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    Granny Flat Strategy

    Add a second dwelling to your property to generate rental income

    What is Granny Flat Strategy?

    Building a granny flat (secondary dwelling) on your property can generate significant rental income that offsets your mortgage, with relatively low construction costs compared to buying a second investment property. In NSW, complying development approval is available for many standard granny flat designs.

    How it works

    1. 1Check your council LEP and SEPP housing code for complying development eligibility
    2. 2Commission design and obtain council approval (CDC or DA)
    3. 3Build granny flat, typically $80,000–$180,000 for a quality build
    4. 4Rent out the granny flat, typically $300–$600/week depending on location
    5. 5Rental income reduces your out-of-pocket mortgage cost
    6. 6On sale: if granny flat was always rented, a portion of the home is subject to CGT

    Worked example

    Home loan: $650,000 at 6.4% over 30 years: $4,066 a month.
Build a granny flat for $120,000, added to the loan: $770,000 costs $4,816 a month, $750 more.
Granny flat rent: $450 a week = $1,950 a month.
Net: $1,950 – $750 = $1,200 a month better off, before tax, insurance and maintenance.
Simple payback on the build: $120,000 ÷ $14,400 a year = about 8.3 years.
Gross rent on the build cost: $23,400 ÷ $120,000 = 19.5% in this example.

    Pros

    • Rent is earned on the build cost alone, not a whole property price
    • May add to the property value; how much depends on the location and the build
    • Relatively simple approval in many NSW areas (complying development)
    • Rental income reduces your mortgage cost significantly

    Cons

    • Loss of garden space and privacy
    • CGT partial exemption lost if granny flat was rented (PPOR no longer 100% exempt)
    • Cannot be sold separately, adds value but not separately realised
    • Neighbours and council may have objections in some areas

    Risks

    • Build costs can exceed estimates, engage a fixed-price builder
    • CGT exposure on the rented portion of the land on eventual sale
    • Tenant management: granny flat tenants live on the same property, choose carefully

    Tax treatment

    Rental income from granny flat is assessable. Expenses (interest on construction loan, depreciation, rates apportioned to granny flat) are deductible. PPOR CGT partial exemption: ATO calculates the capital gain on the proportion of land used for income-producing purposes. If granny flat is 15% of land area and rented for 5 of 10 years of ownership, roughly 15% × 50% of the total gain may be assessable.

    Official references

    Keep exploring

    Read property guides on the blog All strategies

    General Advice Warning

    The information on this site is general in nature and does not consider your personal circumstances, financial situation, or needs. Before acting on any information, you should consider its appropriateness having regard to your own situation and seek professional advice from a licensed financial adviser, mortgage broker, accountant, or solicitor.