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Considering An Investment Granny Flat?

Despite the name, granny flats aren’t just places to house ageing parents! A granny flat – self-contained secondary accommodation within, attached to, or in the backyard of an existing property – can be a source of additional rental income, and a way to add value to your property.

But before you dive right in and start building an investment granny flat, there are a few things to consider.

rules and regulations in your area

The first thing you’ll need to do is check whether your local council allows you to build and rent out a granny flat on your property, and if they do, what rules and regulations you’ll need to comply with.

These differ from state to state. Some areas prohibit granny flats from being rented out, so you’ll need to be sure you’re up-to-date on the regulations for your particular area.

In NSW, the main rules for building a granny flat as a complying development are summarised as follows:

  • The secondary dwelling (granny flat) can be within, attached to or separate from the primary dwelling
  • There may only be one primary dwelling and one secondary dwelling per lot
  • The main property must be at least 450m² and within a residential zone
  • The granny flat’s floor area must not exceed 60m².

The full requirements for NSW granny flats can be found in the State Environmental Planning Policy.

Privacy and access

Privacy is a major concern when it comes to granny flats. The occupants of both the granny flat and the primary dwelling must have adequate privacy, and the granny flat should also have separate access.

Whether it’s from the side of the dwelling or from a laneway at the back of the property, your tenants should be able to access their flat from a completely separate entrance.

For these reasons, houses on corner blocks work best for granny flats, as the main property can face one street while the granny flat faces the other.

Depending on the type of granny flat you construct, other privacy measures that may need to be considered include:

  • Fences
  • Privacy screens
  • Trees or shrubbery.

Separate utilities

It’s recommended that your granny flat has its own separate connections to utilities such as water, electricity, gas, phone lines and the NBN. This is to ensure that your tenant can be charged separately and clearly for utilities and services.

Electricity, gas and water

Under a standard NSW residential tenancy agreement, tenants agree to pay for electricity, gas and water, provided the property is separately metered (and water efficiency measures are in place).

This is the same with tenanted granny flats, so be sure electricity and gas are separately metered, and that a sub-meter is installed for water.

Phone lines and the NBN

Phone and internet connections should also be separate from those of the main residence.

Under the terms of the National Broadband Network, each service must be linked to a unique address, meaning that granny flats sharing the same address as the primary residence aren’t eligible for a separate NBN connection.

However, an additional service can be installed by a registered cabler to extend the existing service from the primary residence.

Common area maintenance

Unless specified otherwise in the tenancy agreement, the owner is responsible for the maintenance of common areas between the primary and secondary dwellings, such as gardens and lawns.

Will the granny flat add value to your property?

Before committing, it’s important to consider whether a granny flat actually has the potential to add capital value to your property, as well as providing rental income. In most cases it will, provided it ties in well with the main property and has adequate privacy and separate access, as discussed above.

However, in some circumstances, the addition of a granny flat might actually devalue your property. If it takes up too much of the property’s outdoor space, lacks privacy (e.g. overlooks the main property), or is located in an area with an oversupply of granny flats, it might end up being the opposite of the value-add you’d hoped it would be.

It’s also worth keeping in mind that if your granny flat is built on the same lot as your principal place of residence, you may have to pay capital gains tax on the flat. This tax is based on how much space the granny flat takes up on the block of land, and is payable once five years have passed since construction.

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If you and your investment adviser would like some more information about granny flats, feel free to contact our Investment Services team.

Disclaimer: This information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your situation, and for professional advice, seek out a financial adviser.
   

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