You may have heard about the rise of granny flats in Australia. But what are they and how can you get involved? This article answers the key questions.
Many average Australians look to property investment as their ticket to a comfortable financial future. However, the rising prices of housing stock and apartment units often puts investment out of reach. Even though prices in some major cities have declined, the cost is still high enough to put many people off.
But there is another option.
Since 2009, granny flats have become a viable alternative for budding investors. These small properties, which you build within the confines of your own property, offer plenty of opportunities. They’re also low-cost when compared to many other types of property investment.
But this doesn’t make them foolproof. As with any kind of investment, there’s a certain amount of risk attached. Get it wrong when building a granny flat and you could cost yourself thousands of dollars.
So, how do you avoid that situation?
This guide takes an in-depth look at what granny flats are and why you may consider building one. It also looks at the pros and cons, in addition to providing some useful tips.
But before all of that, let’s take a look at somebody who got it right.
The Value-Adding Granny Flat in Margaret Street
Granny flats don’t just provide investment opportunities for residential property owners. Experienced investors also use them regularly in an effort to add value to the properties that they buy.
That was the case with the investors in this story. They hoped to expand their investment portfolio into Queensland. However, they weren’t just interested in any old property. They came with the prerequisite that any property that they purchased needed to offer potential for value adding.
Namely, it needed to have enough space for a granny flat.
So, they started their search for a property. They came across a property with a large and well-maintained garden, which offered potential. Most importantly, the property came with both a carport and a garage.
This combo meant that they could offer parking both to the tenants of the main property and the tenants of the granny flat that they would build.
The large garden and corner location of the property also allowed them to make the granny flat area private. Again, this is something that appeals to tenants. No tenant wants to feel like they’re constantly exposed. A dividing fence line and a private entrance through the carport offered all of the privacy that the tenants would need.
Note how the investors approached their granny flat with the same eye for detail that they used for the investment property itself. That’s a key takeaway from this story. Your granny flat is still an investment property. As a result, you must put a lot of thought into the needs of the tenants, as well as your own.
The investors eventually decided to buy the property at a cost of $280,000. With the construction of the granny flat, this price rose to $430,000.
This flat achieves a rental return of 9% on a $150,000 investment. The main property achieves a 6% return on a $280,000 investment.
When combined, the investors now achieve a 7.05% average rent return on both properties.
Compare that to just a 6% return on the initial property and you can see the value that granny flats add.
What Are Granny Flats?
That’s an example of what you can achieve with a granny flat. Of course, we’ve yet to confront the most important question:
What are granny flats?
A granny flat is a secondary dwelling that you build within the boundaries of your own property. The key thing is that they’re self-contained. This means a granny flat is essentially a property within a property.
The name comes from the original purpose of the flats. Homeowners would build them for their elderly relatives to live in, thus keeping the family unit together.
However, they’ve since become an investment opportunity. The rising cost of housing in Australia has led to many tenants considering granny flats as viable housing. They’re also suitable for people who want to downsize from their current home. You could build a granny flat in your block and live in it while renting out the main property.
They’re also a versatile property type that can fit most blocks. However, it’s important that you build within the regulations that your local council sets. For example, you cannot build a granny flat larger than 60sqm in New South Wales.
Having said that, you have plenty of options for how they look as long as you meet the regulations. It’s not uncommon for granny flats to have two or three bedrooms while featuring unique interior designs.
Who Do They Work For?
Granny flats work well for the following types of people:
- Those who have elderly relatives who they want to keep close to home. Granny flats offer the elderly independence while giving their families peace of mind.
- People who have children who want independence but can’t afford a place of their own.
- Those willing to downsize to the granny flat so that they can earn a rental income from their primary property.
- Novice investors who want to use granny flats as a route into the property investment sector.
- Seasoned investors who want to add value to the properties that they add to their portfolios.
As you can see, the versatility of granny flats make them suitable for a number of situations. In fact, it’s likely this versatility that has played a large part in their rise over recent years.
Reasons to Invest in a Granny Flat
There are several reasons to invest in a granny flat. However, these reasons vary depending on the purpose behind the flat.
Let’s first cover those who wish to use the flat for its original purpose – housing a relative. A granny flat is a great option in these cases because it offers you complete control over the design. As such, you don’t have to go out looking for a property that meets your relative’s needs. You can instead build the property around what the resident will need.
This is particularly important for elderly people who have issues that limit their mobility. A well-designed granny flat allows you to take care of your relative without damaging their sense of independence.
