Is there any value in granny flats?

16th Feb 2016By: Charles Tarbey

Gone are the days of the humble granny flat in the backyard only accommodating grandma. Investors searching for more yield from a property often see granny flats as an opportunity to gain an extra income stream from a property.

Easing government regulation has made it easier in many locations to add a second dwelling to a property and many investors have taken advantage of this situation. Subject to state and council regulations, utilising backyard space to gain income has become relatively uncomplicated and a fairly simple process. With speedy approvals and even pre-made granny flat kits, secondary ‘mini homes’ are popping up in backyards all over the country. The number of granny flats approved in the 2014/15 financial year was double the amount approved in 2010/11.

Granny flats can be attached to the existing home or constructed as standalone dwelling. Both designs are subject to specifications regarding size, location on the premises and structural requirements. Regulation is not uniform and varies from state to state.

The potential for a secondary income to be made from relatively low construction expenditure is understandably appealing. Combined with a desire from many government bodies to increase affordable housing, granny flats look like attractive investments. However, all that glitters may not be property gold and investors should be aware that a granny flat may not be a perfect investment.

A granny flat could be a source of increased yield but the capital growth experienced by your property may not be substantial. Value added by a granny flat can be highly dependent upon factors such as privacy, design, ease of access and privacy. If these elements are not desirable, the total value of its addition may not be reflected in a property’s higher overall value.

Many Australians love a big backyard with plenty of space for the family to enjoy. Adding a granny flat can reduce this room to move for both current and future occupants. When the time comes to sell the property, value may be diminished in the eyes of future buyers because of the space taken up by a secondary residence. Granny flats cannot be sold separately to the main house and remain on the original title of the land.

It’s my belief that any value through adding a granny flat will likely be less than the costs associated with building the granny flat.

It can be debated whether this money might be better spent elsewhere. Perhaps the money spent on building a granny flat could fund a renovation of the existing house, subsequently increasing its value to be leveraged for another property purchase. Investors may find that this approach is more financially attractive than building a granny flat.

Due to the desires of tenants in a competitive market, leasing granny flats may not be a solid guarantee of high rental yield. Granny flats tend to be prevalent in more suburban areas where there is space to utilise, however if these areas are not appealing to renters your flat could remain vacant. The only occupants may end up being your boxes, bikes and all the extra household bits and pieces.

Finding a tenant for your granny flat is highly dependent on the types of residences people are searching for. While it may not concern some, living in another family’s backyard may not be a desirable situation for others.

Privacy is a high priority for many when it comes to enjoyment of their property. There is potential for the privacy of both renter and tenant to be impacted in arrangement involving granny flat rental compared to private dwellings. Children want to freely play outdoors, making as much noise as they please however this may not suit older tenants seeking quiet enjoyment of their rented domain. The risk of a sour relationship in such close quarters is something that should be kept in mind.

Although the higher yield from a property with a granny flat may seem attractive, it is important that an investor consider all the factors and make a decision that will work out best in the long term.