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I'm hearing more and more about investors using granny flats to maximise
their rental yields. This is an increasing trend occurring in New South
Wales as a result of changes to the planning laws back in July 2009.

The State Government made the changes to encourage greater supply of
affordable housing in a climate of chronic undersupply. It was a clever move
and a fantastic win-win idea. With every granny flat built, a new home is
made available to tenants, generally at a lower price than an apartment - a
big win for tenants. And because they cost very little to build, the yields
on granny flats can be well over 10 per cent - so a big win for investors.

The new laws made it easier to get approval for granny flats and they also
allowed them to be rented out. Previously, granny flats were only allowed
for a dependent relative such as a teenager, or obviously, a grandparent.

While you can build a granny flat out the back of your home and rent it out
positively geared, you can also add a granny flat to an existing investment
property to increase the yield. In some cases, adding a granny flat can turn
a negatively geared investment into a neutral or positive one overnight (as
long as you can find a tenant and there can be issues with this, which I'll
get into later).

Granny flats are also cheap to build. I've seen advertisements for granny
flats, fully installed, for less than $70,000. Obviously, you'll pay more
depending on the size of the flat and how many rooms you put in it. Say you
spent $80,000 and rented it out for $250 per week. That's a remarkable 16
per cent yield. Of course, yields vary nationwide, so talk a local property
manager about how much a granny flat in your area typically rents for to
determine your potential income. You should also ask them how easy it is to
rent them out.

Unfortunately, the opportunity to rent out a granny flat is only available
in NSW, Tasmania, the Northern Territory and, as of December last year, in
the city of Fremantle, Perth. Tasmania and NT have more restrictions in
place than NSW, such as the flat having to share connections to essential
services with the main house.

Here are the basic rules for granny flats in NSW. If you can meet these
criteria, you'll get approval very quickly through a private certifier or
your local council:

Your block size must be a minimum 450 square metres Your block must have a
minimum 12-metre frontage You need a three-metre clearance between the flat
and the back fence You need about a one-metre clearance between the flat and
the side fence The floor area of the flat can't exceed 60 square metres The
floor area of the flat and the main residence can't exceed local council
restrictions The height restriction is 8.5 metres.
Interested? If you do a quick Google search, you'll find many companies
specialising in granny flats. Check out some of the designs and you'll be
pleasantly surprised. Granny flats are no longer drab little cottages; there
are plenty of stylish designs available that will appeal not only to you but
also to your prospective tenants.

Now, there are some risks. I had a chat to our head of network property
management, Michael Connolly, who confirms they are seeing a few more
clients renting out granny flats in areas where there are larger blocks of
land, such as Sydney's Western Suburbs and Northern Beaches. But he does
have a few words of warning.

Next week, I will fill you in on the pros and cons of using granny flats as
an investment strategy. We'll also tell you about our experiences in leasing
houses with granny flats attached or on the same lot.

Stay tuned and please write to us if you have a granny flat that you're
using for investment - we'd love to hear about your experience.

Published: Wednesday, March 14, 2012