Gold in Granny’s house?

Wednesday, 7th Aug 2013

granny flat

The humble granny flat is going through a renaissance thanks in part to exciting new regulations. No longer seen as boring and strictly for seniors, granny flats are now a stylish and highly functional housing option suitable for a wide range of people.

Granny flats are also a hot topic for property investors in WA, who seek to take advantage of the new laws regarding renting.

From the beginning of August, new laws in WA mean that a granny flat, or ancillary accommodation, can be rented to anyone, not just the owner’s relatives as was the case previously. Granny flats can now also be up to 70sqm in size, up from the previous 60sqm limit.

Suddenly, renting a granny flat could be a viable option for anyone looking for affordable housing, including renovators seeking temporary accommodation, students, or those looking to save towards home ownership.

Given the limited supply of lower priced housing in WA, ageing population and high costs associated with aged care facilities, it’s hard to imagine granny flats won’t experience a rise in popularity.

But what’s the opportunity for property investors? Simply, a granny flat can boost an investor’s rental income by providing a secondary source of income. In some cases, the addition of a granny flat can increase the yield of a property to over 8 percent.

The opportunity to obtain 2 rental incomes from 1 property without going through the cost of a subdivision is certainly appealing, especially for those who own property that is only zoned for single residential. Momentum Wealth’s Planning and Development team have developed turn key solutions for our property investor clients.

Some property investors are already jumping on the opportunity, with the goal of having both positive cash flow and strong capital growth from the one property. But what will a granny flat do to the value of a property? It’s also difficult to determine the true value of properties with granny flats as there is currently not a lot of sales evidence. Granny flats should be looked at as a rental income strategy not a value add strategy.

Investment buyers will certainly value the extra rental income that a granny flat provides and may be willing to pay more for it. However, owner occupiers, who make up the majority of buyers, may not see the value in a granny flat, preferring instead to have the additional outdoor space. Remember that a granny flat cannot be sold separately, only as part of the main property. So, a property with a granny flat may have a limited pool of buyers.

Will the new regulations result in an oversupply of properties with granny flats? I think this is unlikely, but careful analysis still needs to be done before making the decision to build a granny flat or buy a property already containing one.

If you want immediate capital gain, a granny flat might not be the best option. Often, a standard renovation or subdivision will yield better results. That said, granny flats could offer a great opportunity for those who are planning to hold a property for the long term and derive a strong rental income in the meantime.