Guide to renting out a granny flat in NSW

Can I rent out my granny flat?

Yes, you can rent out your granny flat in NSW provided you follow local legislation. Thanks to the Affordable Rental Housing State Environmental Planning Policy, a homeowner is permitted to build a secondary dwelling on their property and rent it out to tenants (family members may instead choose to enter into a formal granny flat arrangement allowing for specific tax benefits).

But you’ll need to get through some red tape before you rent out your granny flat.

Fair Trading NSW requires your granny flat design to be approved by a certified accreditor before it’s built. The advantage to a newly built granny flat is that you are guaranteed compliance with construction codes, council requirements and NSW Fair Trading legislation.

As an experienced builder, Backyard Grannys follows local council rules as well as getting all build works inspected and signed off by a private certifier to ensure compliance.

Of course, council requirements vary from LGA to LGA, so make sure you are familiar with your local legislation before building and renting out a granny flat.

Learn more about granny flat approvals.

Can I rent out my granny flat to family members?

Yes, you can rent out your granny flat to family members. Depending on your financial set-up it may be better to enter into a formal granny flat arrangement instead of a tenancy agreement. The nature of your agreement and the amount of payments made will impact depreciation claims, and capital gains tax exemptions available to you as the granny flat owner.

Pros and cons of renting out a granny flat

Advantages of renting out a granny flat

Quick and cost-effective construction

You don’t need to crunch the numbers to know that it’s usually more affordable to build a granny flat rental on existing land than purchase a standalone investment property. Thanks to its relatively low-cost construction, this secondary dwelling could be your opportunity to get on the investment property ladder without a large loan. To top it off, a granny flat can be approved by the council in as little as 20 days and turnkey ready within 15 weeks!

Greater property value

Adding a granny flat to your property has the potential to boost its overall value. Provided it’s legally compliant, this backyard build can increase the worth of your overall property by up to 30%!

Extra income

There’s no one-size-fits-all figure for this benefit, but your granny flat rental could earn you hundreds of dollars per week! The amount of additional income you pocket will of course depend on the granny flat’s size, features, and location (more on how to maximise your earnings below).

Multipurpose accommodation

Between tenants? Take advantage of your granny flat and use its extra living space for family and friends! Whether you’d like a private guesthouse, teenagers’ den, or quiet home office, your granny flat has you covered while you search for new tenants.

Disadvantages of renting out a granny flat

Privacy concerns

If you’re renting out your granny flat and living in the main residence, it’s important to accept that you’re no longer the only occupant on your property. That said, you can minimise this risk by doing your research in advance – read each application carefully and make sure prospective tenants have strong references with no blacklisting history.

Unexpected expenses

As with any property investment, you should be prepared for some unforeseen costs here and there. From utility fees between tenants to shower repairs, various expenses can arise when you least expect them. Remember to save some extra funds in your property maintenance budget to cover these costs.

Capital gains tax (CGT)

If you end up selling your property and have been earning a rental income from its granny flat, you may have to pay tax on a portion of your profits (this is worked out as the granny flat percentage of the total area of your block).

However, if you have set up a formal granny flat arrangement with a family member at below the market rate, you may be eligible for a capital gains exemption.

Before you welcome tenants, speak with an experienced accountant or financial adviser. This will help you to determine whether the annual income brought in by your granny flat rental will outweigh the CGT you might need to pay if you sell your property.

How much could I earn from renting out a granny flat?

CoreLogic and Archistar report that a granny flat can earn its owner up to 27% extra in rental income. That percentage will vary depending on the location and nature of your property, as well as the design and size of your granny flat – but it’s pretty impressive nonetheless!

With granny flats in sought-after suburbs reaping $200 to $600 per week in rent, you could not only earn back the cost of its construction but also enjoy some extra cash on the side.

And granny flats keep on giving. Planning to sell your property down the line? Many buyers consider a granny flat rental to be a big bonus, as owners can benefit from a secondary income stream, positive gearing, and further claimable deductions on their depreciation schedules.

Learn more with our ultimate granny flat investment guide.

Call in the local real estate agent

Before you break ground, speak with industry specialists in your local area to make sure there’s rental demand for granny flats.  

For instance, phone up a trusted real estate agent and enquire about rental market trends in your neighbourhood. Ask questions like:

• How much is the median rent per week?
• What sort of demographics are moving to the area?
• Which design features and inclusions are these tenants searching for?

And of course, don’t forget to secure local council approval to build and rent out your granny flat! This is an absolute must.

Tips for renting out a granny flat in NSW

Convinced that a granny flat rental is the right move? Here are a few tips to help you get the most out of this backyard build.

Tax on granny flat rental income

How much tax you pay on granny flat rental income will depend on the nature of your rental agreement. A regular tenancy agreement will earn you extra income, but that income must be reported to the ATO and will be taxed appropriately. If you have a commercial (at market rate) formal agreement you must also report your rental income which will be added to your taxable income. In this situation, your deductions may be more than the rental income and create a tax loss which could be offset against your total income.

If you have a non-commercial formal agreement then deductions on your granny flat are capped to the level of rental income and you cannot claim a loss. However, this may enable a capital gains tax exemption for the granny flat should you sell the property.

Ready to build a granny flat rental?

Done right, there’s no question that you could earn a pretty penny by renting out a granny flat in your

backyard. Just make sure to obtain approval from your local council before you begin the build!

Our expert team designs and builds granny flats throughout Newcastle, Lake Macquarie, Maitland, Hunter Valley, the Central Coast, and Sydney. For a free site inspection, contact us and we’ll be in touch as soon as possible!

Add some tenant-friendly touches

All sorts of properties are up for rent these days, from homesteads and share houses to condos and studios. What’s more, granny flats and apartments are similar in size, so they often compete for residents.

As a landlord, that means you’ll need to make some extra effort if you want to attract top tenants. Fortunately, a little can go a long way when it comes to boosting your granny flat’s rental appeal!

With seemingly endless features, fittings, and finishes to pick from, as well as the option to offer some more garden space, it’s easier than you think to make your granny flat stand out from those apartments around the corner.

Get into the mindset of your target tenant and really think about what benefits you’d be looking for in an accommodation. Ample storage, an outdoor living area, and a private separate entrance are just a few examples that spring to mind!

By adding some extra tenant-friendly touches to your granny flat, you’ll be able to fill its rooms faster and potentially even charge more rent per week.