What to Know BEFORE Investing in a Granny Flat in Australia

I don’t really like granny flats. Not for investors, anyway.

Investors buying an old house on a decent block and plonking a granny flat in the backyard to increase the rental yield? At face value, what a GREAT idea.

Rent gives you an income and cash flow, but it doesn’t build wealth. Plus you have to pay tax on it.

Capital growth is what builds wealth. And the secret to capital growth? Buying an asset that many people will want when you go to sell. Market forces, inflation and competition drive your property's future value. The value of residential property is NOT tied to the rental yield.

If the house is sitting on a huge block and the granny flat doesn’t compromise the outdoor space, the outlook or the privacy of the main house, then perhaps adding self-contained accommodation is a great idea.

But, if the granny flat takes up most of the backyard, leaving the kids jumping on a trampoline in the front garden, well, future buyers won’t be jumping at that house.

Your future buyer pool won’t include young families - you’ve reduced it to those who have an elderly parent living with them or other investors - even investors like you won’t buy it because there’s no longer a “value add” - perceived or otherwise.

In many cases, adding a granny flat to a property is like sewing a 5th leg on a horse and expecting it to run faster.

Sure, you’ve added something - added value, some people may call it - but you’ve devalued the overall asset in the process.

Beware the buyer's agents who sell you on the granny flat strategy, then packages the deal with a builder who might be their brother-in-law or with whom they have a financial relationship.

A 5-legged dog does not run faster than a 4-legged one. Hell, even a 3-legged dog would run faster than a 5-legged dog. Please don’t fall for the granny flat trap.

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[khaja]

how can it will decrease property value as it is generating income for a investor. there are many houses with small backyards. consider same leave some space for backyard and use rest for gran flat.

[OilBaron]

I think that you make some valid points about ruining the asset; I love having a four-bedroom house on a 900m2 block as the back yard is my private space for the kids to play and for BBQ's and relaxation. A granny flat would diminish the pool of potential buyers for a house on a large-size block.

Another thing to consider is that if I had $120K in cash available in the bank (or whatever it costs to build a granny flat), I might be better placed to use it as a deposit to simply buy another house and get a rental income from it. I think that granny flats are promoted by some of the buyers agents out there whom profit from their construction.

[bradpage]

I have done this. On a 700m2 block where it adheres to the privacy and space factors you suggested. It appeals to investors from a cash-flow perspective. In about 10 years the GF income could cover the 130k build loan (back in 2019). And in that time it helps hold the property at almost neutral income pre-tax... In my instance we have had a GF home for 4 years now, (purchased through POP) and its been super-easy to hold the asset, and it's grown in value. I know it won't always work, but if you know what you are looking for it can work.. make sure yo do your own homework! don't trust everything the agent says... educate yourself and direct your own way with their help! :).

[chadgray]

If a granny flat would take up your whole backyard, you’ve invested in the wrong property to begin with. Land is where it all at.

[chrisbridgland]

I bought 2 x 6mtr fully self contained portable accommodation pods that I set up in my yard. Current income is over $1000.00pw for the 2 pods. I’m retired so the passive income is very important. They cost around $30k each all up including plumbing, power etc and I can just sell them if I decide to sell the property one day! Much better way to go than a granny flat in my opinion 👍

[williamcrossan]

I think those "pumped on property" guys would disagree with you!

[christofthedead]

It's great how we can profit from the way market pressure forces people without homes to pay so much for housing than the value they provides. Nothing better than a little supply & demand based exploitation. Beats working anyway.