A granny flat can be a good rental investment. Because you’re building on land you already own, the return on what you spend is usually well above buying a separate property. The catch is that the numbers builders quote are gross, and what you actually keep depends on how you let it, what it costs to run, and the tax, which is mostly friendlier than people expect. Here’s the whole picture.
How much does it cost to build?
A turnkey granny flat in Sydney runs from around $140,000 to $180,000 for a one-bedroom or studio, and around $200,000 to $300,000 for a two-bedroom at the 60 square metre maximum. Closer to the city, tighter access and higher trade rates push builds towards the top of those ranges. Smaller builds cost more per square metre than you’d expect, because the kitchen, bathroom and service connections cost much the same whatever the floor area. That’s also why most rental builds are two-bedroom – the second bedroom is relatively cheap to add and widens the pool of tenants.
Sloping or rocky sites, long service runs to the rear of the block, and the seven-star energy rating now required on new builds all add cost. In New South Wales, most granny flats up to 60 square metres on a lot of at least 450 square metres can be approved through the faster complying development pathway rather than a full development application, which saves time and money.
Two ways to earn from it – long-term or short-term
You can let a granny flat long-term to a permanent tenant, or short-term to guests. Which suits you depends on where you are and how hands-on you want to be.
Long-term gives you steady, predictable income and very little day-to-day involvement. A two-bedroom flat in Sydney commonly rents from around $500 to $600 a week, or about $26,000 to $31,000 a year before expenses. A one-bedroom or studio earns less, roughly $400 to $500 a week. The tenant pays their own electricity and gas if the flat is separately metered, and you deal with one lease a year.
Short-term letting, through a platform like Airbnb, can earn more over a year, and it’s more common in the inner and middle-ring suburbs where visitor demand is higher. Part of that demand is families who live in apartments and can’t put up visiting relatives but want them close by. Because you live in the main house while guests stay in the flat, New South Wales treats this as hosted letting, which you can do all year round. Any day limits you may have read about apply to whole homes let out while the owner is away, not to a flat in your own backyard.
A well-run studio or one-bedroom in these suburbs might gross somewhere around $30,000 to $40,000 a year, but that’s before cleaning, linen, platform fees, furnishings and the utilities you cover, all of which you carry when you let short-term. The income is seasonal and less predictable, and it takes real ongoing management. You’ll need to register the flat on the state short-term rental register, show the number on your listings, and meet the fire safety standard and code of conduct.
Put simply, long-term earns less but it’s steady and hands-off, while short-term can earn more, though the net gap is smaller than the gross suggests once costs and effort are counted.
What’s the return on a granny flat?
Say the build costs $250,000 and you rent it out long-term at $550 a week. That’s around $28,000 a year before costs, all earned on just the cost of the build, since the land is already yours. That’s what makes a granny flat stack up so well against other ways of investing the same money.
Take out management, maintenance, insurance, rates, any utilities you cover and the odd vacant period, and the net is lower. A simple way to gauge it is payback: how many years of net rent recover what you spent. For many Sydney builds that sits in the eight to twelve year range, after which you hold an income stream on an asset that has usually lifted the property’s value as well.
What you can claim at tax time
Once you rent it out, the granny flat is an income-producing asset, so the rent is assessable and you can claim the costs of earning it – loan interest if you borrowed to build, depreciation, repairs and maintenance, and a share of rates, insurance and any utilities you cover.
Depreciation is worth calling out, because a new build is where it counts for most. You can claim the building’s construction cost at 2.5 per cent a year over 40 years, which on a $250,000 build is around $6,250 a year, plus the decline in value of the new fittings and appliances. Because the flat and everything in it is brand new, you get the full benefit, where the second-hand fittings in an established rental can’t be claimed. A quantity surveyor draws up the schedule that lets you claim it, and the fee is itself deductible.
Does a granny flat affect capital gains tax?
Your home is normally exempt from capital gains tax. Once you use part of it to earn income, that part loses the full exemption for the time it’s let, whether you let long-term or short-term. When you sell, a share of the gain becomes taxable, worked out on the floor space involved and how long it earned income.
