New rental frontier: garden apartments

Homeowners are cashing in on granny flats and turning them into rentals.
ApartmentThere’s been a boom in granny flats, and “Fonzie” flats over the garage, across the country in recent years. No longer just a potential solution for multi-generational families, granny flats (aka garden apartments) are also providing a source of rental income.
Changes to legislation in New South Wales, Western Australia, the Northern Territory, the ACT and Tasmania, which allows homeowners to generate income from secondary (or ancillary) dwellings, has sparked a rise in the number of people building granny flats and renting them out. In Queensland, Victoria and South Australia, secondary dwellings generally cannot be rented out.
According to the Australian Financial Review, there has been a three-fold increase in the number of granny flats constructed in the last five years. BMT Tax Depreciation also told the newspaper that a granny flat costing $120,000 to build typically generated an annual rental yield of about 15 per cent. Other property investment pundits suggest a rental yield of six to 10 per cent is usual.
For many investors, granny flats are appealing, with the rent earned as a proportion of the cost of the flat usually higher than for an investment unit. On average, the cost to build a 60sqm granny flat is around $100,000. Figures from suggest the average rent for a granny flat in Sydney is almost $300 per week.
Research by Gateway Credit Union found that one-third of homeowners are considering building a granny flat and another 22 per cent are open to the idea. According to the research, the top uses for granny flats include providing extra space for recreation (32 per cent), a home office (25 per cent), housing ageing parents (20 per cent) and so children can stay at home longer (17 per cent). Generating rental income, via tenants or Airbnb, was cited by 23 per cent of respondents.  
In addition to homeowners becoming granny flat landlords, investment property owners are also looking at building granny flats and renting these out in addition to the main residence.
When it comes to insurance, there are a few things owners need to think about:
  • how much the granny flat is worth (there can be a lack of clarity as the property is usually on the same title as the main residence)
  • whether separate building/home and contents insurance is necessary
  • if the existing policy allows for secondary dwellings to be occupied by tenants (either third parties or family members)
  • if the policy covers a secondary dwelling at all
  • public liability
  • what insurance is available for short-term leases (such as Airbnb and the like)
  • contents cover for tenants
  • landlord insurance, the number of policies needed and what types of cover they could be eligible for (e.g. where both dwellings are rentals options may include a RentCoverPlatinum policy to cover the whole premises against defined risks like fire, storm, water damage etc. and tenant-related risks of one tenancy, and an additional RentCoverUltra policy to cover the tenant-related risks of the second tenancy).
Different individual circumstances will affect the level of landlord cover that can be provided, so speak to us about the right cover.
Each state and territory (and often local government) has different requirements regarding secondary dwellings and anyone looking at building and deriving rental income from a granny flat should consult the appropriate authorities. Advice should also be sought with respect to the tax and income implications of renting out granny flats (capital gains tax and income thresholds for government pensions are just two considerations), from lenders for this type of investment finance and from property experts about value and resale issues.