Granny flats have become more than just the retired home of granny in the backyard. These outbuildings have become potential money spillers for passive income when rented out or as a space to have a home office.
According to the research, the popularity of granny flats as measured by listings on their site increased by 16% in 2016 alone. In addition, they reported an increase of 84% for granny flat accommodation in the last quarter of 2016. The question is what has led to this demand for granny flats?
Factors that have led to the attractiveness of granny flats
The crippling housing shortage and the issue of housing affordability have led many Australian states to relax their regulations pertaining to granny flats. In the past, a granny flat was limited as extra accommodation for family members of the owner of the main property. However, states such as NSW through the Department of Planning and Environment brought in new regulations that eased the process and speeded up the approval of these type of extensions.
More so, states such as NSW, the Northern Territory, Western Australia, and Tasmania have allowed granny flat owners to rent these properties out as an income. It should also be mentioned that some states have still not relaxed these regulations, like South Australia, Victoria and Queensland. If you want more information about the regulations in your area, contact your council office. This being since the rules and regulations relating to constructing a granny flat on your block can differ from state-to-state, or from council-to-council.
Besides the issue of lack of accommodation, some homeowners lacked the funds to enter the investment property market. As such, a granny flat has become a cost effective investment tool to become a property investor. Taking Perth as an example, the rental yield of an average granny flat in 2016 brought in about $257 per week, which calculates to $13,364 per year. This against the sunken cost of re-erecting for example a pre-fabricated granny flats sourced from a kit supplied by a home builder that can start at $69,000 for a 60 square meters, which means that having a granny flat could be a lucrative income.
And based on the data from population.net.au, the population that stands at 24 million currently, will grow by another million by 2018, and in 2100 the population will have doubled. This simply means there will be a possible growing demand for housing.
Besides the sunken investment, there are regulations, some hidden costs, and tax implications you need to way up before considering erecting a granny flat.
You need to adhere to the regulations
Each state has their own set of rules and regulations that related to erecting a granny flat. However, in general the rules are that you can erect a granny flat on a property marked residential zone only. This should be a dwelling owned by the owner of the property and there may only be one such building erected. Plus, the size of a granny flat should be not more than 60 square meters.
The process of applying for a development application approval is easy and fast. As part of the application, you need to include your survey plan, the architect’s drawing, the drawings from the structural engineer, and the BASIX certificate.
Some other hidden costs
Besides the costs of council tax, and constructing the building, you need to check if there will not be any hidden costs. For example, you need to know upfront what the costs will be to move any services like sewers or storm water drains that might be in the way.
You also need to find out if your construction will add value or decrease the value of your property. For instance, there are different construction options available for you – from modular to a custom-built. A modular construction can take faster to erect, but you should also be aware of the impact any addition will be on your existing dwelling, and that it does not detract from its value.
You will be subject to tax
Once you start to generate some income from your granny flat, you will be subject to tax. However, the amount you will need to pay for taxes will all be dependent on your own income tax bracket, as well as the marginal tax rate.
Then again, the granny flat can become a negative geared investment if the property is running at a loss. You will then be allowed to claim your loan interest payments and your maintenance expenses as tax deductions. But be warned, when you rent a section of your property out, you will be subject to Capital Gains Tax. If you need more information about the tax implications, do speak to your broker.
Erecting or converting a building to be used as a granny flat can generate you some extra income. What you need to do, maybe with the help of your broker, is to work out if it would be feasible. Work out all the possible costs involves and what the impact of the extension will have on your property. Your little granny flat might just turn into a profitable income generator.