Should I Build a Granny Flat for Rental Income

I am considering to build a granny flat and wondering if this is a profitable idea and how easy it is to find good tenant.

I live in south side of Sydney, near Kogarah. I may be able to get $400-$450 pw for $120k cost. This is for 60m2 size.

My main considerations are:

  1. How easy it is to find good tenant, since we will be sharing our space. I also have a teenage daughter.
  2. Access to granny flat will be from the side of the house which is quite narrow (0.9m) and long (30m+). Would tenant mind this much?
  3. Preferably there will be a fence to separate our backyard and the granny flat entrance, for our privacy. This means the area for the granny flat, including external is around 100m2.
  4. Our backyard will become much smaller, with the distance between our outdoor area to the fence will likely to be only 3m. It is likely to block a lot of sunlight. Note that we don't particularly like gardening anyway.

As I understand it, renting out granny flat isn't as easy as renting out an apartment. It is often need to be self managed. The tenant know their landlord, and where they live, etc. How could we give them notice to vacate, for example?

I'm keen to hear this community thoughts.

Poll Options

  • 31
    Good idea, profitable and likely easy to find tenant.
  • 6
    Don't do it, will be very difficult to find tenants.
  • 30
    Don't do it, the cost to your privacy is too much.

Comments

  • Do it if you can get a 19% 1Y return and don't if it's less than that.

    • +3

      How do you arrive to that figure?

  • +18

    $450 per week for a granny flat?

    • +2

      $450 per week for a granny?!?

    • -2

      A couple in our sydney office are paying $800 for a house in Shitbelltown area…
      Depending on the granny flat 450 sounds cheap that close to the CBD compared.

    • +1

      tell him he's dreamin

    • Well then why is everyone complaining about Sydney prices?

      I get $250pw for a little bedsitter on Gold Coast. Surely $450pw is minimum anyone pays in Sydney, or are they whinging about nothing?

  • No.

    Also, any update on your Russian experience?

    • …ohh. sounds intriguing…

    • +1

      He gave us an update here in the other Russian experience thread

  • +13

    Ah granny flats… I did this back in the day and the best tenants I got were an old couple who kept to themselves until one of them passed away. The worst tenants were "students" who made a mess with empty glass bottles everywhere, bringing questionable guests over, late rental payments etc.

    So you better be ready to take on some weird shit as thats the type of tenants that favor living in granny flats. By the time you break even from rental income your granny flat will be falling apart. Not to mention a whole lot of other risks you'll take on, such as privacy/safety for the chance of a modest gain at best.

    In my experience, granny flats are best for stuffing your parents/weird relative/annoying kid in, keep your friends close, enemies closer!

    • +1

      Are you in hurstville nsw?

      Thanks for the advice. Enough to convince me not to build it, I think.

      • Why? You can learn from his mistakes. Don't take in students. You're right there to screen who you accept. Don't take anyone you feel you might have trouble getting rid of.

        • So in other words, possibly have to place empty for quite some time until he finds someone suitable. Every week not rented is lost income.

          As its been mentioned, it might [maybe not] be harder to find someone quick as per say a flat or unit.

          $450 week might be a bit of a stretch for a 60m sq. place though.

          • @TilacVIP: Housing affordability can't be as bad as so many in Sydney make out, if OP can't find a suitable tenant.
            (When Gladstone had a housing shortage there wasn't a spare bedroom in town, and apartments that were rented for $200pw where going for $200pn.)
            But that's not lost income, Op is earning $0 extra income atm. It might question the value of the capital investment.

            I'm hearing that many think $450pw is too much. So it sounds like Sydney prices aren't really that different from any other major city - just more whingers there I guess.

      • I could negotiate 2bed unit in Kogarah for $300 advertised for $360. But I'd consider granny flat if i had a dog or have access to the backyard for space. I guess you can filter out certain tenants but if you do, the granny flat may be empty for weeks till you find a suitable tenant. But its a renters market now. No landlord will dare increase rent.

