Granny flats are rising in popularity as owners and investors look to maximise returns on existing properties. How to make a Granny Flat strategy work.
Once upon a time, a couple had the bright idea to utilise their backyard to build a place for granny to live. It was perfect: they were doing their part to look after the ailing dear, without having to give up any of their own space. All parties had a private area to call their own, while a babysitter or a hand in the kitchen was just a patch of lawn away.
Nowadays, as Australia’s population continues to grow, the residential space around the nation’s major cities is shrinking.
Families and investors looking to maximise their income are getting creative and thinking outside the block. Meanwhile, local and state governments are looking to facilitate the provision of affordable rental properties, as the cost of living continues to rise. Witness the emergence of the granny flat as a common solution.
What is a granny flat?
Granny flats are regularly defined as ‘secondary dwellings’, meaning they are secondary to the main property on a single block. The dwelling must be self-contained, meaning it has a separate entrance, as well as separate bathroom, kitchen, bedroom, laundry and living area.
The following general regulations govern granny flats across most local councils:
- Granny flats can be built only on Residential Zone property.
- Each residential property is limited to one granny flat.
- The block must be at least 450m² to build a granny flat.
- The owner of the granny flat must also be the owner of the primary dwelling.
- The granny flat can have no more than 60m² of living space. However, patios, verandas or carports can be attached in addition to that allowance.
- Granny flats cannot exist on strata title, subdivided or community title property.
- Granny flats cannot be built on unoccupied land or on a property used for commercial purposes.
- Granny flats can be attached to the primary dwelling, or can be free standing.
- Granny flats must have clear, separate and unobstructed pedestrian access.
Building on your existing home
Granny flats have taken off in recent years and many investors are getting caught up in the hype. The advantages can certainly stack up if you go about it the right way. The ideal granny flat situation for investment and return would be to build the secondary dwelling on the same block as your permanent place of residence. This can add value to your property and also provide a fantastic rental yield, depending on where you live.
In most city suburbs, two-bedroom granny flats can achieve a similar weekly rent to two-bedroom units. So, let’s say you spend $100,000 building a granny flat at your house on Sydney’s north shore. When completed, you get a tenant in paying $450 a week. That is a gross rental yield of 23% or $13,000 each year. With a interest rate of 7%, you would be paying the mortgage off at approximately $153 a week. But that is one of the better case scenarios.
Do your homework
You need to analyse the viability of a granny flat on your property and in your suburb. According to Right Property Group buyer’s agent Steve Waters, the areas you need to cover are council approval, demand and costings.
Council
“The first thing to do is contact the local council to find out exactly what you can and can’t do,” says Waters.
“What frontage you need, how many square metres you need, the zoning, whether you can put a granny flat on your property.”
Getting the council involved at the early stages will stop you from getting your hopes up only to suffer a surprise rejection down the track.
Demand
If you want to get a return, you need a ready supply of tenants willing to provide it. Not everyone wants to live in a family’s backyard. Talk to local real estate agents to find out if there is demand in the area for granny flats and how much rent you could get for one, then check to see how many are listed for rent online and in the newspapers.
“Drive around the suburb and see what type of granny flats are in the area,” says Waters. “Some of them can look like shipping containers, which is not aesthetically pleasing and may reduce the value of a house rather than add to it.”
Costing
Get in touch with builders and specialist granny flat construction companies and have them quote the construction work and any other costs. Based on the quotes, get a real estate agent to give you an estimated market appraisal, not only on rent, but also
on value as a pair of dwellings, so you know you won’t end up in a negative equity position.
“Granny flats can be a fantastic strategy if done correctly,” says Waters. “In the right area, on the right piece of dirt, and with the right construction costs. Don’t do one just for the sake of it. Think of the whole parcel and the real net effect on your whole property, rather than just as individual dwellings.”
Making it happen
Once you are satisfied a granny flat will be a solid investment for your property, you are ready to go. Following is a stepby-step guide to turning your backyard into a second income.
Step 1: Obtain council approval You need to get a Development Approval from your local council, which should only take a couple of weeks. The necessary forms can be
obtained at the council’s website.
It is best to engage the help of an architect, building designer, or planning consultant, who can help with any required compliance.
A local draftsperson will also be able to provide professional drawings the council will accept.
Step 2: Obtain finance You should only need a maximum loan of around $100,000, but it is important to have your finances in order. If you have sufficient equity in your PPOR, you should be able to finance it by increasing or refinancing your current loan. If you don’t have enough equity, or you need the lender to consider the rental income from the flat, you may need to take out a construction loan.
Step 3: Engage builders The recent surge of interest in granny flats has seen the emergence of a number of companies that specialise in the field and act as a one-stop shop for all of your secondary dwellings needs. These companies can offer a
cooperative process, which is free from potential conflicts involved in engaging
separate designers, builders and tradespeople. They can even take care of the application and approval stages if you wish.
“The first thing we ask people to do is get a 149 certificate from their local council, which outlines all the planning and zoning objectives of that property,” says Wally Gebrael, design and approvals manager at Granny Flat Solutions. “From there, we go
through that and make sure there are no surprises, implications or anything that might prevent you from putting in a granny flat. We research the property and make sure it can be done, then we design the flat to suit and take care of construction from start to finish.”
Gebrael says the rule of thumb for construction costs is around the $100,000 mark, but due to the different nature of each block of land, costs could climb to as high as $130,000.
“Because you’re building in backyards, you have to rely on existing services like storm water, sewers, power and gas,” he says. “Some are easier to connect to than others.”
Dealing with a specialist company will help you rest easier about the costs involved and any legal issues that may have arisen if you took the project on by yourself.
Choosing the best location
Location is crucial when looking at potential returns. As you get closer to the city, housing density means granny flat opportunities are severely limited, but the returns are still decent out in the suburbs.
Generally speaking, whatever part of the country you are in, proximity to amenities and infrastructure will help attract big-spending tenants.
“The closer you are to shopping or transport hubs, you find there’s greater demand,” says Gebrael. “A lot of people these days will pay more for convenience. If you’re further away from public transport, you will want to provide parking access for a car. Another good position is near a university, where you can attract student renters.”
When granny flats are not for you
Some investors get caught up in the hype surrounding granny flats and fail to take into account their own unique situation.
Investing in a property with potential
If you go out with the intent to buy an investment property that has the potential to house a granny flat, rather than simply build a granny flat on your existing property, it’s a whole new ball game.
You then need to take into account the cost and return of both properties, rather than just the granny flat.
A 7% rental yield is pretty good, but it is also achievable by getting a good price on a regular property, without having to do the construction.
Adding to a tenanted property
Constructing a granny flat at an investment property that already has tenants in it is also likely to give you some headaches.
Firstly, give the existing tenants notice of your actions and be understanding if they want to move out. A family of four living in a threebedroom house with a large yard is
unlikely to want to share that space with a new set of strangers.
The value added by the granny flat can also be discounted by value lost on the primary dwelling.
“Sometimes, you may have to reduce the rent on the original house, because you have taken away space and reduced what the tenants are paying for,” says Gebrael.
“If it’s a small block and you’re squeezing two properties on it, the houses are going to be very close to each other. This creates a noise issue and lack of outdoor living space.”
Most houses have windows on both sides, so there will usually be one portion of the separate access point that always passes close by a window. This can be unsettling for tenants. You should also be prepared to have periods of vacancy in these situations, while tenants from both dwellings come and go until you find a harmonious mix.
