tristan's granny flat investment

What are the tax implications of a granny flat investment property?

Will a granny flat add value to my property?

Pros and cons of granny flat investment properties

Pros

Cons

Tips for getting the most out of your granny flat investment

Compare the latest investor mortgage rates

Thank you for your enquiry! A local mortgage broker from Aussie will contact you shortly to discuss your options.

Thank you for your enquiry! A local mortgage broker from Aussie will contact you shortly to discuss your options.

Marc Terrano

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