  • +15

    A quick look on realestate.com.au and I can find plenty of 2 bedroom apartments in Kogarah for less than $400 a week, with a car park and around 60m2. I think you're dreaming if you think you can get someone to live in your backyard for more than that.

    If the money is the difference between being able to pay a mortgage or not then I'd do it, otherwise no way. Absolutely everything about it is a detriment to your quality of life. Just downgrade your house to a place with a smaller yard and pocket the difference instead.

    • -9

      The difference between apartment and granny flat is the garden and a furnished place. That example you found is probably very old.

      I'm too old to dream.

      You have a good point, but the way you say it is very condescending.

      • +6

        Didn't mean to sound condescending, more your concerns for privacy will also apply to the tenant. Their landlord will be living a few metres away from them, they need to walk into your backyard to get home, you have to cross paths a lot. Fair point on garden + furnishings, it is nice to not be in a tall apartment building but there's also downsides to consider too. I've had incredibly nosey landlords before, they're horrible.

        https://www.realestate.com.au/rent/with-2-bedrooms-between-0... - Those are current listings in the area for 2 bedroom less than $400. There's a lot.

        I'm too old to dream as well, which means I'm too old to put up with the crap of someone encroaching on my lifestyle. I would have to really need the money to want to deal with that. You'd constantly see them, hear them, it's a big change.

  • +2

    I think that rent is too much, 350 would be max. The entrance sounds a problem. can you not do a seperate entrance? How much does it cost to get plans made to council? Can you get granny flat quotes?

    • The total costs would be around $120k. Since the house is already build, entrance would only be from the side of the house, which has 0.9m gap.

      It's separate, because they don't walk from the inside of my house.

      • +1

        entrance would only be from the side of the house, which has 0.9m gap.

        well you can cross most of ozbargain users off your list!

  • -1

    Should I Build a Granny Flat for Rental Income

    Are you a Granny ?

    • jv… youve done it again!

    • I take it your question is a joke. But fair point I forgot to mention. I could use it to move there in the future and either rent out my house or have my kids live there.

      • +1

        Have you considered capital gains tax on your property if you later decide to sell ?

        • -1

          I haven't, I presumed it will be higher gain with granny flat, since there is more living space.

          If I don't rent it, then there is no cgt. Or if I get paid cash on hand, also no cgt.

          • @OldDataGuy: You need to seriously take a look at the CGT implications. The risk of getting cash on hand is that tenant knows you doing dodgy thing. If the tenant suddenly decide to stop paying rent, you will be in a hard position.

            Doing legitimate way (ie pay tax) allows you to deduct some construction cost and running expenses

          • @OldDataGuy: Definitely talk to an accountant. You must pay tax on the rent so you can depreciate the new build. You'll need to get a valuation of your house without the granny flat, and find out whether a % of your entire property will now be subject to CGT, or whether you are able to separate the new building.

            I'll ignore the mention of untaxed income, I'm sure that's not what you meant to say.

        • Tbh I probably won't sell ever. Unless I'm forced out due to development. I plan to die here.

          • @OldDataGuy: Then your kids will have to pay the CGT…

            • @jv: Not sure why you were downvoted, I thought that was the case too?

          • @OldDataGuy: You'll probably die in hospital or an aged care home. Soz for the buzzkill.

            but i know what you mean :)

    • +1

      Now I’m getting an image of a Granny and a steamroller.

  • +2

    so the entrance is 2 feet wide? Does not sound practical. Is there a driveway entrance or something?

    • +1

      Oh Pam, a foot is about 30cm, not 45cm.

      • -1

        screensaver has BIG feet….

  • ive seen granny flats go for $300-$350 in the inner west of sydney, so i think your price of $450 for kogarah is a bit optimistic

  • As others have said, even at $400pw, this is optimistic in light of other rentals are going for in the area.

