VANESSA DE GROOT
Once upon a time a granny flat lived up to its namesake - that is, it was reserved strictly for granny to live in through old age. But that's no longer the case. Over time, the concept of the traditional granny flat has transformed.
While they're sometimes still used for granny or other family members to reside in, they now have other uses including as a home office or more importantly to generate rental income by being rented out to paying tenants.
If you weren't already aware of the growing granny flat trend, as an investor the allure of additional rental income has surely piqued your interest. Let's face it, who wouldn't be keen on deriving a greater income from a property?
But it's not all as simple as it might seem - while there are some benefits to granny flats, and profits to be made, there's a range of factors for investors to consider before they jump in, and as always thorough research must be undertaken to determine if it's right for you.
Is There A "Granny Flat Revolution?"
Basically they're secondary dwellings on a property, either attached or separate to the primary dwelling on the block, but are self-contained, with a separate entrance, bathroom, kitchen, bedroom, laundry and living area.
In contrast to a duplex, for example, a granny flat is on the same title as the property's primary dwelling.
Granny flats are generally allowed in most areas around Australia but the key thing to be aware of is that you can't rent them out to tenants everywhere. In some areas, including Victoria, South Australia and parts of Queensland, you can only have relatives, or dependants, living in them.
Each state and territory - and in fact council - has its own rules and regulations surrounding granny flats, so if you're thinking about building one on a property you own or buying a property with a granny flat, you'll need to research your particular council area to find out if they're permitted, what the rules and regulations are, and whether you can rent it out for income.
Some of the general rules for granny flats include that they can only be built on residential zoned property, the block must be at least 450 square metres and only one secondary dwelling can be built on each residential property.
The average granny flat has 60 square metres of space, though things such as verandahs and carports can be included in addition to this.
While they're not allowed to be tenanted everywhere, it's clear that the laws surrounding granny flats are starting to be relaxed in many areas around Australia, and experts believe this may continue as time goes on.
The argument for allowing more granny flats is largely based on affordability, with many touting this property type as being the solution to the affordable housing issue plaguing some cities. But can we say there's a "granny flat revolution" under way, as some have claimed? Well, there's no doubt that around Australia there's been an increase in homeowners building granny flats in recent years, with Sydney being one of the most popular areas due to the affordability factor and a change in rules.
But Adrian Graham, WBP Property Group's valuations manager, says that while granny flats appear to be on the rise, it comes amid an increasing number of granny flat providers spruiking the benefits of the accommodation type, and the movement has been met with contention.
"Not only are granny flats subject to strict council approval, but they're relatively costly to purchase considering their basic construction and don't attribute value to the property,” he elaborates.
There will be different results depending on whether you're buying a property with an existing granny flat, buying a property with the potential of housing a granny flat, or simply building one on your existing property, so make sure you do the calculations properly.
While there does seem to be a move towards home builds that come complete with an attached secondary dwelling, to date freestanding granny flats seem to be the most common and one of the reasons is that they're cheaper to build. This is especially true if you have an existing house, as you're not interfering with the structure of that house.
If you're looking at constructing a granny flat, one of the main considerations for determining the yield will be the cost of getting the granny flat approved and delivered.
Rick Stapleton, managing director of Positive Renovations, says a few years ago the cost of standalone granny flats, including approvals, was around $80,000 to $90,000. But he says there were issues with delivering them at that cost as they were "underpriced" and now the average price is around $110,000 for a 60-square-metre granny flat.
Sonia Woolley, Vision Property Group director, who builds granny flats in Queensland, adds that the minimum build would be $99,000 but they can range up to $140,000 for a two-bedroom granny flat with all the trimmings, including landscaping, a deck and a carport, plus another $7,000 or $8,000 for costs such as approvals and fees.
Is a Granny Flat For You?
- Council rules — Are granny flats allowed to be rented out in the area where your property is located and does your block meet the applicable rules and regulations?
- Rental demand — Is there demand from tenants in the area for this type of property?
- The yield — Do the sums to determine the costs and rental return involved to determine whether it will be beneficial to you
- Your block — Does it meet the minimum lot requirements and is it big enough to accommodate a granny flat comfortably so that the properties aren't on top of each other and setback requirements are met?
- Finance — There can be difficulty in obtaining finance for granny flats from lenders, so make sure you can fund it before putting plans into place
knocking on our door
wanting to rent them.”
The Rules And Regulations
In general, granny flats are allowed but they can't always be rented out.
In recent years several states and territories have relaxed laws to enable granny flats to be used for investment purposes rather than just for relatives or dependants. But there are areas where you still can't do this and, in fact, in some you must decommission the granny flat if it's not being used for relatives or dependants.
You'll need to do your own research as to a) whether you can rent out a granny flat in your council area and b) what the regulations are in terms of size and setbacks, etc.
Be aware that the rules can change at any time, but here are the general guidelines for your consumption:
He advises investors not to underspend, however, as you'll get what you pay for.
