Some Australians see building a granny flat as a way to keep the family together. Others see it as an opportunity to help fortify their financial security. For many people, it is also a cost-effective way to add value to their property.
Investors are always looking for ways to add value to their property and grow their rental income. The usual approach includes adding an extra bedroom, a pool, or a second storey. But such expensive additions may be too risky in the current real estate climate.
According to a 2017 Demographia survey, Sydney’s housing market is the second least affordable in the world. That’s because house prices here are almost 13 times higher than the median household income. Add the fact that rental yields in Sydney are already low, and it’s easy to see why property owners are reluctant to make costly renovations.
Instead, many of them choose to build a granny flat to boost the value of their property. As a result, this type of housing has seen a major boom in recent years.
Right now, there are thousands of new granny flats built each year in Australia. These convenient housing units are popular with both investors and renters. What’s more, their rise shows no signs of slowing down anytime soon.
So what is it that makes granny flats so prevalent in today’s housing market?
What Is a Granny Flat?
Granny flats are small self-contained living areas built on the grounds of an existing family home. They are also known as granny pods, secondary suites, and accessory dwelling units.
They got their name from the purpose they initially served. Namely, families would use these dwellings to accommodate their aging parents or grandparents. This helped keep the family together while giving everyone their much-needed privacy. On top of that, it was a much more affordable alternative to aged care homes and facilities.
Over the years, people started using granny flats for many other purposes. They use them to accommodate live-in housekeepers or give their adult children a place to live while they are saving money to buy their own home. At the same time, many homeowners decide to rent out their granny flats, thus creating an extra source of income.
Under existing regulations, granny flats mustn’t exceed the size of 60 square metres. As such, many of them fall into the tiny houses category (40 square metres or smaller). They can be either detached or attached to the main house on the property.
There are no rules as to the amenities granny houses offer, either. While some of them are much like small-scale replicas of full-size houses, others offer very basic amenities. It all depends on their size, as well as the needs of their tenants.
Why They’re on the Rise
You don’t have to buy a brand new property to build a granny flat. As long as there’s enough free space on your existing property, you can build it and start renting it out. This gives everyone an opportunity to become an investor, which is one of the main reasons why granny flats are so popular.
Of course, there are plenty of other reasons for the steady rise of the granny flat in recent years. They include the following:
- Keeping Families Together: Granny flats allow families to stay together on the same property without having to share a single roof. That way, they can all have the privacy they need and still be there for each other in case one of them needs help. This type of housing is good for families with adult children that can’t yet afford to move out of the house. It’s also good for individuals who want to provide housing for their elderly parents.
- More Affordable Housing Options: Many young people are moving to large cities in search of work. Due to their limited means, they can’t afford to pay high rental prices for city properties. But as the prices of real estate in Australia continue to grow, affordable housing options are becoming increasingly scarce. And because they are usually cheap to rent, many renters are opting for them over alternatives like shared housing.
- Low-Cost Investment: Building a granny flat is much cheaper than building a full-size house from scratch. While a new house could cost you upward of $500,000, granny flats average a price of just $120,000. This means that you can build up to four granny flats and get as many new rental income sources for the price of a single house. That is, of course, if you own as many properties since you can only build one granny flat per block.
- Extra Income: Many people decide to rent out their granny flat to generate an extra source of income. That way, they can pay off their mortgage sooner or add funds to their savings account. On average, granny flats generate an income of about $280 per week. Sydney has the highest granny flat rental rate of $346 per week on average. On the whole, homeowners can generate between $13,000 and $18,000 a year this way.
- Added Property Value: Granny flats also add to the overall value of a property. That’s no surprise, seeing as the property has not one but two liveable units. Of course, this comes in very handy when the owner decides to put the property up for sale. It’s good for the prospective buyers too as the extra rental property gives them a chance to offset the cost of the purchase.
You don’t have to be an expert investor to reap the benefits of having a granny flat on your property. Research-backed strategic planning is often all it takes to maximise the value of your granny flat.
Just take a look at Zack’s success story.
Zack’s Story
A few years ago, Zack became the owner of a 695 square meter block in Cambridge Park, about an hour away from Sydney. He also owns a three-bedroom house on this block that he’s been renting out.
But the property was only generating a 4% rental yield, in line with the low yields in the larger Sydney area. And although he was happy with his income, Zack knew his property was worth a lot more. He thus set out to find a way to maximise its value and grow his rental income.
After consulting with property managers, he realised that building a granny flat on the block would be his best bet. There were three reasons why he’d want to do that:
- Granny flats are more cost-effective than other options.
- They are in high demand for their convenience and affordable rental prices.
- The interest in the neighbourhood is growing due to the planned construction of the Western Sydney Airport. This, in turn, is going to drive the prices of property up in the next few years.
