The Ultimate Granny Flat Investment Guide

 In Granny Flat Designs, Granny Flat Ideas

Interested in building a granny flat investment property?

Can’t say we’re surprised! These compact yet often lucrative secondary dwellings are on the rise, with increasing mortgage rates driving demand for smart and scalable investment opportunities. But as with any venture, it’s important to understand all considerations and implications before you bite the bullet. 

Thankfully, we’re here to help you do the homework! Our ultimate guide to granny flat investment covers everything you should factor in when deciding whether this is the right move for your portfolio, from construction costs and financing to tax exemptions and depreciation entitlements!

Benefits of building a granny flat investment property

With a granny flat, you can utilise (and potentially even monetise) every inch of your backyard. Whether you want to create some long-term rental accommodation, an AirBnB retreat or a cost-effective living solution for family members, there are many reasons to invest in a granny flat

See for yourself below!

Earn a cool 10-20% ROI

It’s becoming harder and harder to hunt down affordable housing as property prices continue to rise across Australia. The good news is that granny flats are a cost-effective solution for investors and tenants alike!

Not only do they offer affordable housing to renters in sought after suburbs, but granny flats can also generate an average return on investment of 10-20% for their owners. As well as being a wallet-friendly alternative to purchasing an entirely separate investment property, building a granny flat in your backyard could reel you in up to $12.5k per year

Categorised as secondary dwellings, these compact and comfortable homes can be built on the same plot as a principal residence. Live in the main house and lease out your backyard accommodation or vice versa. Or take it one step further and maximise your earnings from a single site by adding a granny flat to an existing rental property. 

Still not convinced? According to flatmates.com.au, the weekly asking rent for a granny flat has recently risen to 5.95% – a higher rate than both houses (3.9%) and apartments (1%).

Have a play with our return on investment calculator and learn what you could earn!

Positively gear your property

Building a granny flat has the potential to transform your property from negatively to positively geared. Sound appealing? Many granny flats are earning a surplus of over $10,000 per year after interest repayments (check out some forecasted figures below!). 

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Boost your overall property value 

Whether you’re planning to lease out your granny flat, use it as a guest house or leave it to the teenagers, this new build can boost the value of your property up to 30% (provided it sticks to council regulations). That’s a pretty big bonus if your aim is to sell down the line!

Adding more bedrooms to your property is almost always going to be a smart move when it comes to your property valuation. But a granny flat takes this improvement to the next level. Instead of simply extending your primary dwelling, you get a whole other self-contained home that can earn you some extra income on the side before you sell.

Gain granny flat depreciation entitlements

Granny flats offer investors significant depreciation entitlements, allowing you to claim  general wear and tear over time. Granny flat depreciation in Australia is set at a minimum of 2.5%, so it’s only upwards from here. 

In fact, research by BMT Quantity Surveyors suggests that the average first year depreciation is $5,288, growing to $23,713 in deductions over the first five years that the home is owned.

But with various features depreciating at different rates, it can be tough to determine the depreciation on your entire granny flat. To confirm your exact entitlements, we recommend arranging for a quantity surveyor to complete a depreciation report on your property. That way, you can be confident in your claim!

Start earning sooner with quick approvals

Thanks to the Affordable Rental Housing State Environmental Planning Policy, granny flats in New South Wales can be approved in just 10 days (subject to meeting set criteria).

In other words, by securing a Complying Development Certificate instead of a dragged-out Development Application, you can skip the time and stress of waiting for your investment project to get underway. And the sooner construction begins, the earlier you can start earning a return on its end result!

Learn more about granny flat approvals.

Keep aged care costs in the family

Instead of handing your hard-earned money over to a nursing home, why not put it towards a private, comfortable and bespoke granny flat for Gran and Grandad? 

Once approved by an Aged Care Assessment Team, your loved ones can get the assistance they need at home with subsidised support. Plus, you’ll get to keep your funds in the family!

Factors to consider before investing in a granny flat

While owning a granny flat brings heaps of benefits, these secondary dwellings can also come with some potential compromises.

Shared backyard space

If you rent out your granny flat while living in the primary residence (or vice versa), you may have to share your property with tenants. That likely means less privacy and more patience required as you live in close quarters with another household.

The good news? Depending on your site, the granny flat can be built with its own entryway and garage to help minimise interactions and create a sense of separation between homes.

Maintenance costs

Remember that your granny flat investment doesn’t end with construction. You will need to budget for the ongoing costs associated with its upkeep – particularly if it’s being used as rental accommodation.

Capital Gains Tax

If the end goal is to sell your property, you may be required to pay Capital Gains Tax (CGT) on any income earned from the granny flat. 

