Are Granny Flats a Smart Investment? Real Estate Investors Analyze the Numbers

Discover if granny flats are a profitable investment as real estate investors calculate potential rental income and construction costs in New Zealand.

Real estate investors are crunching the numbers to determine if granny flats are a worthwhile investment. The New Zealand Government has proposed making it easier to construct small, self-contained dwellings on properties with existing homes. These "granny flats" could be up to 60 square meters in size and built without the need for building or resource consent. While the cost of building a minor dwelling of this size typically ranges from $200,000 to $300,000, it could potentially generate rental income of $400 to $600 per week, depending on the location.

Despite the potential for a gross yield of 8% to 12%, experts suggest that adding a granny flat may not significantly increase the overall property value. Instead, investors often opt for this option to create cash flow. For example, older individuals may choose to build a minor dwelling on their property and rent it out to supplement their retirement funds. However, properties with granny flats may take longer to sell compared to traditional homes, with home and income properties typically staying on the market for 10% to 20% longer.

The cost of building a new property is estimated to start at $3000 per square meter, with portable cabins over 30sqm also being impacted by the proposed changes. While smaller cabins may not require a building consent, larger cabins can be purchased as kitsets starting at around $30,000. These cabins, which may lack plumbing, could be rented out or bought second-hand for as little as $8000. Renting out a cabin could potentially cover the initial cost within a few years, providing additional rental income for the owner.

It is important to note that rental properties must comply with Healthy Homes rules, and the proposed changes could result in cost savings for property owners. However, engaging a Licensed Building Practitioner or equivalent to oversee the construction process may incur additional expenses. A report by CoreLogic revealed that a significant percentage of properties in Sydney, Melbourne, and Brisbane are suitable for granny flats, presenting an opportunity for policymakers to address housing supply issues.

For homeowners, adding a second self-contained dwelling not only offers rental housing options but also increases the value of their property and potentially generates additional rental income. Granny flats could serve as a cost-effective solution to meet housing demands within existing town planning guidelines.

While granny flats may provide a steady stream of income for real estate investors, they may not necessarily boost the overall property value significantly. However, they offer a practical solution for homeowners looking to provide additional accommodation or rental housing options. The proposed changes by the New Zealand Government could streamline the process of building granny flats, making them a more attractive investment opportunity for property owners.