If you have some extra space in your backyard, you might be wondering if building a granny flat is a good idea.
You’ll want to know how much value it might add to your property, whether it will improve your cash flow position and whether it will generate capital growth. In particular, you’ll probably wonder what your local council think – will you need council approval?
Secondary Dwelling on Existing Property
A granny flat is a secondary dwelling that is attached or detached from the main residence on the same lot of land. It has its own entrance, bedroom(s), kitchen, laundry and bathroom facilities, and can provide additional living space or income for the property owner.
Sometimes adding a granny flat can be as basic as converting an existing garage. Other times it may require council approval by way of a development application and involve engineering work, like any other construction.
Overall, there are a variety of reasons for constructing granny flats. As the name of the dwelling suggests, the original concept came from providing a home for their own “granny”. It is quite a ‘western world’ and modern culture to not care for and co-habit with our older relatives. Setting up a granny flat may be a positive step back to those times! Social comment aside, other reasons for additional dwellings on house blocks are to:
- increase cash flow and bring in extra money for the household
- to add value to the property assuming more bedrooms means a higher price
- to potentially increase the appeal of their home to buyers when it comes to selling.
How Much – if Any – Does a Granny Flat Add Value?
These are all good reasons. But, does having a granny flat increase the value of a property in Australia from a rental perspective? As one might expect, the answer to this is not straightforward. What adds value to houses nearly always depends on various factors. Before you decide to make any changes or build anything, we recommend doing your homework to identify what will create the most value for you.
Rental return and capital growth
The question needs to be approached from both a rental return and also a wealth creation point of view. The amount of value added will depend on factors such as:
- the location of the property,
- the size of the main house (i.e. whether it is a five bedroom house or four bedroom house, for example) and
- the size of any granny flats on the main property.
Of particular importance is the rental demand for that kind of accommodation in the area you’re contemplating setting up any granny flats.
Furthermore, the design of any secondary dwellings and quality of accommodation, finishes and ourdoor space will also have an influence. For example, if you’re in the inner city and your prospective buyers or tenants won’t be home much or using outdoor space, then green space won’t likely be in demand. However, if you’re considering building a granny flat for retirees, they may desire green space.
Success in generating this second income from secondary dwellings depends on knowing the answers to these questions – amongst others. The best property, poorly located, will be unlikely to be the success you anticipate.
In general, Granny flats add value
However, in general, a well-built and well-maintained granny flat can add value in several ways
How a Granny Flat Adds Value
Extra cash flow or rental income
According to New South Wales builders, Backyard Grannys, a granny flat could earn you up to $14,000 per year, although this will depend on the area and the market conditions.
Also, according to analysis conducted by CoreLogic – a leading provider of real estate data and analytics who have conducted research on the impact of granny flats on rental returns – adding a granny flat to a property can significantly increase its rental return.
In a report titled “Granny Flats – Adding Value to Australian Property Investments“, CoreLogic found the following:
“…the rental yield on a property with a granny flat was 27% higher than on a property without one.”
So, the general consensus seems to be that a property with a granny flat would generate considerably more rental income than the same property without one.
Wider appeal to a wider variety of tenants
One benefit of a granny flat is that it can be attractive to an additional market segment of tenants. Those who are looking for affordable and flexible accommodation options in locations with good amenities for extended families are amongst the likely tenants for this kind of accommodation. With affordability for younger generations being an increasing issue, many are staying home for longer.
It is possible to rent out a granny flat separately from the main house, which can be ideal for such as older parents, unrelated couples or individuals or single students, for example.
Alternatively, some offer both the main house and a separate, self contained
unit as a single rental option for larger families.
Granny flats are an ideal way of housing elderly family members, when they need smaller and more affordable accommodation. It’s a win-win situation that still provides a level of dignity, privacy and independence for the occupant and a level of separation for adult children.
Increase capital value
A well-considered granny flat has the potential to add value to a property. It does this by not only increasing the number of bedrooms on offer, but by offering greater functionality and flexibility. The added options the increased accommodation offers leads to a potentially greater appeal to sections of the market. A granny flat can also make a property that is for sale stand out from other similar properties in the area, especially if it has a modern and attractive design. However, a run-down, structurally poor or unappealing (for example) converted garage space may have the opposite effect.
According to some estimates, a granny flat can add up to 20% to 30% to the value of a property. This can depend on the quality and size of the build. This estimate is supported by the earlier-mentioned CoreLogic report, where it was reported that the addition of a granny flat could increase a property’s overall value by as much as 30%.
Increase tax benefits
PLEASE NOTE: This is not investment advice!
A granny flat can provide the owner with some tax benefits. These benefits would take the form of depreciation deductions and capital gains tax (CGT) exemptions.
According to the Australian Taxation Office (ATO), from 1 July 2021, if a granny flat arrangement meets certain conditions, CGT does not apply. The implication of this is that the owner is potentially not liable for paying CGT when selling the property with a granny flat. It is necessary to have a written and binding agreement with the occupant that is not commercial in nature. This will depend on each individual’s taxation situation and must be explored with their qualified and experienced accountant.
An important point to note:
When asking the question of “how does granny flat add value”, do check facts with your own property-wise tax accountant who understands your individual situation – we do not.
You may like to review our other property tax articles here:
- What Rental Property Tax Deductions Can I Claim on my Investment Property?
- Investment Property Tax Deductions
Overall Value to a Property – Pros and Cons
Of course, building a granny flat also involves costs and challenges – and potentially not insignificant ones. Costs will come from requirements like:
- obtaining approvals and complying with regulations,
- finding the right builder and contractors, and
- (once built) maintaining the property.
It’s also going to be really important to ensure only a good tenant is allowed to move in. Ask yourself:
“Will the extra income be worth it if you’ve given up valuable outdoor space and freedom only to end up with a troublesome lodger?”
So, before you launch into building a granny flat on your property, be absolutely sure to research thoroughly, including consulting appropriate advisors. Carefully weigh up the pros and cons carefully.
Property Management for Optimum Rental Yields
At Position One Property, we can help you with all aspects of renting out your property with a granny flat. We are a trusted real estate agent in Brisbane. Having been in business for over 20 years, we have extensive experience and knowledge of the Brisbane property market.
Our friendly team are happy to share their expert advice with you when you call, and can provide the guidance you need. If you want to know how to maximise rental income from your investment property and optimise its value they will be happy to discuss this with you. Contact us today about our services and how we can be on your ‘A-Team’ to help you achieve your goals.