Should you build a granny flat?

A while ago I was driving home from somewhere when I noticed a few houses with a lot of renovation work going on. Didn't think much of it and went on with my life. Fast forward a few weeks though and there's 4 granny flats within walking distance from my house about to be completed. For most the idea of having someone living incredibly close to you is not something they're willing to entertain but if you're comfortable with the concept it's a great way to make extra income from the moment you have tenants.

The good

The yield on granny flats is huge compared to a house. Depending on who you speak to and your block of land, a granny flat can be built from as low as $80,000 and then rented out for anywhere up to $350 a week depending on the specifications of your flat. To put it in perspective, the loan repayments on a $100,000 loan are $470 a month, the rent is approximately $1300 a month. You are instantly up $800 a month. It's a great way to invest on a low income.

The ordinary

It is very possible that your property is positively geared and that means you are liable to pay tax on the earnings. It's not all doom and gloom, you only pay tax when you're ahead so you have to be making money to have this concern. You do have good depreciation claims though as your granny flat will be brand new which will lower your tax liability.

The less than ordinary

When a granny flat is first built the bank will value the house independently of the flat but then add the contract price to build the flat to the valuation of the house. Once the granny flat is built however it's not always certain how both properties will be valued and if you're looking to refinance your loan down the track this is definitely something to discuss with whoever is helping you with your finance, it may not be an issue at all but it can be a problem later on. This is because when a valuer puts a value on your house they use previous comparable properties to help them come to a value. At the moment it isn't that often a property with a granny flat is sold so the valuer has to come to a number on their own. The other thing, when it comes time to sell there may not be many people who are either willing to have someone sharing their block with them or want a granny flat to rent out. On the other hand though, if granny flats became all the rage, you're one step ahead.