Granny flats used to be more basic, with standard finishes, but nowadays a better, often more lavish, product is being supplied.
Stapleton adds that prefabricated models built in factories are becoming increasingly popular because they can be installed quickly. Sixty square metres seems to be about the norm for a granny flat, at least in New South Wales, but they do come bigger or smaller, and most have two bedrooms, a kitchen, a bathroom and one living area.
The potential yields for a granny flat will depend on the area and the rents you can ask, but according to the experts, if you add one to an existing property you own the return on your outlay will be in the vicinity of 10 to 20 per cent, including depreciation benefits.
Whether or not there's a big rental pool for your granny flat will again depend on the area it's in and this is something you need to research before going ahead and building one.
Demand for granny flats will continue to be driven by housing affordability, however, as well as the trend towards single occupant households.
Western Sydney is one of the most popular areas and this is largely because housing is so expensive in NSW's capital - people are looking for smaller accommodation that they can afford.
With housing so expensive in Sydney, property lecturer and author Peter Koulizos says the opportunity to live on a relatively small block of land, albeit behind somebody else, and pay a relatively low rent is very enticing to many people.
But he adds that in somewhere like South Australia, which is relatively affordable, there's no great appeal for people to build, buy or rent a granny flat.
Meanwhile, Woolley says in the council areas of Ipswich and Logan in Queensland, where she's building granny flats, there's so much rental demand they have a wait-list of tenants.
"We have people literally knocking on our door wanting to rent them," she says.
In addition to single, older, often divorced persons, the tenant pool for granny flats also includes young people, either singles or couples who, again, can't afford anything larger.
Do Granny Flats Add Value?
Whether or not a granny flat adds value to a property is different in each case, according to Graham, but he says compared to an extension of an existing dwelling, they're an ineffective method of adding value.
He adds that the dwellings aren't typically considered when assessing the value of a property because they're not classed as a permanent fixture of the property.
Koulizos believes properties with granny flats will be harder to sell as the potential buyer pool will be substantially less than an ordinary property, and this is one of the key reasons that capital growth will be restricted.
"Most people aren't looking for properties with granny flats, so there's a lot less demand for that sort of property," he says. "You'll get some investors that are keen but the property market in general is dominated by homebuyers, not investors:'
Koulizos adds that the people that are looking for granny flats - even if they're owner-occupiers looking for somewhere to put teenagers or granny - will be willing to pay a little more, but not as much as the granny flat would've cost to build.
"I'm not a big fan of granny flats because they don't add value to the total property," he says.
"Let's say you buy land for $300,000, build a house on it for $250,000 and then build a granny flat on it for $150,000, that granny flat doesn't add another $150,000 in value if it's all on the same title."
Propertyology managing director Simon Pressley agrees that the resale appeal of granny flats is restricted to a very select market, resulting in diminished buyer competition, and hence investors will experience compromised rates of capital growth.
He says the "specialised" nature of granny flats causes rates of growth to be contained below more vanilla properties in the same market.
Air BNB Income
According to PRDnationwide, the average Australian Airbnb host is now earning $7,100 per year from the site, and the potential of earning this extra income is attracting more people to properties with dual living capabilities or potential (which isn't limited to just granny flats).
PRDnationwide national research manager Dr Diaswati Mardiasmo says renting out a secondary dwelling on a property appeals to owner-occupiers because it can help with affordability.
"Home affordability isn't just about whether or not you can pay off your mortgage; it includes all the costs of maintaining a home such as rates, insurance premiums and utility bills," she says.
Mardiasmo stresses, however, that the income from Airbnb is irregular and unstable and people shouldn't rely on it to service their mortgage and pay their bills.
"As hosting on Airbnb becomes more common, the average earning a home can expect from listing on the site is likely to decrease," she adds.
According to the PRDnationwide research, the rise of Airbnb in Australia has pushed up the value of properties with dual living capabilities or potential.
In Brisbane these types of properties are believed to sell for 23.4 per cent more on average than ordinary houses in the area, and in Sydney and Melbourne the average price increase is 21.2 per cent and nine per cent respectively.
Those considering being an Airbnb host need to be aware of the changing rules and regulations, from both a tax and zoning point of view, Mardiasmo warns.
"You hear about people getting fined for renting out rooms on Airbnb, due to zoning restrictions," she says."
However, these regulations are inconsistent between councils and states, and can make it hard for people to determine whether what they are doing is okay or not."
"Think about this scenario logically: who wants to buy a granny flat property?
"It has to be a buyer who doesn't mind someone else living in their backyard and the various annoying behavioural traits of each new tenant. That buyer probably isn't a young family, a baby boomer or a young professional couple.
"Most often, granny flat properties only appeal to investors, so to invest in a granny flat property is to sink a heap of money into an asset with a very small basket of future buyers."
Pressley says if you have two investors who each spend $500,000 on property, one on a "specialised" property such as a house with a granny flat and the other on a conventional property, the latter will end up with greater capital growth.
