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Are granny flats a good investment?

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Smart Investor

Our lowest rate property investment loan. The Smart Investor will save you money on interest and fees to make it easy to buy an investment property.

  • 2.99%
    variable rate p.a.^^
  • 3.01%
    comparison rate p.a.*

If you have a big backyard that you don’t use and you’re wondering whether building a granny flat is a good investment, you aren’t alone. Many Australians have chosen to invest in building or buying a property with a granny flat. However, building a granny flat isn’t as easy as hiring a builder and then renting it out; there are some rules you’ll need to follow, as well as some pros and cons to weigh up, before deciding investing in a granny flat is the right move for you.

What is a granny flat?

A granny flat is a self-contained housing unit located within your land’s boundaries that can operate as a separate dwelling. This type of housing is referred to as a ‘granny’ flat as it is commonly used to house an older parent, but any person can live in a granny flat. The unit can be completely detached from your home, or attached via a garage or side door, but the idea is that it can be lived in completely independently. As in, the person wouldn’t need to use your home’s facilities as it has its own kitchen, bathroom, laundry, and living spaces.

Typically known as a ‘secondary dwelling’, because the main house would be the primary dwelling, granny flats are becoming more desirable as house prices skyrocket. Granny flats can be low maintenance, and relatively cheap to build when compared to a house, with a general estimated price of $100,000.

Is having a granny flat a good investment?

Whether you are buying a home with a granny flat or thinking about building one, it can end up being a good investment choice for you. Before deciding whether or not having a granny flat is, in fact, a good investment, you should consider the pros and cons.

Pros

One of the main benefits of having a granny flat is that it’s a cheaper way to acquire an investment property than buying a house or unit. This is because they are generally smaller, and they can exist on land you already own.

Renting out the space can be another key benefit. The rental income can act as extra cashflow, and you can save on having to rent it out through a property manager. You may have more control by owning a granny flat and renting it out, as you will always be nearby to inspect the property or if there are any maintenance issues.

Investing in a granny flat can also be convenient. You may choose to rent it out for some parts of the year, and have it available for family during other periods of the year. This way, you can have people staying for a longer period of time without needing to have them constantly in your space.

Lastly, having a granny flat on your land can increase your property’s resale value. Granny flats are like houses and units in the fact that they can go up in value over time.

Cons

While there are a number of attractive perks, there are also some potential downsides to investing in a granny flat that should be equally considered. Firstly, there are a number of rules and laws around building a granny flat. Though the rules may vary depending on which state or territory you’re building in, generally you’ll need to have a few things sorted:

  • Your property should be zoned for residential use
  • Your property should be at least 450 sqm
  • The granny flat should be no more than 60 to 80 sqm
  • You should only build one granny flat on your property
  • The granny flat must have separate, unobstructed pedestrian access

Another potential con is that you will need council approval to build your granny flat.

You may also be required to pay capital gains tax (CGT) if you rent out your granny flat to tenants and decide to sell. This is because it is technically an investment property, even though it may sit on your primary residences' property.

Tips for investing in a granny flat

If you’ve decided that the pros outweigh the cons, here are a few tips that you may find helpful when investing in a granny flat.

Do your research

Before setting anything in stone, do your research and run the numbers to see how much a granny flat could cost compared to how much you could potentially make. You should also research builders, council approval processes, and so on.

Get multiple quotes

Don’t settle for the first builder you find. Shop around for a few quotes; this doesn’t mean going with the cheapest. Look at reviews, ask for samples of work, and find the best fit for you.

Be ready to finance it

If you need to borrow money to invest in a granny flat, you could speak to a loans.com.au expert to find out your financing options. You may be able to refinance or increase your existing home loan.

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About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

Tags: buying an investment property