That said, certain exemptions apply. As of July 1 2021, the Government is providing a targeted CGT exemption for granny flat arrangements with a formal written agreement in place. Designed to support older and disabled Australians and their families, this exemption only applies to agreements between family members or those with other personal relationships.

Learn more

So is a granny flat a good investment?

There’s no one-size-fits-all answer to this question, as it depends on a few factors. In short, a granny flat can be a good investment if it is built with high-quality materials, cost-effective methods and a clever design that is likely to appeal to potential tenants and/or add value to your property. 

Building a granny flat can be a smart investment in the following situations:

  • You are willing to rent out the granny flat, the main residence or both.

  • Your property is in an attractive area for tenants.

  • The additional income stream will help to cover the expense of your mortgage.

  • You are interested in claiming depreciation entitlements on your income tax.

  • The granny flat has potential to boost the equity in your property.

  • You have done your homework on Capital Gains Tax.

How much does a granny flat cost in NSW?

A granny flat can cost anywhere between $140,000 and $250,000 to build. With such a sizable price range, we gathered data from over nine businesses throughout Sydney, the Central Coast and Newcastle to get some specifics for you. 

Below are the average costs for one, two and three-bed granny flats:

  • One-bedroom granny flat: $100,000 – $120,000 full turn key
  • Two-bed granny flat: $135,000 – $145,000 full turn key
  • Three-bed granny flat: $145,000 – $155,000 full turn key

Several factors influence these estimates, including:

  • Site conditions and approvals
  • Granny flat size and design
  • Builders and construction
  • Material selections and extra features

So before you commit to building your granny flat investment property, confirm exactly how much it’s going to set you back. And that doesn’t mean the misleadingly-low starting quote offered by many kit home companies before they hit you with hidden costs. We’re talking full turnkey price with all expenses included, from pre-construction site reports to finishing touches.

Keen to learn more about the factors affecting the total cost of your build? Head over to our Ultimate Guide to Granny Flat Prices.

How to finance a granny flat

In general, building a granny flat in your backyard is more affordable than purchasing a standalone investment property. That said, you might still require some financing to get your venture up and running. 

According to Richard Windeyer of Mortgage Choice, the most effective ways to finance your granny flat are:

  • Refinancing your mortgage;
  • Accessing equity in your home; or
  • Taking out a construction loan

When it comes to figuring out how to fund your granny flat investment property, it’s important to select the right finance option for your specific situation. Not sure which one to go for? We suggest seeking professional guidance from a local mortgage broker to get started.

Learn more about financing your granny flat.

Why the right builder can make all the difference to your investment

Once you’re confident that a granny flat investment property is the right call, it’s time to choose a builder who can bring it to life. 

At this point, it is absolutely vital to select a granny flat company with suitable building licenses, legitimate references and a professional website to prove their reputability!

It pays to know that various granny flat companies deliver to different standards. Some serve merely as project managers or designers, with no building experience to understand what will work best on your block. Others promote a startlingly-low starting price that only includes the bare minimum, revealing heaps of hidden costs after you’re locked in to a contract. Not fun for your finances.

At Backyard Grannys, our transparent pricing and turnkey solutions ensure you know every single thing that’s covered in your quote from the outset. With over 10 years experience and 900 granny flat projects under our belt, you can enjoy peace of mind that the build will stick to your budget.

Want to learn more? Make the right choice with our advice on selecting a granny flat builder.

Maximise your return on investment

We’ve put together the below tips to help you get the most out of your granny flat investment property. 

  • Research, research, research. To make sure this is a viable investment, read up on core considerations such as council regulations, the demand for rental properties in your suburb and the expense of building a granny flat.
  • Get accurate quotes from builders. As discussed above, getting a reliable quote for construction work will help you to avoid hidden costs and understand exactly how much you need to budget for the build.
  • Ensure a consistent style. To increase the value of your property as a whole, design your granny flat to compliment the look and feel of your main house – without taking up too much garden space.
  • Double your property’s earning potential. If you already own an investment property, consider boosting your income stream by adding a second rental home to the same site. Weigh up the additional maintenance costs with the extra earnings to determine whether it’s worth it – but our guess is that it will be!

Need a little investment inspiration?

Below are just some of the granny flat investment properties we’ve built to rake in extra earnings for their owners.

Ready to build a granny flat investment property?

If you’ve got backyard space to spare and have done your homework, then a granny flat could be a game-changing addition to your portfolio. And now that you’ve brushed up on your granny flat investment knowledge, you’re one step closer to that extra income stream!

Whether you’re based in Newcastle, Lake Macquarie, Hunter Valley, Sydney or the Central Coast, our expert builders are here to help you get your next venture off the ground.

To arrange your free site inspection, complete our easy form below and we’ll be in touch as soon as possible!

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