In the past a granny flat was a small room provided by families for their elderly parents, but now they are luxurious self-contained dwellings.

For many families, the home can become too overcrowded with a growing family. A granny flat is a win-win situation for all, elderly parents are happy in their own space, while Mum and Dad have the peace of mind of their parents living nearby.

In our article, we explore why the modern granny flat is such a popular investment option and what you need to know before you start planning your own.

Its popularity is on the rise!

At Oracle, we have receive enquiries regarding granny flats, as families are moving back together as parents age or require assistance and/or parents want to assist children pay off mortgages or purchase a new/bigger home as prices of homes go up.

Here are a few other reasons why granny flats are fast becoming a popular option for investors:

Strong demand
There is high demand for granny flats from students, young couples, and singles. It is also a viable and affordable housing option for retirees who are not part of the sea change phenomenon and instead want to downsize.

Lower costs
Building a granny flat is usually cheaper than buying a standalone investment property.

Could increase your resale value
Adding a granny flat to your property can increase its value, giving you more return on investment when it’s time to sell the property.

Renting out a granny flat gives investors extra claimable on your depreciation schedule.

Can help you in building your portfolio
Adding value through a granny flat can rapidly increase your capital value and rental income. The rental income may help you in boosting or maintaining your servicing capacity with lenders and, in turn, help you with your next property acquisition.

It’s important to understand Centrelink treatment of granny flat arrangements, because of the implications for deprivation, home ownership and estate planning. A granny flat arrangement can be seen by some as a more acceptable option than moving into a retirement village or Aged Care Facility. Be mindful you may not avoid an Aged Care Facility entirely.

Establishing your granny flat

To establish a granny flat correctly, an individual must transfer cash or other assets to another party, in return for a legal right to occupy a dwelling. Generally, this is between parents and children, but not always.

The following conditions must be meet, so that a genuine granny flat right is established:

  • A right of occupancy for life in a residential property – preferably in writing
  • A payment is made for the right of occupancy
  • The granny flat resident cannot own the property in which they reside

Where certain conditions are met, transfers of cash and/or other property under a granny flat arrangement are not assessed under the gifting and deprivation rules for social security purposes. As certain aged care fees are calculated based on income and assets (assessed under the social security rules), a granny flat right may reduce future aged care fees.

A granny flat right can be established in a variety of ways.
Broadly, these can be considered in four main categories:

  • Title of existing main residence of the client is transferred – right to reside retained.
  • A person pays for the construction of a premises on another party’s property in exchange for a life interest in that property.
  • Cash and/or other assets are transferred – right to occupy a dwelling provided by the other party; or
  • A new dwelling is purchased in the name of another party

In all these cases the granny flat resident must be guaranteed the right to permanently reside in the property for life.

There are two methods for valuing a granny flat correctly:

  • Amount paid or value of asset/s transferred is accepted as the value of the right, or
  • Centrelink/DVA determines the value using a formula-based method, known as the ‘reasonableness test’

The accepted value relative to the total value of assets transferred also determines whether

or not deprivation is assessed as having occurred. Where a person transfers assets in addition to the granny flat arrangements, Centrelink applies the ‘reasonableness test’ to determine whether deprivation will apply.

The formula multiplies an age-based conversion factor by the maximum annual rate of Age Pension payable to a couple (at the time the granny flat right is created). The couple rate is used regardless of whether the person is single or a member of a couple.

Depending on the amounts transferred and the clients remaining assets, they maybe defined as a homeowner or non-homeowner – in which case they may also receive rent assistance. They may also receive a decreased amount of Centrelink Aged Pension entitlements if their assets grew because of selling their home.

legal agreement

Set up a legal agreement

We recommend that any granny flat agreement is formalised by having a solicitor prepare it, although this is not a Centrelink requirement. It is also recommended that you seek professional financial advice regarding any potential granny flat agreement be so that you are aware of the financial and social security impacts.

Bear in mind that if an Aged Care Facility is required in the future, as part of the granny flat arrangement, the other party may be required to give the funds back to assist with the cost of the room. All parties to the arrangement should seek independent legal and financial advice.

Ensure that the Will is updated as part of your granny flat plans. If you have sold a property that was referred to in your Will, your asset position may have changed, and you may have provided part of an inheritance to one family member prior to the others. This will need to be addressed to avoid time-consuming and costly issues upon your passing.

Summing up

A granny flat can be a value-adding strategy, but only if done correctly. Before taking any steps, make sure to do your due diligence research if a granny flat is a good fit for your investment strategy.

If you wish to learn more about investing in a granny flat, we recommend speaking with an Oracle adviser and find out if a granny flat is a good fit for you.

Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.
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