How to earn rental income from a granny flat in NSW

Building a granny flat isn’t just about creating extra living space in your backyard - it’s also a smart way to earn rental income while adding long-term value to your property. If you’re thinking about renting out your granny flat in NSW, here’s a clear, step-by-step guide to help you get started.

Backyard Grannys

17 Sep 2025 · Investment

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Step 1: Ensure legal compliance

Before you advertise your granny flat for rent, it’s crucial to make sure it meets all legal requirements:

Council approval – Your granny flat must be approved under the NSW State Environmental Planning Policy (Affordable Rental Housing) 2009. This ensures your property is compliant and safe for tenants.
Building standards – Your granny flat should comply with the NSW Building Code and be certified for occupancy. This includes structural safety, fire regulations, and accessibility where applicable.
Separate utilities – Installing separate meters for electricity and gas makes it easier to manage bills for your tenants.

Following these steps ensures your investment is legally sound and avoids headaches down the track.

Step 2: Estimate your rental income

Rental returns vary depending on location, size, and features of your granny flat:

Average rental income in regional NSW areas like Newcastle can be around $550 per week for newly built or well-equipped granny flats.
In higher-demand areas closer to universities or hospitals, rents can reach $600–$650 per week.
Keep in mind that amenities, privacy, and quality finishes can significantly increase rental potential.

Step 3: Set up a formal rental agreement

Even if you’re renting to family or friends, a formal rental agreement protects both parties:

Use a standard residential tenancy agreement from NSW Fair Trading.
Include clear terms for rent, duration, maintenance responsibilities, and notice periods.
Formal agreements prevent misunderstandings and give tenants and landlords peace of mind.

Step 4: Understand tax implications

Income from renting out a granny flat is taxable:

Rental income must be declared on your annual tax return.
You may be eligible for deductions including maintenance, insurance, interest on loans, and depreciation.
Consider Capital Gains Tax (CGT) if you sell the property later - especially if it’s used as an investment.

Consult a qualified accountant to maximise deductions and ensure compliance.

Step 5: Manage the property

Keeping tenants happy protects your investment and ensures steady income:

Conduct regular inspections and attend promptly to maintenance requests.
Consider hiring a property manager for a hands-off approach, especially if you have multiple properties or live far away.

Bonus benefits of renting out a granny flat

Adds value to your property – A well-designed granny flat can increase the overall value of your home.
Flexible living arrangements – Ideal for tenants, extended family, or intergenerational living.
Contributes to housing solutions – Helps address the shortage of affordable rental options in NSW.

Renting out your granny flat is a fantastic way to generate income, increase property value, and create versatile living spaces. By following the right steps - legal compliance, realistic rental estimates, clear agreements, and proactive property management - you can make the most of your backyard investment.