How to add value with a granny flat

Adding a self contained unit, or ‘granny flat’ to your home can be a cost effective way to provide a home for elderly relatives or older children struggling with rising rent. It can also be a great way for homeowners and investors to generate extra cash flow through rental income and increase the property’s overall value.

With rental yields of anywhere between $200-$600 a week, granny flats can be a great strategy if you’re looking for a long-term return on investment. Not only do they provide a second income, you can also benefit from positive gearing and extra claimables on your depreciation schedule.

From a valuation perspective, the costs of construction can be significantly higher than the increased value of the property once the granny flat is complete. Depending on whether you’re building a freestanding structure or a unit on top of an existing garage (the latter tends to be more expensive as it can require more engineering work), average costs can range from between $100,000 - $150,000 and can be expected to add 20 to 30 per cent to the total value.

While valuers do consider the rental return of a property as part of their assessment, they can’t value a property on this basis alone. However, in an area where rental demand is high, a granny flat can stand out from the competition when it comes to selling.

If you’re looking to achieve the highest increase in capital value on your property, it’s important to invest in a high quality structure, fixtures and finishings that will stand the test of time. The most lucrative granny flats are usually in areas where there is a limited supply of similar properties, meaning yours will appear unique. A granny flat will appeal to both owner-occupiers and investors looking for an additional income, but bear in mind a structure that isn’t in keeping with the design of the existing property or encroaches too much on the garden may actually end up devaluing the property.

By law, granny flats must comply with both the Building Code of New Zealand and any relevant NZ standards. It’s also important to be aware of all rules and regulations relating to granny flats as these vary from city to city and even council to council, so do your homework first. Useful information can be found at www.building.govt.nz as well as on your local regional or city council website.