"Ten years pass and the conventional property has grown in value in line with the broader Australian market at six per cent a year and will then be worth $895,000. The smaller buyer pool for the specialised property has resulted in an increase in value by four per cent a year for an end value of $740,000.
"It's not rocket science figuring out which property will make a bigger contribution to that retirement nest egg:'
Woolley believes granny flats can add value to a property - she says this has been the case with every one they've built in Queensland. But she acknowledges that in the area she's servicing to date no one has bought an investment property, built a granny flat and onsold it, so there's no tangible evidence of values improving.
"Most investors are interested in buying and holding; these investments are mainly about the cash flow," she says.
Woolley believes properties with granny flats have good potential for capital growth going forward because there's growing demand for them.
In addition to investors, she says there are plenty of retirees who are building granny flats so they can live in them and then either rent out their house or sell it to their children or grandchildren at an affordable price.
Issues To Watch Out For
An illegal granny flat can lead to fines, he says, and it's also costly to remove and relocate in the event council deem it to be operating illegally.
"Furthermore, granny flats are often only permissible under a 'dependent persons' permit in many zoning areas, in which case they can only be used by a dependent person, such as the elderly, children or people with a disability."
"Once this use ceases the flat must be removed or decommissioned, with the removal of the toilet and stove:"
Stapleton adds that if you have an illegal granny flat rented out on your property and something goes wrong, you won't be able to make an insurance claim, which means you'll be out of pocket for the expenses.
In addition to ensuring the granny flat is legal, investors should also make sure they can get finance for the dwelling, and it's not always easy. Pressley adds that banks have a more conservative credit policy for granny flats and when assessing a borrower's affordability they'll often significantly discount the potential rental income.
They'll often also limit the amount they will lend against granny flat properties.
Pressley says investors are drawn to granny flats due to the higher than normal rental return, but there are caveats to the income, with investors often experiencing longer vacancy periods between tenants because people can be turned off by the thought of having a stranger live in their backyard.
Those tenants who are interested will demand a lower rent, he adds, and investors will also need to factor in the double property management and letting fees for each dwelling.
Stapleton notes there's also an increased risk of conflict between tenants on properties that have granny flats. He explains that it's different to units and duplexes, where tenants are also living in close proximity, because those types of properties are designed to be separate residences, whereas granny flats aren't necessarily.
In many instances, he says, granny flats have been squeezed onto properties that aren't ideal for them in terms of size and layout and it's therefore difficult to separate the dwelling.
"You're building in the backyard of houses and often the tenants are virtually living on top of each other.”
As a retiree, Steven Fraser is using the extra rent generated from his granny flat in Western Sydney to boost his income.
He added the granny flat about two years ago, after the rules were changed to allow them to be rented out, to a 600-square-metre property he bought in Habersham back in 2007.
Since Steven's granny flat was constructed before the property type really started proliferating, he only paid $85,000 all up for it and is getting $230 per week in rent, equating to a circa 15 per cent yield. This return is the big benefit of having a granny flat, he says, especially because he's retired and is using his properties to generate income.
He says, "you wouldn't be able to build one now at that price", adding that he had great difficulty getting the granny flat delivered because he signed the contract when the granny flat "boom" was just starting and prices were low.
He also points out that investors will pay extra council rates for a granny flat, which eats into the profits — he says he pays $1,200 for rates on the Habersham house and then another $800 for the granny flat. Steven's granny flat is fairly basic; at 42 square metres it has two bedrooms, a kitchen, living area and a shower, basin and toilet, but no added extras.
"These days there are many more granny flat designs available than there were then," he says.
"If I did it again I'd look for something with a pitched roof and verandah. In fact, I'm thinking about putting a verandah on my granny flat now."
In addition to the $230 per week rent Steven is getting from his granny flat, his house is rented for $310 a week, a $10 discount from the market rent due to the granny flat.
Steven paid $167,000 for his Habersham property in 2007 and spent $50,000 renovating it and it's now worth $500,000. But has the granny flat added value? He doesn't think the granny flat has made much of a contribution to the increase; he believes the improvement in value has been largely due to growth in prices in the area and Sydney overall.
Although Western Sydney has been a cheaper area of the New South Wales capital, Steven believes the area is experiencing growth. As prices and rents continue to rise he says affordability will only become more of an issue, with more demand anticipated for granny flats, which are a cheaper alternative.
So far Steven says he hasn't had any conflict between his tenants and he hasn't had any trouble finding renters for his granny flat, with no long vacancies. He adds, however, that many of his tenants have only been short-term, staying about six months, although his latest has become more long-term.
"That's one of the issues with granny flats; it's a temporary thing for a lot of people, so there's a high turnover."
Steven adds that as more granny flats are built, particularly in Western Sydney, the market may become "saturated" and he says this might make it harder to find tenants.
He's considered putting granny flats on his other investment properties, but is hamstrung at the moment, as they can't be rented out in Melbourne and his Brisbane property is too small.