Gold from granny flats

By simply knocking together a second abode, that green expanse out the back could be earning you serious investment dollars. Lauren Barker takes you on a step-by-step guide to building a granny flat in your backyard.


Granny flat, in-law apartment or secondary dwelling – whatever you choose to call it, it’s a clever property investment strategy. And no longer just for granny.


Granny flats are popping up in backyards across the country as homeowners and investors begin to take note of their money making potential.


Whether you decide to add a detached flat to your principal place of residence to earn a little extra cash, or build a secondary dwelling on your investment property to up the rental earnings, much can be said for the flexibility a granny flat provides.


It’s a fantastic way to generate additional cash flow through rental income as well as increase the property’s value if and when you decide to sell.


Particularly in a time of rising interest rates and tight budgets, a granny flat might just provide that little bit of extra financial freedom.


The NSW government defines a granny flat as a self-contained extension of a home that is within, attached or separate from the home but on the same lot of land, and not in a strata plan or community title scheme.


Mark Moumdjian, projects manager with Ian Cubitt’s Classic Home Improvements, explains that a granny flat enables an entirely separate occupancy on the same block of land, without having to subdivide.


This humble abode has certainly come a long way since the days of the makeshift shack down the back; buyers today are spoilt for choice, with styles, shapes and sizes as diverse as the people who occupy them.


Ranging from simple model studios to custom-designed, two-bedroom, 60m2 apartments, you can choose an option and style to suit your taste and budget.

Cid Daher, co-founder of Granny Flats Australia, says people are slowly realising that granny flats are good quality, secondary dwellings and no longer just tiny bedsits or rumpus rooms.


“People’s perceptions on granny flats are associated with garage conversions,” he says. “What we provide ... are two-bedroom, self-contained homes with full kitchens, bathrooms, laundries, standalone hot water systems and rainwater tanks.”


Step 1: Collect your crew

First, you need to assemble your troop. If you plan to manage the project yourself, you’ll need to hire licensed contractors; but if you hire a building company, they’ll take care of the entire process for you, from conception to completion.


Companies such as Ian Cubitt’s Classic Home Improvements offer different teams of experts who can assist in areas such as design, council approval and construction.


An architect will need to draw up the building plans or you can choose from the many kit homes available. Building companies can work with you to custom-design a flat that meets all of your requests.


“It all starts by looking at the investor’s needs,” explains Moumdjian. “We then conduct a feasibility study on the property and look at the raw figures. Once the investor is confident with what we can do for them, we take the project into the planning and construction stages.”


Ian Cubitt's Classic Home Improvements offers more than 24 standard designs, which vary in floorplans and finishes, as well as custom-designed options.


Daher emphasises that it’s important to use a granny flat specialist who understands all of the particular requirements and processes involved. “It’s very simple if you have the right team on board from the start.”


Step 2: Check requirements

There are, of course, many legal and financial issues to consider, so make sure you check the relevant requirements before you embark on your project.


Regulations regarding construction and occupancy vary from state to state and council to council, so contact your local authority for further information. Rules apply to the size and positioning of the building on the land, as well as title registration and rates payments.


The NSW government recently relaxed rules regarding the construction of secondary dwellings on properties, which means granny flats can now be built in all residential zones in the state. A State Environmental Planning Policy (SEPP) will cover all local council areas, removing the previously complicated processes and zoning requirements of Local Environmental Plans (LEP).


The NSW government’s report, Supporting Affordable Rental Housing – Granny Flats (Secondary Dwellings), says the new policy aims to enable granny flats to be approved within 10 days, subject to the requirements set out in the SEPP, such as a maximum floor area of 60m2 and no subdivision.


“These secondary dwellings give families the chance to use a granny flat as a source of additional income in these challenging economic times,” the report says.


“The new policy will better support opportunities for the creation of granny flats in line with the state government’s actions to boost the supply of affordable rental accommodation.”


Daher explains that once the building plans are drawn up, property owners in NSW can lodge the application with a private certifier, rather than going through the entire Development Approval (DA) process with council.


“The first step is to find out if your site complies with the Development SEPP – generally the block has to have a 12-metre frontage and be bigger than 450m2. This is done by ordering Certificate 149 from your local council,” he explains.


“If your block is non-complying, you can still apply through council under their development control plan, but it would be a full DA application.”


