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March 18, 2015

Could granny flats be the answer?

Analysis of data collected by tax depreciation specialists BMT indicates that construction of granny flats in Western Sydney has increased by 24.1 per cent over the past two financial years, compared to just 2.8 per cent across greater New South Wales and 9.3 per cent across Australia over the same period.

BMT believes this increase has been driven by a range of factors, including falling rental yields across the state and the NSW Government’s decision to loosen restrictions on who these properties can be rented to.

“Much of the Australian property market has recently experienced a period of strong capital growth, however this has been offset for many investors by a fall in the indicative yield of their portfolio,” BMT managing director Brad Beer says.

Bradley Beer

Bradley Beer

“This has led many investors to consider creative means to boost their portfolio’s yield, such as the addition of a granny flat, which can be constructed for around $120,000 and rented at a rate achieving around a 15 per cent yield annually.

“This is far higher than the rental yield typically achievable on a house or unit in Australia, making granny flats an interesting investment proposition,” Beer says.

The Affordable Rental Housing – State Environmental Planning Policy came into force in NSW in 2009.

In this policy, granny flats are defined as fully self-contained dwellings built on the same plot of land as a principal dwelling, and are required to comply with a range of zoning, council and design restrictions.

“These versatile additions can range in size from studios to two-bedroom apartments and require a significantly shortened Development Approval period of only 10 days for complying structures,” Beer says.

BMT also encourages investors not to overlook additional cash flow that might be obtained by claiming tax depreciation on the granny flat as well as the primary dwelling.

“There are significant depreciation deductions available on these types of properties, which investors might not be aware of,” Beer says.

“The average first-year depreciation deduction on a granny flat is $5288, while over five years these deductions can add up to around $24,000.

“For many investors, this could be the difference between their properties being positively or negatively geared.”

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