Fortunately, several state governments have relaxed the rules around building a backyard granny flat and renting it out. However, the situation varies between states – and even councils, so it’s important to contact your local council to know the regulations that apply in your suburb.

How much will it cost to build a granny flat?

Pre-fab kits can cost as little as $26,000[1]. But that doesn’t include a cement slab, construction costs, floor coverings, appliances and connection of utilities or council fees. 

Analysis by CoreLogic and Archistar found a self-contained one-bedroom granny flat is more likely to cost upwards of $120,000[2]. Add an extra $80,000 for a 2-bedder.

Will a granny flat add value to my home?

According to CoreLogic/Archistar, a granny flat can boost the value of your home by 30%. But remember, you may spend upwards of $120,000 to drive that rise in value. And if you plan to sell in the future, not every buyer will have a granny flat on their wish-list. To know how a granny flat could impact your home’s value, speak to your local Raine & Horne property expert.

What sort of rent can I expect from a granny flat?

Rental income will be shaped by whether your granny flat is a 1- or 2-bedder, the suburb, quality of construction and whether the flat is furnished. Your local Raine & Horne team can explain market rents in your area.

As a guide, in some areas of Sydney, one-bedroom granny flats are commanding weekly rents of $480[3]. Allowing for construction costs of, say, $120,000, that works out to a rental yield of 20.8%, which is very impressive.

What about tax issues?

This is something to discuss with your tax professional. In general, though, you’ll need to declare any rental income received in your annual tax return, and on the flipside you may be able to claim a variety of expenses, including building depreciation.

The bigger issue can be capital gains tax (CGT). Your home is normally a tax-free asset. But when you rent out a granny flat, you are using your home to generate income. This may mean you’re not entitled to the full CGT exemption, and you could be up for CGT on part of any profit made if you sell your home in the future[4].

[1] https://i-build.com.au/kit-homes-oakdale/

[2] https://www.corelogic.com.au/news/granny-flats-have-potential-shake-housing-market

[3] https://flatmates.com.au/granny-flats/sydney?page=2

[4] https://www.ato.gov.au/General/property/your-home/renting-out-part-or-all-of-your-home/