Step 3: Get finance

While some lenders may restrict the size of a loan for properties with more than one dwelling, you’ll find that a number of financing options are available to bring your granny flat project to fruition.


Geoff Dalgliesh with Aussie Doncaster, has worked in granny flat financing for almost seven years. He advises that the addition of a granny flat is the perfect time for an owner to reassess their mortgage needs.


“The construction of a granny flat provides the customer with an opportunity to review any current home loan they have and refinance to a cheaper lender, while obtaining the required loan increase,” Dalgliesh explains.


Otto Dargan, director of the Home Loan Experts, says gaining finance for two dwellings on one title is generally viewed by lenders in a similar light to a typical home loan.


“This is because there are still plenty of people who would be happy to buy a property with a granny flat. In comparison, there’s a much smaller market for people looking to buy three or four houses on one title,” he explains.


“For that reason, banks tend to be relatively lenient when lending for a house and a granny flat. Even most lenders mortgage insurance (LMI) providers are happy with a house and granny flat as security.”


Dargan suggests that a construction loan can be used to fund the secondary dwelling. “Granny flats can be funded using a normal construction loan, as long as a licensed builder is doing the work,” he explains. “The banks will lend based on the lesser of the ‘on-completion’ value of the house and granny flat, or the current value of your property plus the cost of building the granny flat.


“If you’re building it yourself, you’ll need to have plenty of equity in your property, otherwise the banks won’t approve it.”


Dalgliesh suggests using that equity to fund the granny flat’s construction: “Often the customer can use existing equity in the property to obtain finance. For this reason, 100% finance is often available, as the overall loan-to-value-ratio (LVR) is acceptable to the lender.


“Regarding security, in many cases there’s adequate equity in the current property to satisfy the lender. If not, an ‘upon completion’ valuation may be required to obtain loan approval.”


Dargan recommends keeping your loan application simple – for example, including all of your costs in the building contract rather than as separate quotes – to save the lender a time and effort.


He also suggests gaining pre-approval once you’ve decided to carry out the project, and only going for formal approval once you’ve collated the final building contract and plans.


“Always have spare funds,” Dargan continues. “Many people go over-budget and most banks don’t lend against half-complete construction projects!”


Step 4: Begin!

Once you’ve got your plans, your team and your approval, it’s time to kick-start construction!


If you’re self-managing the project, it’s time to co-ordinate contractors and get the show on the road. If you’ve hired a building company, you can still keep an eye on progress to limit delays.


Step 5: Connect to services

Once the flat is constructed, it’s time to connect to utilities.


“The most complicated and expensive part is the connection of storm water, sewer, water and electricity to the granny flat,” explains Daher. “This is the part that needs to be considered even before you engage an architect.


“These are some pitfalls people fall into when they order kit cabins or pre-made homes that get transported in, and then they have to connect to these services themselves. There are many cases where driveways and paved areas need to be removed for connection of these services that haven’t been budgeted for by DIY builders.”


Complete any finishing touches, such as painting, furniture and fittings to make sure your granny flat is a tenant magnet.


Step 6: Reap the rewards

Once construction is finished, the fittings in and the walls painted, it’s time to start putting your investment to work.


Experts suggest that the financial gains can be significant, with Moumdjian estimating that investors can fetch between $250 and $600 a week in rent.


Granny Flats Australia suggests that a $63,200 studio in Parramatta, NSW, on a loan of 6.5% interest, would cost $79 in weekly repayments and reap $200 a week in rent. If the granny flat was a one-bedroom building, however, it would cost $76,800, cost $96 in weekly loan repayments and earn $280 in weekly rent payments.


Daher says that investors reap financial gains through three different channels: rent, sale price and depreciation benefits. “The primary purpose of building a granny flat as an investor is for the creation of extra income for a small outlay.


“For an outlay of $105,000 for a two-bedroom granny flat, it could generate an extra $350 per week or more in rent, depending on the area. Over a year that’s an extra $18,200. As a gross yield on investment, that’s 17% gross return. Where else can you get that kind of return without taking a huge risk?”


“Secondly, due to the increase in yield, the value of the property has increased and appeals to a new wave of purchasers,” continues Daher.


“The creation of this new dwelling also adds depreciation benefits to the investor, assisting with their tax situation. Once a granny flat is complete, a deprecation schedule is ordered from a quantity surveyor, and determines how much depreciation you can claim back as an expense each year.”

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