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Granny flats no longer the sole preserve of elderly

Granny Flat in front of two storey home
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Short-stay websites like AirBnb and Stayz added another option in recent years for investors to produce income from a granny flat. Photo: Shutterstock

Granny flats no longer the sole preserve of elderly

API Magazine explores the factors driving investors towards the granny flat market and provides an expert checklist to ensure your building project is a success.

Driven by changes in home affordability, welfare, economics and societal attitudes, the once humble granny flat has evolved from a cleaned out garage afterthought into a tastefully designed, income-generating, multipurpose dwelling.

Traditionally designed for ageing parents, granny flats have evolved to cater for a wide range of market segments.

Property investors are finding that granny flats can not only provide a boost to the value of their assets, they can also produce a solid income stream and improve their yields, particularly if they tap into the popularity of short-term accommodation sites such as AirBnB.

Analysis released in 2019 by CoreLogic showed that an extra two bedrooms and an additional bathroom could add around 30 per cent to the value of a dwelling, meaning for a house worth $500,000, a two-bed granny flat could add around $150,000 to the property’s value.

Demand from NDIS-funded family members means granny flats now encompass every age group and demographic, while for young adults locked out of the housing market, a granny flat can provide an opportunity to stay at home without being under the same roof as their parents.

Up to 26 per cent of Australian households, or 1.5 million families, had an adult child (or “kidult”) living at home in May this year, with many blaming COVID-19 for increasing job and financial insecurity.

Home ownership among young people has also plummeted, with just 16 per cent of 25-year-olds owning or buying a home in 2019, compared from 26 per cent in 2009, with fewer holding down full-time work than they did a decade ago.

Released this week, Finder’s First Home Buyer Report 2021 revealed that more than a third of first home buyers from New South Wales were willing to pay more than $1 million for a home. The survey found the median budget for first home buyers is between $500,000 and $750,000. 

Also fuelling demand for granny flats are the 22 per cent of older Australians accessing some form of support or care at home and many families fearing their elderly relatives could be locked-down during further COVID-19 outbreaks.

Adelaide’s Rivergum Homes Managing Director, Victor Said, acknowledges there was a need to design a more adaptive home to allow larger families to live independently.

“Our living arrangements are constantly changing and the past year has shown us, more than ever, that our homes need to be increasingly adaptable,” Mr Said stated. 

“Whether it’s bringing our older parents’ home, respectfully meeting the care needs of disabled relatives being supported by the NDIS or even wanting to establish a separate office or self-contained gig economy studio, flexibility is essential.” 

“We no longer live in the days of the sandstone bungalow on a quarter acre block, and our modern families are changing at the same time as our working environment shifts from the communal workplace to the home office.” 

The prospect of capital gains, rental income or living cost savings is also poised to be complemented by tax reform.

The government has commenced consultation on draft legislation that will reduce the tax burden on granny flats in a move to prevent elder financial abuse.

The legislation follows the budget announcement that the government would provide a targeted capital gains tax (CGT) exemption for formal granny flat arrangements. Under the measure CGT will not apply to the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with disabilities.

Summit Granny Flats senior building consultant Drew Murray told API Magazine that any legislation that removes grey areas and promotes stability in the market is a positive change.

“Current market positivity is leading to an uptick in the level of inquiry and transition from consideration of the project to proceeding to build and we would expect this legislation to further increase interest in the granny flat option,” Mr Murray said.

“It has been five years since significant rule changes opened up the granny flat market and in that time the market has become more informed about the product and how they can take advantage of building a granny flat.”

Getting it right

A tight rental market and concerns about the standard of elderly nursing home care were among some of the drivers of the granny flat market, according to Granny Flats WA managing director Mike Nicholls.

“Rising house prices mean people are now willing to invest in assets that are growing in value, while a lack of rentals in the Perth market is seeing outer suburbs attaining around $250 a week for one-bedroom investor granny flats,” Mr Nicholls said. 

“High property values along with the very tight rental market has parents building granny flats for their children so they can have independence without the need to rent.

“We’re also seeing the divorcee market develop, with separated couples not being able to afford two new homes and either building granny flats in parent’s backyard or even their own backyard to live separately but in their preferred local area and close to children.”

While the savings, convenience and potential income delivered by granny flats can be attractive, there are a litany of dos and don’ts to adhere to in order to make the building project and investment a success.

Mr Nicholls said it was important to avoid overspending on investor granny flats. 

“Price is relative and for rental it is important not to overspend and to factor in realistic maximum rental returns.

“Avoid oversizing a granny flat in a backyard that is not suitable for a structure of that size, as it needs to form part of the garden and landscaping and be relative to the whole property.

“And use a builder who specialises in the field, as granny flats are more like an addition to the property rather than a new house construction and present their own building nuances and challenges.”

Top ten tips

Mr Nicholls shared with API Magazine his top ten tips a potential granny flat buyer needs to pay heed to in order to ensure project success.

  1. Reputation: Select a reputable builder, with confirmation they are able to meet the building deadlines in a booming market with both materials supply and trade availability and adequate residential builder’s warranty insurance capacity. View the showroom, meet the owners and be comfortable with whom you are dealing.
  2. Size matters: You’ll likely need a block exceeding 350sqm and adequate area to place a granny flat clear of underground services such as sewer and drainage easements. Discuss in detail with the builder and have them assist with proper due diligence checks on the property prior to undertaking design.
  3. Bureaucracy: The buyer will require a council application for a building licence, sometimes planning approval and sometimes bushfire attack level, or BAL, assessments to be completed before commencement. A good builder will provide this service as a matter of course.
  4. Features: Be aware of all the personal needs of the individual and what’s important to them, including mobility, living areas or bedroom size, number of bedrooms, verandas for personal outdoor space, deluxe kitchens, higher ceilings, air conditioning, walk-in pantries, walk-in wardrobes, and general storage.
  5. Access: Building on site on a concrete slab is preferred, allowing for a more customised build and better build quality. Drop-in granny flats have a donger-style look and will lead to the need for steps and less insulation to the floor. Councils are adjusting the laws to minimise drop-in donger style granny flats and container homes to maintain higher build quality to residences and reduce visual impact on neighbours. On top of that, the cost of trucks and cranes can be better spent on the better build.
  6. Sitework costs: If planning on purchasing a home suitable to add a granny flat, the more level clear site will minimise site costs. Corner sites are ideal for siteworks access and also after the build possibly an independent driveway access.
  7. Design: In designing a granny flat in an existing back yard the considerations for two households living independently are important. Consider avoiding windows looking directly onto one another’s entertainment areas, having independent entertainment areas with patio added to the granny flat. Avoid access pathways crossing well used living areas.
  8. Utilities bills: Factor in separation of bills for water, gas and electricity. Separate metering can be added to facilitate this.
  9. Budget: A budget one-bed investor specification granny flat can be built from as little as $79,000 move in ready, or can cost more than $275,000 for a designer, very large granny flat that has carports, garages, verandas etc.
  10. Try before you buy: Visit a showroom and get a feel for what you really need. Don’t just rely on call-out visits and offers of free quotes.

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