Developing to hold? Consider ancillary dwellings

Thursday, 2nd Nov 2017

ancillary dwellings

When looking to develop a residential property, the goal of many investors will be to hold some or all of the completed development to maximise rental yield. This is particularly the case with smaller projects, where the original lot is subdivided and developed into two new lots and two brand new dwellings are built.

A great way to maximise rental income in the above situation is to consider the addition of an ancillary dwelling to one of the two newly subdivided lots. The ‘granny flat’ as they are more commonly known, will require the relevant building and planning approvals, but will not require its own certificate of title as it is located on the same lot as another single house.

By opting to include an ancillary dwelling early in the project, the new dwellings can be properly designed and built to optimise the land area available. The result of such a project might mean that an old, highly depreciated home on a large single block is replaced by two lots with three brand new, attractive dwellings, achieving a great outcome for both the investor as well as the local residents of the area.

Provided it is financially feasible to do so, the developer has the option to hold the two new houses and granny flat, renting each of them out and effectively turning one original rental income into three. In this hold option, the investor avoids losing a large portion of the profits through sales agent fees, marketing, income tax and GST. Furthermore, provided the development is well located in an area with strong long-term growth drivers, they are rewarded with the capital growth the dwellings will achieve over time.

Investors in the early stages of exploring this option should keep the following state planning requirements in mind:

  • The original single house associated with the granny flat must be located on a lot that is no less than 450sqm in area
  • The granny flat must not exceed a maximum plot ratio area of 70sqm

Further to this, the Residential Design Codes outline a number of deemed-to-comply requirements for ancillary dwellings, and different councils will have their own set of regulations to be met.

If the strategy is to hold, and if the relevant planning and building approvals can be acquired, adding a granny flat into a new development can be an excellent way to boost rental returns.