- Pros may include better cash flow, particularly during renovations
- Cons of a granny flat include overcapitalisation
- Granny flats only suit some investment goals
Dual income properties are becoming increasingly popular for property investors who are looking to supercharge their cash flow and increase their rental yields.
With a granny flat on your property, the benefits differ from other multi-occupied investment properties like duplex and they aren’t suitable for every investor.
The reason we have seen the popularity in granny flat construction rise is due to the changes to state-level legislation for secondary dwellings, which was introduced to address the housing affordability issues in capital cities.
These legislative changes have made it easier to get these types of developments approved. Keep in mind that each state or territory provides their own legislative requirements, including the land and build sizes of secondary dwellings or granny flats.
If you are thinking of building a granny flat on your investment property, then you would really want to know: Is a granny flat development worthwhile?
As we will explain, granny flats are not suitable for all investors and it will entirely depend on your investment strategy.
They will add some value to your property, the same that an additional bedroom and kitchen would add value to a property, but the instant equity return from the construction of a granny flat will be much less than if you built a duplex or subdivided the land.
There is also no guarantee that the value of your property will rise to be equal or more than the cost of building the granny flat. This is because you aren’t creating a new property through subdividing, but more adding to your existing property like a renovation would also achieve.
Granny flat strategies
Granny flats are not suitable for every investor. If you are looking for long term capital growth, the real cornerstone for wealth creation, then a granny flat will not guarantee this for you.
However, if your strategy is focused on achieving higher cash flow and rental yield, then a granny flat strategy may be the right choice for you.
For a cash flow strategy, a granny flat will add additional cash flow and increase the yield of your investment property, which in turn is likely to assist your serviceability from a lender’s perspective, but at the cost of long-term capital growth.
Another strategy suitable for granny flat development is a tax-focused strategy.
If you are a very high-income earner and your focus is on tax reduction, a granny flat may provide some benefits such as additional depreciation, capital deductions, and interest expenses. However, this tax-focused investment strategy is a strategy that we would very rarely recommend and is only suited to some buyers.
If you are looking into building a granny flat on your investment property, it is important that you have fully weighed up the pros and cons before going ahead with your decision.
What are the benefits of a granny flat development?
- Cash flow and yield:
- Granny flats can be an additional source of income as well as provide flexibility.
- Whilst you may be in between tenants in the main residence you may still be getting income from the granny flat.
- You are able to complete renovations in the main residence and have income from the granny flat providing a cash flow you would otherwise not get.
- Tax benefits:
- You may be able to claim non-tax benefits like depreciation on the granny flat.
- Equity:
- A granny flat may increase the value of your property, just like a renovation for an additional bedroom would add equity to your property; albeit, less than other dual-occupied properties.
- Appeal:
- When it comes time to sell, a granny flat can be quite appealing for prospective purchasers even if they are wanting a primary residence. A granny flat can be used as a teenager’s retreat, visitor’s space, home office, or additional bedroom.
- Development cost:
- The cost to build a granny flat is relatively low compared to a large renovation on a property, duplex development, or subdivision.
- Flexibility:
- There is also flexibility with a granny flat. Because it provides an affordable housing option it is likely to be rented out easily, even if you are having difficulty finding tenants or are in between tenants for the main residence.
- The typical tenants who seek granny flat rentals are singles, the elderly, retirees, and single parents.
What are the drawbacks of a granny flat development?
- Approvals:
- Every council will have different rules and requirements around adding a granny flat to your property, so it is important you keep up to date with your local council’s requirements.
- Overcapitalisation:
- The cost to develop a granny flat on your property will not always result in a like-for-like return in a property valuation.
- You will not be gaining the same instant equity as you could potentially gain from other dual occupancy property developments. In fact, it is common for lenders to not value the property much higher (if at all) than the cost to build.
- Demand:
- Although we added the appeal of a granny flat as one of the pros, keep in mind that a granny flat will also not appeal to some buyers. A family looking for a four-bedroom house may not want a three-bedroom plus a one-bedroom granny flat, particularly buyers with young families who could not utilise separated living arrangements. In this scenario, you would likely be attracting buyers who want a 3-bedroom house and would only consider the granny flat as a bonus space.
- Opportunity cost:
- Something you should consider before forking out the cost to develop a granny flat is the opportunity cost of the project. This means whether there is a better way that your money can be used to get a better return. You need to consider all the options and whether the cost to build a granny flat could be better utilised towards a deposit for another investment property.
What are the main requirements for a granny flat?
- Keep in mind that granny flats will be restricted in size (unlike duplex developments).
- For example, the maximum floor size in NSW is 60 square metres.
- You will need to comply with the Affordable Housing State Environment Planning Policy (SEPP) and obtain an Occupation Certificate (OC) before allowing people to take residence.
- You will need to obtain either a Complying Development Certificate (CDC) through a private certifier or undergo a Development Application (DA) through your local council.
- Local councils all set different rules and regulations. Do your research and seek professional advice in order to avoid making mistakes building your granny flat.
- Some of the important things to check whether your property is suitable for a granny flat is the size of block required, access required, and setback (how far away from the boundary fence it needs to be).
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