Granny flat: How can it add value to your property?

By Zarah Mae Torrazo 18 January 2022 | 1 minute read

Looking for new ways to increase added value to your property? A granny flat may be the thing you need. 

Granny flat

If you have excess space on your investment property’s land and are not sure how to make the most of it, there is one option that proves very popular: building a granny flat.

A granny flat is a small, self-contained home on an existing property that’s separate from the main house. Granny flats can be constructed above a garage or in the space outside of the main house such as the backyard. It can also be referred to as a secondary residence or accessory dwelling unit. 

With more Aussies finding it harder (and more expensive) to find a decent home as real estate prices continue to rise across the country, smart property investors are now looking to secondary dwellings such as granny flats in order to generate rental income, make their living space more versatile and add value to their property.

A recent CoreLogic report revealed that more than half a million property owners across Australia could build a granny flat if they wanted to. You could be one of them.  

Here’s what you need to know if you’re thinking of adding a granny flat to your investment property.

What is a granny flat?

When you hear the term granny flat, you may be imagining a lone grandmother looking out the small window of an attic. However, the term and its definition have greatly evolved over time. 

The term granny flat is believed to be adapted from the Victorian era in England. Historically, it is the living space taken up by a widow who moved out of the main house to a smaller residence on the estate to make way for the family heir.

Nowadays, a granny flat does not strictly cater to grieving widows or, the more common misconception, only houses grandmothers (or grandads).

In present times, granny flats are put to a range of uses, as rental properties, home offices, art studios and extra accommodation for visitors, relatives, teens and, yes, even grannies. 

In Australia, you might also hear them being referred to as the following:

  • Accessory apartment
  • Accessory dwelling unit (ADU) 
  • Bonus unit
  • Casita
  • Carriage unit
  • Fonzie flat
  • Garden studio
  • Granny pod
  • In-law apartment
  • Tiny house
  • Kit house
  • Mother-in-law unit

A granny flat can be a standalone structure in the backyard, or it can be built as an addition to your home. Some property owners even convert attics, basements, or garages into granny flats, depending on the local regulations around ADUs. It really depends on the amount of space you have to work with and the legal requirements in your area.

A granny flat plan could be a studio design, or it could feature one or two bedrooms. As a self-contained home, these spaces usually have their own (at minimum) fully functional kitchen and bathroom.

Is a granny flat a good investment?

There is an observed trend of investors now building granny flats to boost their property’s value through short-term rentals and extended lease agreements.

According to CoreLogic, a granny flat could boost home values by 30 per cent and add around 27 per cent to rental income.

“Building a granny flat is becoming an increasingly compelling proposition for homeowners,” said CoreLogic’s head of research, Tim Lawless.

“Not only can it help to manufacture new capital gains but it has the potential to generate rental income while meeting demand for more affordable housing.”

Here are a few other reasons why granny flats are fast becoming a popular option for investors:

  • Strong demand.  There is high demand for granny flats from students, young couples and singles. It is also a viable and affordable housing option for retirees who are not part of the sea change phenomenon and instead want to downsize.
  • Lower costs. Building a granny flat is usually cheaper than buying a standalone investment property. 

  • Could increase your resale value. As mentioned, adding a granny flat to your property can increase its value, giving you more return on investment when it’s time to sell the property.   
  • Depreciation. Renting out a granny flat gives investors extra claimables on your depreciation schedule. For more information, here is our basic guide on how rental property depreciation works. 
  • Can help you in building your portfolio. Adding value through a granny flat can rapidly increase your capital value and rental income. The rental income may help you in boosting or maintaining your servicing capacity with lenders and, in turn, help you with your next property acquisition.

 When are granny flats not a good investment? 

 Like any investment, there are also circumstances when a granny flat may not be the most strategic investment strategy. Here are some: 

  • The cost of construction goes over your set budget. There is always a possibility that there will be cost overruns when building your granny flat. In these instances, you could run the risk of overcapitalisation.  
  • The cost of constructing the granny flat does not add sufficient value to the property. For example, you spend around $100,000 to $120,000 on the granny flat but the lenders will only increase the value of your property by $80,000 to $90,000. 
  • Reduce the resale and rental market potential. While granny flats are increasing in popularity when it comes to rentals, there is a risk that when the property is sold, some owner-occupiers are not open to having a granny flat in their backyard. Mainly, a property with a granny flat will appeal to investors. 
  • Tenant issues. There are renters who are very protective of their living space and will not want another tenant in their backyard or the presence (or nuisance) of an adjoining property, making it harder for you to find someone to occupy your main property. 
  • Potentially longer vacancy periods. Your pool of tenants will be restricted for both properties, so you’ll have less choice in your selection, and could potentially mean longer vacancy periods.  

What are the legal considerations when adding a granny flat to my property? 

If you are planning to add a granny flat to your property, you will need council approval and planning permissions.  

Due to the rise in popularity of granny flats, lawmakers in certain parts of Australia have been making it easier to build (and eventually rent) granny flats. 

For example, in NSW, the Affordable Rental Housing State Environmental Planning Policy (SEPP) states that a property owner can build a granny flat in any residential zone and get approval in just 10 days.  

While it’s easier to get council approval to build a granny flat, make sure you dot the i’s and cross the t’s. To make sure you comply with your local government’s regulations surrounding granny flats, here are the websites providing the official information for each state: NSW, Victoria, Queensland, South Australia, Western Australia and Tasmania. For ACT, check the revised guidelines for secondary residences here

You can also check with your local city council for more information, and there are plenty of builders you can consult that have expertise in granny flats. 

How is a granny flat investment taxed?

Just like for any other investment property, you will be required to pay tax on the rental income you earn from your granny flat. Another tax consideration is that the capital gains tax liability also applies to this type of real estate investment. 

On the upside, there are tax breaks available for a granny flat investment. You can negatively gear a granny flat if its cost is more than your income. In this instance, you could claim the loan interest and ongoing expenses, such as maintenance and insurance as tax deductions.  

However, if your granny flat is positively geared, you can only claim the ongoing expenses. An investor might also be able to claim value depreciation as well – but always remember to seek professional advice on tax matters. 

Final word 

Granny flats can be a value-adding strategy, but only if done correctly. Before taking any steps, make sure to do your due diligence research if a granny flat is a good fit for your investment strategy. 

Disclaimer: This is a general guide only and is not intended as a substitute for financial advice.

If you want to learn more about the latest industry expert insights on the property market and other general information that will help you along your investment property journey, check out our amazing podcasts. Also, make sure to check our News Section for the latest property market reports, insights, news and useful tips and strategies for investors. 

 

 

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Granny flat: How can it add value to your property?
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