But what about investors? There are several reasons why granny flats make a smart investment:
- They add value to an existing property, as you can see from the case study. This allows investors to increase their rental return. Typically, you’ll also achieve a higher sale price later on.
- Compared to buying an investment property, granny flats are extremely affordable. In the case study, the investors managed to build a granny flat for $150,000. This flat then earned a consistently high rent return. It’s usually possible to build at a lower price too, especially if you use a prefab home kit.
- You have complete control over what the flat looks like and the features that it possesses. This means that you can build a flat that specifically appeals to the demand in your location. This compares favourably to the idea of having to search through dozens of properties to find one that suits your needs.
- You’re not limited to renting out the granny flat. If you’re willing to downsize to the flat that you build, you have the option of using it as a place to live while you generate income from your main property.
- Typically, you can access loans for granny flat construction in the same way as you’d access other construction loans.
The Potential Pitfalls
All of this may make granny flats an alluring prospect for novice investors. However, they’re not perfect. Granny flats offer several pitfalls that may trip up the unwary:
- A granny flat limits your options when you try to sell the property later on. Remember that you’ve turned the property into a dual occupancy. Many residential buyers will hesitate due to that fact, especially if they have no intention of using it to generate income. You may limit your buying pool to fellow investors and residential buyers who specifically want a granny flat.
- You will face several restrictions from the local council. Moreover, these restrictions vary depending on the council in question. You have to conduct plenty of research before building a granny flat, else you may run afoul of regulations.
- While a granny flat may be a smaller property, that doesn’t mean that you can skimp on the costs of construction. A lot of granny flats aren’t suitable for tenants because the owners tried to get them up and running as quickly as possible. If you rush the work, tenants will recognise the poor quality. This could limit your pool of potential tenants or even make the flat impossible to rent out.
- There’s always a risk of overcapitalising and spending too much money on the construction. If you don’t budget appropriately, you could end up with the shell of a flat that you can’t afford to finish.
- Even with the growing popularity of granny flats, there’s still a limited demand for them in terms of the types of people who want to rent them. You must understand that you’re appealing to a small niche of the tenant pool with your flat. If your location doesn’t offer the appropriate demand, the flat may sit vacant for long periods of time.
As you can see, there are a few issues to look out for. Building a granny flat isn’t for everyone, so it’s important to understand your situation before you start construction.
Some Tips for Building a Granny Flat
Let’s assume that you want to go ahead with the construction. What do you need to do to build a great granny flat that offers a strong return?
Here are a few tips:
- Get Approvals Early. Before any work begins, you need to attain approvals for the work from the local council. Typically, you’ll have to apply for the construction itself, as well as applying to build over existing water and sewage pipes. You may also have to consider the restrictions that your land creates. Get the planning done first before moving forward, as there’s no point starting to build only to find you haven’t met a certain regulation.
- Budget Properly. As with any building project, it’s possible that unexpected issues could cause you to go over budget. Work out how much the flat should cost to build. Then, budget 10% or 20% above that figure to ensure you’re covered for any unexpected issues. This helps you to avoid the overcapitalising issue mentioned earlier.
- Find the Right Contractors. It’s natural to assume that any builders could help you to create a granny flat. However, it’s often best to go with those who specialise in this type of construction. Such builders have a deeper understanding of the regulations related to granny flats. Plus, they’re more likely to be able to adapt to your specific demands. Look for contractors who have proven experience and success with granny flat construction.
- Make Clever Design Choice. By design, granny flats have a limited amount of interior space. Clever design choices, such as using round tables or building shelving into walls and dividers, ensure you maximise this space.
The Final Word
A good granny flat could be your route into the property investment sector. But it’s important that you understand the drawbacks, as well as the positives, of building a granny flat. A granny flat places some limits on who you can sell your property to. Plus, it’s not something that you can go into with a “get rich quick” mentality.
Always remember that a granny flat is still a property, even if it’s on the smaller side. Potential tenants want to be able to consider it their home. Poor construction quality and a lack of privacy can prevent this, which means you’ll struggle to earn a return.
However, there are plenty of opportunities to make a return if you get it right. Australia’s housing affordability issues have made granny flats a viable choice for many tenants. You can capitalise on that market without spending enormous amounts of money.
But it all starts with ensuring you can actually build a granny flat. The Archistar instant granny flat assessment offers some quick insight. Take it today and start your granny flat journey.
