Case Study: Dave & Sue

Dave and Sue have been living in their three-bedroom home at Mount Colah, New South Wales for the last three decades. It has served them well as a family home through this time, but they have less need these days for their big back yard. They both dream of retiring early, travelling for a while, and then moving to somewhere quieter.

So they decide to build a granny flat.

                Brook River Cabin

According to the Housing Industry Association of Australia, 10,144 Granny Flats were built across Australia in 2018. Combined analysis by CoreLogic and Archistar identified an extra half a million properties in Sydney, Melbourne and Brisbane that meet the criteria for the addition of a separate residence, whether it be a granny flat, extension, or flat built over a garage.

Governments want to encourage this trend. By providing streamlined application processes and simple criteria for entry, state governments and local councils are pushing to ensure there is a suitable number of residences to cope with the densely populated business centres of the country. In NSW, if you have a spare 60qm on a property that is 450sqm or greater, you may be eligible to build a granny flat. You can apply for a specialised “Complying Development Certificate”, which bypasses the more complex development application processes. While each state and territory is slightly different, all jurisdictions are committed to making the process easier to access for all property owners.

With these streamlined processes and simple-to-follow criteria, it is easier for homeowners to invest in building and renting out new structures on existing properties. Whether an investor is looking to capitalise on a large property without resorting to subdivision or an owner-occupier is looking to make a smaller investment than required for a new house, the granny flat has been the answer for many.

kitset log cabin tiny house

                  Lake Log Cabin

Dave applies for a development certificate from the local council and soon receives word that he has permission for a flat to be built on the back of his property. Immediately, they begin to look at the practical requirements for building a granny flat

Building a Granny Flat comes with a range of costs. A cheap pre-made unit can be purchased online for under twenty thousand dollars but will set you back nearly that much again once it is delivered and installed. These modular units may contain a small ensuite, but a kitchen nook will set you back further.

A savvy tradesman with time on their hands might be able to build one themselves, although this will require investment of not just money but time and labour. One would also have to be well-versed in the requirements to ensure the dwelling passes all code requirements.

However, a granny flat built from the ground up by professional building contractors can be made for a reasonable price. A two-bedroom flat with bathroom, kitchen and air-conditioning can be purchased for only two hundred thousand dollars.

Not being great with tools and wanting to attract the best tenants, Dave and Sue take this last option. They know that this initial outlay will allow them to ask for a higher rent, will save in maintenance costs in the future and will let them kick their feet up while a professional does all the building work for them.

When the flat is built, Dave and Sue discuss how they wish to capitalise on their investment. These days, relying on your local real estate agent to find a traditional tenant is not the only option.

In recent years, Short Term Rentals (STRs), through companies like AirBnB and Stayz, have made billions of dollars for people with rooms, houses, apartments and flats that they are willing to rent out to tourists and business travellers around Australia. In 2016, it was estimated that STRs contributed over forty thousand jobs and the money made by these arrangements made a contribution of over eight hundred million dollars to the Australian GDP. Properties that are making the most of these arrangements are found close to Sydney, Melbourne and Brisbane.

There are issues, of course, with running a STR. Beyond the risk of it remaining empty during quiet seasons, or being rented by noisy parties that damage the property, maintaining an STR can sometimes feel closer to running a hotel to renting a flat; doing laundry, cleaning the flat regularly, checking people in and out.

Australia is currently in the middle of a seller’s market when it comes to housing. With owning your own home being an unrealistic option for many young workers, the priority instead becomes finding somewhere new, quiet, but conveniently located. Mount Colah is the perfect place for young professionals to live while they work in Hornsby, Northern Sydney or the Central Coast. Even Sydney’s CBD is only forty-five minutes away.

According to BIS Oxford Economics’ Building in Australia 2019-2034 report, rental prices are expected to boom in mid-2020 after a few years of less enthusiastic growth. Traditional renting offers stable income, while STRs may remain empty in the “off season”, and having your flat managed by an experienced property manager can ensure it is being rented for the best price, by vetted tenants.

Of course, today’s landlord can also opt for private rental agreements, advertising on the same portals as real estate agents and taking advantage of the guides and forms the government provide to ensure legally binding contracts and bond agreements that protect both landlord and tenant.

Dave suggests perhaps putting up their flat on AirBnB, where nearby flats are receiving up to a thousand dollars a week from short-term visitors. However, after admitting that he would not want to be the one doing the washing four times a week, he agrees with Sue to become private landlords. NSW’s Department of Fair Trading offer Dave and Sue easy-to-follow guides to being a private landlord, and this saves them money. They advertise their flat online for an extremely competitive $385/week and it is immediately snapped up by a young professional couple looking for a place doesn’t share a wall with a noisy neighbour.

According to Capital Claims, one of Australia’s most trusted depreciation specialists, an investor can claim up to thirty-five thousand dollars worth of depreciation deductions over the first five years of having their flat. They also have minor maintenance costs associated with any property. Despite these, Dave and sue are able to get a 10% return on their investment immediately. Knowing that rental prices are set to continue rising in this high-growth area, they are very pleased with these numbers.

Ten years pass, in which Dave and Sue have had to re-advertise their flat twice. Each time they raised the rent by ten percent and it was still grabbed up immediately. However, they have both reached their early sixties and want to retire early. So they decide to put their property on the market.

According to Australian Taxation Law, Capital Gains Tax (CGT) and Goods and Services Tax (GST) may be required to be paid on any property that is not the place of residence. This includes Granny Flats that have been rented out. However, this tax only refers to the portion of the land that the Granny Flat resides on, and the value of the flat itself. There are also ways to claim a discount if the flat has been rented for longer than five years.

Dave and Sue intelligently hired a tax attorney to instruct them on the best way to approach the sale of their property and were able to show all their planning and purchasing paperwork from when the flat was first put in. This saves them valuable money.

In the meantime properties that have secondary dwellings, such as granny flats, have an increased value of twenty to thirty percent. Little did Dave and Sue know, but the second they started renting their flat, it had paid for itself through the increase in property value alone. Now, ten years later, it adds nearly half a million dollars extra to the price they sell their property for.

Breaking it down, this was the experience of Dave and Sue during their first year of renting:

House Value:                                                   $1,100,000

Building a high-quality Granny Flat:                  -$200,000

Maintenance and paperwork Costs:                      -$2000

Property Depreciation Deduction:                          $7,500

Rent earned:                                                        $20,020

Additional Property Value (25%):                        $275,000

Immediate return on investment:                          $25,520

Overall net gain:                                                  $100,520


Dave and Sue are very happy to have taken the plunge and purchase a granny flat. In the end, making sure it was high-quality ensured that it added value to the eventual sales price and saved them from having to find tenants more often.

The family they sell their property to is just as excited. The Thompson’s are a family of four. The father, Kevin, uses the granny flat as an office for his business as a freelance software developer. He is able to claim the entire building as a tax deduction and finds it easier to separate life from work by having a space just to himself. As the business grows, and he takes on employees, he moves out. It is perfect timing, too, as their oldest boy has just started university and wants his own place. By being able to move into the granny flat, he is able to study without needing a full-time job.


Thank you!