Here’s What to Do When Building a Granny Flat

01st Apr, 2018 | Construction Loan, Investor

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Building in the backyard can make more of your property. For the Yates family, it’s been a roaring success.

When Hannah and Campbell Yates added a second storey to their home in Sydney’s Northern Beaches, they knew they needed to find a way to pay for it. They chose to build a granny flat in their backyard.

That was two years ago. Since then they’ve had a steady stream of tenants, providing the rental income they need to help pay down their home loan.

We invited Hannah and Campbell to talk to us about how they have made their granny flat a financial success.

Is your granny flat custom-built or pre-fabricated?

We had it custom built. Once our builder had finished the renovation of our house, he got to work on the granny flat.

The draftsman who designed our renovation also designed the flat. A major benefit was that he was very familiar with the local council and its complying development (CDC) process.

The flat has a single bedroom, ensuite, living area and study. The open plan kitchen has an oven and all the usual appliances. There is a 1.8 metre deck and 1.2 metre garden full of palm trees and established plants – it’s a lovely space.

We know how important storage is, so we included built-in robes in the bedroom and study, with an outdoor tin shed for bikes and surfboards.

If I had my time again, the only alteration I would make is to include a standalone bathroom not an ensuite. This came up frequently with prospective tenants.

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How much did the granny flat cost to build and how did you pay for it?

It cost approx. $120,000 to build. This includes blocking off the flat from our home with screened fencing and adding a private pathway down the side of our house.

We borrowed to fund both builds, which means we now have two home loans: one for the granny flat and one for our house. The granny flat is an interest-only loan. We pay principal and interest on the house because it’s our priority to pay this down first.

Hannah and Campbell’s Granny Flat Top Tips

  • Make privacy a priority
  • Face the granny flat towards the back fence, not your garden
  • Include a bathroom, not an ensuite
  • Offer plenty of storage
  • Provide an attractive outdoor space, such as a courtyard or deck
  • Use a property manager
  • Don’t be afraid to call it a ‘granny flat’ when advertising for new tenants

What council regulations did you need to meet?

Our CDC required the granny flat to be three metres off the back fence, which we worried would bring it too close to our garden deck.

We considered doing a Development Application (DA) to move the granny flat closer to the fence. But then we came up with the perfect solution – flip it around so its deck was facing the back fence, not looking onto our garden.

How do the neighbours feel about the granny flat?

We knew the neighbours at the back of our property might have an issue with the granny flat facing towards them, so paid to build a new high fence. This wasn’t part of the complying development, but we felt it was the right thing to do.

What rental income does the granny flat bring in?

We recently started charging $590 per week. Included in this price is our estimate of their water, gas and power usage. Unfortunately, it was too expensive to separate these utilities between the granny flat and the house.

When we first put the granny flat on the market two years ago we were asking $600 per week. It was vacant for two weeks, so we dropped the price to $550, which was on par with the rent of one-bedroom units in this area.

Two years after building the granny flat, we’re onto our third lot of tenants and we’ve been able to increase the rent to $590 per week.

How have you advertised for tenants?

Our property agent has always managed the advertising, but it’s word-of-mouth that has secured our previous two tenant couples.

When our flat first went on the market, the property manager made the mistake of marketing it as a ‘free-standing home’, not a granny flat. It attracted couples with children, which is what we didn’t want. The next time around we advertised it as a granny flat and in the first open Saturday we had three applications.

As it happened, friends of our departing tenants had indicated their interest in moving in, so we choose them over the other applicants.

Have you had any issues with tenants?

We’ve been on good terms with all the tenants. This has a lot to do with choosing the right tenant – for us, that’s young couples with dual-income and no kids. With three teenagers living at home, we don’t need any more kids down the back garden!

It also helps that we sort out issues with the least fuss. When our new tenants brought in an old fridge and it tripped the electricity, to compensate for the power outage we offered a large discount on their first week’s rent. These small gestures go a long way towards creating goodwill.

What are the tax implications of your granny flat?

As it’s an investment loan, we can make deductions against our tax return. We deduct things like property management, maintenance, water, electricity and council rates.

It also means we can claim depreciation deductions for the decline in value of depreciating assets such as the oven.

Do you manage it yourself or use a property manager?

We’d heard so many horror stories about bad tenants that we decided to use a property manager. It is easy money for them, but we don’t regret the decision as it enables us to have a good relationship with the tenants. We don’t knock on each other’s doors when there is an issue, so there’s no animosity between tenant and owner.