Are Granny Flats a Good Investment?

We always say that the real estate market is challenging, and finding profitable investment opportunities to supplement your income is tough. However, there is now a potential solution for this, and it is called the “Granny Flat.”

Granny flats are already becoming popular across Australia, with approximately 5,000 being built annually. This significant rise is tied to changes in state-level regulations, which aim to increase the number of affordable houses in metropolitan areas.

Given this trend, you might be wondering: Are granny flats worth the risk? Is investing in one a smart decision?

The answer is, "It depends."

To help you decide, let’s dive deeper into the concept of granny flats so you can assess if they are a good investment for you.

Granny Flats – Should You Consider Investing in Them?

Generally speaking, taking a risk leads to uncertainty. The same applies to granny flats. Sometimes, they may not be as rewarding as you think, but in most cases, they can be a valuable investment.

Here are a few reasons why you might want to consider having a granny flat built on your property:

1. Extra Rental Income: If you have a spacious backyard, building a granny flat will require only minimal effort. Not only can it provide you with additional income, but the construction costs are also relatively low. You may also be exempt from paying large expenses upfront, like lender’s mortgage insurance and stamp duty.

2. Increases Property Value: Building a granny flat can increase the overall value of your property. You can install separate water and electricity meters for the granny flat, so you don’t incur extra utility costs.

3. Diversifies Your Income Sources: We already know it’s safer to have multiple sources of income. Relying on just one rental property can be risky, as there may be periods when it's vacant. So, if you add a granny flat to your property—perhaps a two-bedroom granny flat—you’re likely to secure an additional income source, especially when your main rental property is empty. Additionally, you could rent out the granny flat as a permanent residence or list it on Airbnb as a vacation rental.

4. Tax Benefits: A granny flat can offer significant tax breaks, especially in the form of depreciation. When you obtain a depreciation report, you can claim a portion of the depreciation value each year. This can reduce the taxable rental income from the granny flat, lowering your tax liability.

5. Flexible Investment Opportunity: Granny flats are incredibly flexible. You can rent out both the main property and the granny flat for double the income, or you could move into the granny flat and rent out the larger home. Additionally, when it's not in use, you can offer it as a vacation rental to accommodate your guests.

If you decide to build a granny flat, consider the location carefully. You’ll maximise returns if you build in a high-demand area. Generally, granny flats perform best in higher socioeconomic areas.

Check if the suburb you choose offers good access to amenities like schools and shopping centres, has tourist potential, and has a growing population. You can also consult with a professional to determine whether your location is suitable.

When Are Granny Flats a Bad Investment?

While granny flats have many benefits, there are situations where they may not be a good investment. Here are some potential drawbacks:

1. Costs Can Exceed Expectations: Building a granny flat might end up costing more than you anticipated. It can become even more of a hassle if you run out of funds during construction, as you could face financial difficulties. So, make sure you carefully plan your financial budget to avoid overcapitalising.

2. Building in the Wrong Location: The growing popularity of granny flats has led to oversupply in some areas, which could result in lower rental returns. If there are already too many granny flats in a suburb, you might want to reassess whether it's worth competing in that market.

3. Zoning Restrictions: Not all councils approve the construction of granny flats. Make sure to check local council requirements (e.g. block size, proximity to fences, and access) before proceeding.

4. Limited Resale Appeal: Granny flats can reduce the resale value of a property, especially if potential buyers prefer empty backyards.

5. Lack of Privacy: Building a granny flat may limit your ability to subdivide your property, as it remains registered as a secondary dwelling on your main lot. Both the primary home and the granny flat must remain on the same property, which can affect privacy for both you and your tenants.

So, Is It a Good Investment?

Despite the potential downsides, building a granny flat can still be a great investment in many cases. If you have the opportunity to do so, it can be worthwhile.

Ensure that the granny flat is well-designed, and consider using it for personal use or listing it as an Airbnb rental when it’s vacant.