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.

Investing in a granny flat featureThe 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 basically means that they’re built on the same lot of land as the main dwelling. Granny flats are also “self-contained dwellings”, meaning they 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 in order to meet regulations.

What rules and regulations need to be considered?

Housing affordability issues around Australia have prompted a number of state and territory governments to introduce measures that make it easier to build a granny flat. In NSW, for example, the Department of Planning and Environment introduced new regulations to make it easier and quicker to obtain granny flat approval, which has seen the number of approved new granny flats jump from 1,500 in 2010 to more than 4,800 in 2014.

Along with NSW, 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, it’s essential to 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 that is 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 does not include 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.

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How much does it cost to add a granny flat?

The cost involved in adding a granny flat to your home varies depending on the type of granny flat you choose. But generally you’d be 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 when it comes to 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.

Tristan’s Granny Flat Investment

Tristan granny flatTristan lives in a four-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 a modular kit home is the right fit for his property, and spends a total of $100,000 getting the home built and installed on site, 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 two-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 four and a half 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.

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

Investing in a granny flatIf 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 will also be able to 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?

If you’re wondering whether a granny flat will increase the value of your property, the answer is 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/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 potentially 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. It’s also essential to ensure that the granny flat doesn’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.

Compare the latest investor mortgage rates

Rates last updated October 18th, 2018
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.89%
4.24%
$0
$0 p.a.
80%
Fix your rate and minimise repayments for 2 years with this interest-only investor mortgage.
3.99%
3.99%
$0
$0 p.a.
80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
3.99%
4.13%
$0
$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with no application fee.
3.84%
3.91%
$0
$0 p.a.
80%
Get instant online approval and flexible repayment options with this fixed rate mortgage for investing.
4.08%
4.09%
$0
$0 p.a.
90%
Low-fee investor mortgage with a partial offset account. 10% deposit option available.
3.79%
3.82%
$0
$0 p.a.
80%
A variable investor mortgage with a high borrowing amount so you can fund a large purchase.
3.93%
3.94%
$0
$0 p.a.
80%
This investment loan keeps fees low, has a sharp interest rate and comes with a 100% offset account.
3.99%
5.35%
$600
$0 p.a.
90%
Competitive rates for fixed for 3 years with redraw facility.
4.05%
4.22%
$0
$10 monthly ($120 p.a.)
90%
Lock in your interest rate on your investment property for 2 years. For a limited time you can earn double Velocity Frequent Flyer Points.
3.91%
3.92%
$0
$0 p.a.
80%
Investors can go from application to approval in as little as 20 minutes with this innovative online lender.
3.98%
3.98%
$0
$0 p.a.
70%
Investors can get a 100% offset account and a low rate if they have a big deposit. 100% online application process.
4.09%
4.87%
$0
$395 p.a.
90%
Buy your investment property and set your repayments for the first year. Available in QLD, NSW and ACT only.
4.24%
4.00%
$0
$0 p.a.
80%
Buy an investment property and enjoy the certainty of a 3-year fixed rate with interest-only payments.
4.09%
4.40%
$0
$0 p.a.
70%
Forget about rate rises for two years and minimise your investment repayments with this interest only mortgage. Requires a 30% deposit.
4.54%
4.56%
$0
$0 p.a.
80%
An investment loan for new Heritage Bank customers. Low fees and interest-only repayments.
3.97%
3.99%
$0
$0 p.a.
80%
Package your owner occupied loan with investment loan and receive a discounted investment rate. 100% offset account included.
4.09%
5.28%
$0
$395 p.a.
90%
Lock in a competitive investment rate and combine your loan with a credit card and transaction account for extra savings. Package fee applies.
3.99%
4.62%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
4.29%
4.31%
$0
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80%
Investors will pay no application or ongoing fees for this interest-only loan.
4.18%
4.18%
$0
$0 p.a.
80%
Investors get a 100% offset account and pay no application or ongoing fees on this loan from an innovative online lender.
4.90%
4.31%
$0
$0 p.a.
80%
Lock in a fixed rate for 5 years and make interest-only payments with this investment loan.
4.19%
5.49%
$600
$8 monthly ($96 p.a.)
90%
Lock in your investment repayments for 3 years with one of the big 4 banks. Available with a 5% deposit.
4.43%
4.24%
$0
$0 p.a.
90%
Interest-only loan for investment. Available with a 10% deposit and includes a partial offset account.
3.99%
3.99%
$0
$0 p.a.
70%
Investors with a 30% deposit can get this low rate loan to fund their property portfolio.
4.29%
4.31%
$0
$0 p.a.
80%
A simple, variable rate investor loan from an online lender that keeps fees to a minimum.
3.99%
4.62%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.
4.24%
4.68%
$0
$0 p.a.
90%
Fix your investment repayments for 1 year. You can get this loan with a 10% deposit. Available in QLD, NSW and ACT only.
4.13%
4.14%
$0
$0 p.a.
90%
Access a fee-free offset account and a special interest rate for investors.
4.14%
3.96%
$0
$0 p.a.
80%
Investors can go from application to full approval in as little as 20 minutes with this innovative online lender.
4.18%
4.19%
$0
$0 p.a.
80%
Investors can easily access their equity using BPAY, a debit Master Card or cheque book with this interest-only line of credit.
4.65%
4.69%
$600
$0 p.a.
90%
You can get this variable investment product with a 10% deposit. The loan has limited fees.
4.31%
3.95%
$0
$0 p.a.
80%
A variable interest-only loan for investors. Fast application, low fees, optional offset account. 100% online lender.
4.79%
5.44%
$0
$395 p.a.
90%
Pay off your investment knowing your exact repayments for the first 4 years. Get this loan with a 10% deposit.
4.29%
4.27%
$0
$198 p.a.
70%
Fund your property portfolio with this fixed rate mortgage which includes a 100% offset account. 30% deposit required.
3.94%
3.92%
$0
$0 p.a.
80%
Lock in your interest rate for 2 years and enjoy flexibility, an optional offset account and a fast online application process.

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