    From an investment POI,

    Let us say you were able to rent the granny flat out for $350pw. This $350 pw is still 15% gross on your $120k outlay, this is pretty good.

    If you bought a flat for 4 times your price, you might get $80pw more, and then the gross return is like 4.6%.

    • I think the ROI is out of the question. Even if I get $200 pw, it's still better than buying an apartment. Plus often the house value is more attractive to buyers, while apartments haven't gone up much in value for decades.

      It's more a sacrifice of privacy and living space.

      • while apartments haven't gone up much in value for decades.

        Apartments are odd. You buy new you are guaranteed to lose gross because depreciation benefits. Then the price bottoms out and it goes up with inflation. Meanwhile the rent should be 7% gross (you still need to see if net will pay off your mortgage payments, some places have outrageous management fees). Anything less is garbage and you'll get ripped off.

        I think the ROI is out of the question. Even if I get $200 pw, it's still better than buying an apartment

        You need to account for the price of the land it is going to sit on as part of your ROI. I quick google and your suburb median is $1.4m? You need to include the land value too.

  • You need to find out the laws around this. I am sure it is a grey area first to do with council. Then to do with what you reference the property as for tenancy purposes.

    Looks like a good return but we don't know all the facts. $120k looks awfully cheap. To get plans done, planning and building permit would cost $15k. Left is $100k to build. $2k per sqm it is 50sqm which is a large one bed not a two bed.

    Due to limited access I'd suggest your build costs might go up a little (which means your 50sqm would end up being less).

  • +1

    Op, take a look at this setup for reference:

    https://www.realestate.com.au/sold/property-duplex+semi-deta...

    It's a newly built duplex with a granny flat out the back. Same for next door as well.

    Owner/builder went all out to maximise whatever they could get away with.

    Small backyard for the occupants of the duplex, Zero yard for the renters out the back! Narrow entrance to and from the GF. Car space? What car space. Park on the road with the other's who have to battle it out with the other dual occupancy residents…

    I mean, the only good thing about it is that it far batter than a converted garage or shed that some peeps are flogging as habitable.

  • I'd love to know how you are going to get a granny flat built out the back for $120k, with not even a metre width of side access. Are you guessing at the price, or you've actually had quotes?

    • Lift a prefab over the house with a crane?

    • Hard quotes. Requirement is 0.9m side setback. Granny flat has no requirement for side or private entrance to be built.

      • I think they meant how are the builders going to get access for building the granny flat - materials, diggers, cement mixers etc…

  • Do it mate. You'll get $450. I've done it myself nearby

  • Do you have a garage at the end of a driveway or something

  • $450 per week rent for a brand new granny flat in Kogarah is not unrealistic. Some people prefer granny flats over apartments due to a small garden and more open space. For the $120k build, does that include the council fees as well? I got a granny built on an investment property and it roughly cost me the same amount. But with the recent increase in timber and steel prices, better re-check.

    Since the granny flat will be in your backyard, you will have to be extra careful of who to rent it out to. Cash in hand works for some, does not work for most. I won't recommend cash in hand. And yes, you also have to factor in taxes. Your PPOR is not taxable. But if you build a granny flat and rent it out, some portion of your house becomes taxable. Talk to an accountant.

  • I don't know why everyone who can wouldn't be doing this, from all the whinging I hear about house prices in Sydney. It seems obvious to me you shouldn't be maximising what you get get out of your investment.

    When Gladstone had an accommodation shortage, many backyards were subdivided and a driveway run up the side of the house to the new neighbour behind (They call them battle-axe blocks.) and heaps of homes got converted into single room, shared kitchen and bathroom accommodation.

    Just makes sense to me. If the land is valuable, you should be maximising how many can share it.

  • BEST ADVICE
    1. Look on the real estate sites for similar properties for rent. Check rents asked and number of properties for rent
    2. call some local real estate agents for an opinion

    I wouldn't worry about privacy and sharing as this is all totally acceptable and normal in apartments.
    At least you are in charge