There was just one problem – there were other investors building several granny flats in the area. Zack knew that he had to offer something extra if he wanted his granny flat to stand out from the rest. After careful consideration, he decided to build a two-bedroom flat with a porch and a garage.
He explains: “The garage provides secure parking as well as storage, the porch area gives shelter when entering, and having two bedrooms provides ample living space for the occupants.” This cost him $146,000 to build, which is higher than the $120,000 national average. But Zack was certain that this would make his granny flat more attractive to renters.
Before the construction began, there was another problem Zack had to solve. Namely, his tenants informed him that they were going to move out due to the construction. But he couldn’t allow this to happen as he was counting on that rental income to cover a portion of the construction costs.
Zack decided to meet his tenants halfway. He offered them a $100 discount on their rent, taking the cost down from $450 to $350 per week. While some would frown at the very thought of this, Zack knew what he was doing. “I would rather have the cash flow than have the front home vacant”, he said.
The construction itself was fairly straightforward. He hired a reputable builder to sort out the paperwork and manage the budget. There were no problems whatsoever throughout the process. After the construction, he renegotiated with his front home tenants and brought their rent back to $450.
Less than a year later, he is generating a combined rental income of $860 per week. The granny flat on its own generates an annual income of $21,320. This means that his yield on the new unit is 14.6%. At this rate, the granny house will pay for itself in less than 7 years.
Right now, Zack’s rental yield is enough to finance mortgage repayments. His long-term plan is to hold the property until it reaches optimal capital growth. That way, he will have recouped his total investment by the time the property hits the market. He could thus direct all the money he gets from the sale toward future investments.
Has Zack’s success story inspired you to invest in a granny house yourself? If so, the following five tips will help you get started.
Tip #1 – Follow the Local Regulations
As soon as you decide to build a granny flat on your property, you need to contact your local council. They will tell you about your options and inform you of local regulations. This is important, as the rules regarding granny flats vary from state to state.
For example, some states only allows you to build a granny house if the person who will live in it is dependent on you. If they ever move out of the house, you will have to remove it from the property.
Leasing your granny flat to anyone other than a family member is illegal in some places around the country. Each state also has a special set of rules regarding the dimensions and position of the property. Make sure to learn all about them to avoid problems down the road.
Tip #2 – Work with What You Have
Building a granny flat is a cost-effective way to add to the value of your property. As such, it shouldn’t incur any other expenses apart from construction, furnishing, and administrative costs. If it does, your investment might not be as profitable as initially planned.
To avoid this scenario, make sure that your design fits the layout of the block you’re building it on. This includes factors like slope, shape, setbacks, and sewer lines. Work with what you have and avoid costly remodelling unless absolutely necessary.
Tip #3 – Focus on Functionality
While the design of your granny flat certainly matters, its functionality matters even more. After all, that is the first thing prospective tenants will consider when looking at your property.
And that is why Zack decided to build a two-bedroom flat with a porch and garage. Yes, adding these features ended up costing him more. But it also helped him find tenants very easily, which is quite a feat in a competitive market.
Of course, you don’t have to go way over budget to ensure the success of your granny flat. As long as your tenants have enough privacy and easy access to the property, you won’t have any problems. Everything beyond that is just extra that can add value to your newly built unit.
Tip #4 – Find a Reputable Builder
The success of your investment depends in large part on the people you choose to work with. That is why it’s important to find a reputable builder to realise your design.
To ensure that your builder is reliable and trustworthy, ask them to show you their Certificate of Currency. This document will protect you in case anything goes wrong on their watch.
Ultimately, the builder you choose needs to meet three requirements. They need to keep to a schedule, stay within the agreed-upon budget, and maintain regular communication with you. Treat any deviation from these rules as a major red flag and act accordingly.
Tip #5 – Hold On to Your Current Tenants
Construction works on the property will inevitably cause some discomfort to your current tenants. In addition, they can take weeks or months to complete. It is thus important to warn your tenants in advance and see what you can do to make it easier for them.
As you have seen from Zack’s example, you must also be ready to make certain compromises. Otherwise, you could end up without a rental income for months. Seeing as you can use this money to offset some of the construction costs, this is a scenario you should avoid.
The Final Word
As you can see, there are many reasons why granny flats have become so popular in recent years. They help keep families together, generate extra income, and add value to properties.
If you decide to rent out your granny flat, your rental yield should be enough to cover mortgage repayments. So, with careful planning, not only is building a granny flat cost-effective but also self-sufficient.
But before you start making detailed plans, you need to know if you’re able to build a granny flat in the first place. Archistar can help you with that. Take our instant Granny Flat assessment quiz to get all the answers in just minutes.
Don’t waste any time – get started now!
