The Backyard Boom: Subdivision and secondary dwellings as the new investment strategy

A newlywed son or daughter can’t afford a house of their own? A family’s teens long for extra room to romp? Elderly parents need a closer helping hand? Everyone could use a little more cash to cover the bills.

For solutions to all kinds of problems, Australians are increasingly looking to their own backyards.

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“Granny flats, or secondary dwellings, are always a great investment during good times and bad,” says Michael Willoughby, director of Smart Choice Granny Flats. “They’re so much more affordable than buying a bigger home and paying stamp duty and moving, and now it’s become so much easier to have them built.

“We find people put their newlywed kids in them, or they move into them and let their kids have their house, or they might have a teenager who needs extra room, or parents they want to live close by. Then the other 50 per cent might have them as permanent rentals or Airbnbs. They work out incredibly well.”

As house prices and interest rates continue to rise, many people are turning away from the idea of buying bigger homes and instead are unlocking value in their existing blocks.

Wayne Brady, for instance, had a two-bedroom granny flat built by Willoughby’s company at his five-bedroom corner block home in Sydney’s Silverdale. The father of four wanted it to look like a mini-version of his existing house, so he paid more than the usual $140,000 to have it customised and upgraded with vaulted ceilings, a front verandah and similar finishes.

“Although I spent $225,000 in total, the good thing is that you don’t pay tax on it because it’s your own house,” says Brady, 55, who works in the timber industry and whose children are aged between 16 and 25. “But talking to agents, it’s definitely added at least $300,000 to the value of my property, and they believe it also would make it easier to sell.

“We had it built 12 months ago and we’re still deciding how to use it, for the children to come and stay, or parents or maybe looking at Airbnb or renting. But we’re very, very happy with it.”

Backyards can now hold enormous promise as a new frontier for wealth creation, with NSW the first state to make it easier to obtain permission for 60-square-metre buildings in 2009, and both Victoria and Queensland recently coming to the party. Yet no one quite knows how many of the different types of dual-occupancy dwellings – a separate granny flat, subdividing a house, or even knocking down to rebuild a new dual-occupancy building – are being created to provide extra accommodation for family, friends or rent-paying tenants.

“When we collect data, they don’t distinguish between the different types being built, whether they might be attached or detached, or a dual semi, as they all come under the umbrella of ‘granny flats’,” says Professor Nicole Gurran, who teaches urban planning and housing at Sydney University. “But we know a lot of knockdown and rebuild is going on to be replaced by two semis that can be rented or lent or subdivided and sold.

“It’s important to have such granny flats to diversify the housing stock, and they’ve been part of the landscape for a very long time before they fell out of fashion but are now back in. The only issue, really, is when there is no provision for parking, or when a granny flat is illegal or doesn’t have the proper permits.”

Building costs and rental returns can vary widely around Australia. BMT Tax Depreciation estimates that rents can average $400 or $500 a week for a $100,000 to $200,000 granny flat, creating a yield in the double digits, usually well above that of a regular investment property.

InvestorKit research found that adding a granny flat can increase a property’s overall rental yield by 1.4-1.65 percentage points compared with comparable homes without one.

“The cash flow and the rental income can be significant, especially in Sydney, Melbourne and Brisbane where yields are lower,” says senior research analyst Junge Ma. “Granny flats can be much cheaper to build than regular houses, but the rental income can be very similar.”

Renowned Melbourne architectural firm Pleysier Perkins now has an additional PP Mini Homes business, designing high-end, luxury contemporary granny flats priced from $100,000 to $500,000. They’re currently designing one to serve as an artist’s studio for this year’s Archibald Prize winner, Richard Lewer, with four-metre-high walls for giant canvases.

“With a move towards multigenerational living, a lot of people are activating their backyards now,” says director Ramon Pleysier. “They’re often higher-performing buildings than the older main houses, too.

“The challenges can be in the confined spaces and about the trees, overshadowing and overlooking neighbours and easements, but they can be very habitable spaces. And with smart planning and development, this can be a great way of staying put and maximising an asset.”