Should you invest in a granny flat?
Is buying a granny flat a good idea? We tackle frequently asked questions
Granny flats, as their name implies, were traditionally accommodation options for aging parents to live close to relatives. These days the humble backyard granny flat is more than just an extra living space in your property but a sophisticated building that has all the modern conveniences of a larger house. They can even be listed on Air BnB as a holiday let or a way to make extra money on the side. It is also popularly used as a long-term investment.
As well, the granny flat is no longer just granny’s accommodation, but it’s also popular with young couples, singles, downsizers and young families. It’s not merely a separate structure in your backyard too, but can be built as part of your home, with a separate entrance.
They are so popular that you can browse through a suburban home listing, and chances are many homes will be advertised as having the potential for a granny flat to be built subject to council approval (“STCA”) because most investors want to buy a property that can bring them bang for their buck by being able to rent out the main house as well as the smaller granny flat in the backyard.
Is it a good investment?
Whether a granny flat is a good investment will depend on your goals. Is your goal to make extra money on the side? Increase the value of your property? Accommodate relatives such as elderly parents or adult children? Use it as an accommodation option for yourself when you retire? Or all of the above?
Being clear about your goals will help you decide if a granny flat is the right investment choice for you. Read more about buying investment properties here.
Can I make money from it from rent?
The main reason why a granny flat is an attractive investment option is that it’s cheaper to build a granny flat than to purchase an investment property. Studio or one-bedroom granny flat prices can start as little as 60K to 120K for a 2-bedder. This is much cheaper than buying an investment property which usually sells for more than double that price, and you can still rent it out for the same price.
The median price of a unit in Western Sydney is $420,000, which is many times more than the cost of a granny flat. Let’s say you bought a granny flat for $120,000 and received an income of $400 a week on rent; it will take you about five years to make your money back in investment. Compare this to a unit – if you bought a unit for $420,000 and received an income of $400 a week on rent, it will take about 20 years to make that money back.
It’s easy to see why granny flats are a popular investment option.
Will it increase the value of my property?
According to CoreLogic, a granny flat can boost your property value by up to 30% and add approximately 27% to your income through rent. As a depreciating asset, you can also claim the depreciable value of the granny flat to offset your income tax.
Many new investors add a granny flat to their portfolio as part of their strategy, as the increase in income and capital value of your property can help you apply for a home loan on your next investment property.
But be sure that when adding a granny flat to your existing property, the cost of your investment will pay for itself. For example, if you’re spending $100,000 to build a granny flat, make sure that the valuation of your home also increases by more than $100,000 (your lender will usually perform a valuation when you apply for a loan to build the granny flat).
You will also need to consider the potential rent you’ll receive per week, keeping in mind the renter demographics in your area (e.g. are there more singles or couples, young people or retirees) and what the market is willing to pay per week on a granny flat like yours. If what you’ll be earning on rent is much less than the cost to build your granny flat, it might not be a good investment.
Is it a viable option for my retirement?
A granny flat is an excellent option for retirees who want to be closer to family or simply want to downsize but still live in their property while renting out the main house. For some retirees who need extra assistance, it’s also more attractive than going into residential aged care as it affords them a level of independence.
However, bear in mind that if you are planning to have family move into the main house while you live in the granny flat, you need to prepare for changing circumstances such as divorce or a breakdown in family relationships, as this may affect your tenancy (if for example, ownership of the property passes to family members). In these cases, it is essential to see a specialist lawyer to explain your rights and document the agreement.
You may also need to see a financial planner with expertise in this area to advise you on how a granny flat asset can affect your pension or government entitlements.
Are there other alternatives to granny flats?
These days there are many lower-cost alternatives to granny flats that you can explore if you’re thinking of retiring or investing. Modular homes, prefabricated homes and tiny homes are also other options. Each has pros and cons, and we recommend doing as much research as possible if you’re thinking of downsizing or investing in one of these. Read more about tiny homes in our blog. Read about investing in retirement villages here.
Ready to sell your home and downsize?
If you’re considering selling your home, we have friendly, professional agents with many years of experience in your area who can give you a free appraisal. Contact us on 0450 914 535.
