Is a granny flat better than an investment property?

Rental returns are one of Australia’s favourite ways to bolster retirement funds and create passive income. But how do granny flats stack up against house-and-land investments?

As home builders of all kinds, we’re well-versed in designing and constructing full-sized brand-new houses all the way through to one-bedroom studio granny flats. We’ve seen it all, and we’ve seen the results.

And, while both are brilliant investments, one has some distinct financial advantages.

Let’s look at how granny flats stack up in cost, yields and capital growth compared to traditional investment properties.

Note: for the purpose of comparison, we’re using 3-bedroom homes and 3-bedroom granny flats in our calculations.

Table of Contents

1. Comparing purchase costs.

Firstly, it’s important to know that granny flats come in all shapes and sizes, from one-bedroom studios through to 3-bedroom modern homes. They have a small footprint with a maximum size of 80m2 (unless you have approval for something bigger).

Let’s look at the median prices for both:

As of July 2023, the median house price on the Gold Coast is $655,000, and $672,000 for units according to CoreLogic data.

A granny flat, designed and built from scratch, will cost in the vicinity of $90,000 to $170,000 depending on the size.

When you buy an investment property, you’re paying for the house and the land. You’ll also pay pest and building inspection costs, stamp duty, legal fees and mortgage registration fees.

When you build a granny flat, you may need to pay for permits and building inspection fees, but that’s about all. Everything else has been covered by your existing home.

2. Comparing interest charges on your loan.

A home loan for an investment property will be charged interest and potentially Lenders Mortgage Insurance if you have to borrow more than 80% of the property’s value.

With a granny flat, you may be able to use the equity in your own home to fund the build if you can’t pay for it outright. You may have to pay a refinance fee and the construction cost will be added to your loan, but the difference between adding $150,000 to an existing mortgage and taking out an $800,000 mortgage is substantial.

For example, using today’s average interest rate of 6.5% and a 30-year loan term for a 3-bedroom dwelling, the difference in repayments would look like this:

3-bedroom house and land: $800,000 x 6.5% p.a. = $1,350 per month

3-bedroom granny flat : $150,000 x 6.5% p.a. = $614 per month

3. Comparing rental yields.

The weekly rent for a 3-bedroom house is $864 according to SQM Research, and $704 for a 2-bedroom unit.

We’ve been building granny flats for years and we’ve seen rental returns in the vicinity of $450 – $550.

If we compare the two, assuming a 3-bedroom dwelling in each scenario, this is how the rental yields compare:

 

Property cost

Weekly rent

Total yield

House and land

$800,000

$864

6.88%

Granny flat

$170,000

$450

13.8%

4. Comparing depreciation and ongoing costs.

You can claim depreciation on an investment property and a granny flat that’s used for rental purposes. In Australia, depreciation for granny flats is set at a minimum of 2.5%. Research by BMT Quantity Surveyors says that the average 5-year deductions on a granny flat is $23,713.

The depreciation rate is the same for a rental property built from scratch, but you may miss out on more deductions with an existing property, depending on what year it was built.

It’s also important to note that if you build the granny flat on the property you also live on, you won’t pay capital gains tax on the flat when it comes time to sell.

5. Comparing resale value and capital growth.

The last comprehensive report on granny flats was compiled by Corelogic in 2019 and revealed that homes with granny flats sold for around 30% more. Since the pandemic market boom and our current housing shortage, it’s likely that number is still accurate or even a touch low.

On a listing, a home with a granny flat promises its future owner an immediate passive income. It could be a home for their children, aging parents or extra space for a studio or office. Its potential and opportunity make your property more desirable and create competition between buyers.

Other considerations.

Of course, there are plenty of ticks for investment properties too. You can choose to sell the property down the track to fund your retirement or other investment purchases, which you can’t do with a granny flat.

The weekly rent for a house-and-land property will likely always be higher than a granny flat, so once the home is paid off, you’ll be making more per annum.

But, if you want to maximise what you have for a small outlay and large yields, granny flats tick all the boxes.

The question is: can you fit one on your property?

 

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