Two things soften it. Your cost base for that part is generally reset to the property’s market value on the day you first rent the flat out, so only the growth from then counts, not the whole time you’ve owned the place. Working the other way, the building depreciation you claim along the way reduces your cost base, so a little of it comes back as a larger gain at sale. In practice the taxable slice is usually small next to your total gain, but the exact figure depends on your numbers, so it’s worth having it worked out before you sell rather than after.
Does a granny flat trigger land tax?
In New South Wales your principal place of residence is exempt from land tax, and Revenue NSW lets you have one extra residential occupancy on the same land, a rented granny flat included, without losing that exemption. This is as long as the block isn’t unusually large (broadly up to around 2,100 square metres) and the flat is your only such income-producing use. On a standard Sydney block, that means a rented granny flat generally doesn’t bring land tax into play. Rules differ from state to state, so be wary of generic articles, and it’s worth a quick check with Revenue NSW for your own block.
The other costs to factor in
Tax aside, there are the everyday costs of running the place, including maintenance and repairs, landlord insurance, any utilities you cover, and the odd month sitting empty between tenants.
The other cost many people don’t factor in is their own time. A long-term tenant is fairly hands-off, but you’re still the landlord for someone living a few metres from your back door. Short-term letting is more again, with cleaning, guest messages and turnovers between stays adding up to a real job rather than passive income. It’s a cost even when it isn’t a dollar figure, so factor it in.
So, is it worth building a granny flat?
For a lot of Sydney homeowners, a granny flat is one of the better returns available on money that would otherwise sit in the house. Whether it’s right for you comes down to the net return after tax and costs, how you’d fund the build, whether you’d let it long-term or short-term, and how the capital gains position looks when you sell.
That’s the conversation worth having before you call a builder. If you’d like to talk it through for your own situation, we offer a complimentary session to look at the whole picture and work out whether it’s worth pursuing. It’s a better starting point than a rental estimate on a flyer.
Frequently asked questions
Is a granny flat a good rental investment in Sydney?
Yes. For many Sydney homeowners a granny flat is one of the highest-yielding property investments available, because you build on land you already own. A $250,000 two-bedroom build renting at around $550 a week returns roughly 11 per cent gross. What decides it is the net return after tax and costs, which is lower but still strong next to buying a separate investment property.
How much rent can a granny flat earn in Sydney?
A two-bedroom granny flat in Sydney commonly rents from around $500 to $600 a week, and a one-bedroom or studio from around $400 to $500. It usually leases at or just below a comparable unit in the same suburb, with the inner and middle-ring suburbs at the higher end. Short-term letting on Airbnb can gross more, roughly $30,000 to $40,000 a year for a well-run studio, but with higher costs and more work. Rents move, so check current listings for your suburb.
Can you rent out a granny flat on Airbnb in NSW?
Yes. If you live in the main house while guests stay in the flat, New South Wales treats it as hosted short-term letting, which has no annual day limit. You register the flat on the NSW Short-Term Rental Accommodation register, display the registration number on every listing, and meet the fire safety standard and code of conduct. The 180-day cap that gets talked about applies only to whole homes let out while the owner is away, not to a flat in your own backyard.
Do you pay capital gains tax when you rent out a granny flat?
Partly. Renting out the granny flat means part of your home produces income, so it loses the full main residence exemption for the period it’s let. When you sell, a share of the gain becomes taxable, based on the floor area used and how long it earned income. It’s usually a small slice of the total gain, and your cost base for that part is generally reset to the property’s market value on the day you first rent it out, so only the growth from then counts.
Do you pay land tax on a granny flat in NSW?
Generally no. In New South Wales your principal place of residence is exempt from land tax, and Revenue NSW lets you keep that exemption with one extra residential occupancy on the same land, a rented granny flat included, as long as the block is no larger than about 2,100 square metres and the flat is your only income-producing use. On a standard Sydney block, a rented granny flat usually doesn’t trigger land tax. Rules differ by state, so advice written for Victoria or Queensland won’t apply here.
Can you claim depreciation on a new granny flat?
Yes, and a brand-new granny flat is where depreciation counts for most. You can claim the building’s construction cost at 2.5 per cent a year over 40 years, which on a $250,000 build is around $6,250 a year, plus the decline in value of the new fittings and appliances. Because everything is brand new, you get the full benefit, unlike the second-hand fittings in an established rental, which can’t be claimed. A quantity surveyor prepares the schedule, and the fee is tax-deductible.
