Maria Krohn had paid off her house when she decided to build a two-bedroom granny flat in the back yard of her house in Concord in Sydney's inner west.
"I wanted to buy a little two-bedroom unit in the area but I would've probably had to spend $600,000 or $700,000 and so I decided to go with a granny flat instead," Maria says.
"It had a build cost of about $140,000 and all up with council fees and so on, it was well under $200,000."
Granny flats are proliferating like crazy, at least in NSW where the rules are much more relaxed than Victoria.
They can be great investments, with the rent earned as a proportion of the cost of the flat usually higher than for an investment unit. Figures from Flatmates.com.au suggest the average rent for a granny flat in Sydney is almost $300 a week.
In Maria's case, she rents the flat out on Airbnb for more than a $100 a night and it's almost always occupied.
The 54-year-old senior administrator has been letting it out to visitors from overseas and interstate, with the average length of stay at four nights.
"[The bookings] have been pretty solid and it is really like my second job now because I go into the flat between visitors to change bed sheets and get it ready for the next guests," she says.
Maria borrowed the money for the granny flat, with the loan scheduled to be repaid over 10 years. The repayments come straight out of her pay, but she puts all of the rental income into her loan and she is on track to pay it off in five years.
Property investing expert Kevin Lee, of Smart Property Adviser, says the high prices of city properties mean the rental yield can be much higher for granny flats.
"But the granny flat has to be in right parts of the city and has to be of sufficient quality," Lee says.
He says there are granny flat kits that sell for under $50,000 that are put up by builders in the backyards of houses a long way from the city centre.
You could rent these out on longer-term leases, to a young couple or someone who can't rent an apartment because they have a pet. But Lee thinks the better investment proposition is high-quality granny flats that are closer to the city and on good public transport links.
Wally Gebrael, the owner of builder Granny Flat Solutions, who built Maria's granny flat, says not everyone is comfortable with having someone living in their back yard.
"Others look at it as a small sacrifice in return for the rental income they receive," Gebrael says.
More than half of his clients are investors, with many in their 50s, he says.
Government figures suggest the demand for granny flats in NSW has soared since the planning rules were liberalised in 2009, increasing by 260 per cent in the five years to 2014 and a further 20 per cent from 2014 to 2015.
Granny flat approvals in NSW are running at an annualised rate of about 5000 compared with about 1400 five years ago, and make up about 10 per cent of all dwelling approvals, says Kim Hawtrey, associate director at property forecasters BIS Shrapnel.
In Victoria, although there are some variations from council to council, generally, small backyard dwellings cannot be rented out. They are meant to house "dependents" of the owners of the granny flats, such as an elderly or disabled parent or a teenage son or daughter. And when the dependent moves out the flat, the flat is supposed to be removed.
The Andrews government was elected in Victoria with a commitment to review the restrictive rules that basically stop granny flats from being built without having to go through the hassle and expense of a sub-division.
Under NSW's fast-track approval process, a certifier can be used and if the plan complies with the planning rules there is no need to apply for a development application from council. Straightforward approvals take less than 14 days.
Anyone thinking of building a granny flat has to take care over how the flat is financed, because lenders are generally charging investors higher mortgage interest rates than they do for owner-occupiers, with a differential of 0.85 percentage points on average.
Some lenders will charge the investor rate for a granny flat if it is to be rented out or used for business purposes.
Gateway Credit Union has recently released mortgages specifically designed for granny flats. Crucially, borrowers will be charged the same rate of interest, regardless of whether the granny flat is used to house a family member or is rented out.
Gateway chief executive Paul Thomas says the product is in response to soaring demand.
"The explosion in granny flat construction really is a case of homeowners realising the financial and lifestyle value sitting in their own backyard," Thomas says.
Mortgage Choice chief executive John Flavell is sceptical, saying it sounds like marketing spin on a regular mortgage for home renovations or an extension.
"I think consumers will want to get credit at the lowest rate possible," Flavell says. "It's either an extension to a home loan; a loan secured over a mobile dwelling, which is effectively a caravan; or it's unsecured lending. The extension to the home loan is the most cost effective."
However, Gateway points out that some people would be unable to get a top-up on their home loan because the cost of a granny flat is a lot more than the average loan for renovations. If the customer is forced to get a construction loan, the rates are usually much higher.
It's important not to overlook the tax implications. The principal place of residence is free of capital gains tax, but if the granny flat is rented out, that part of the property will be taxable in the event of a sale. And, of course, all investment income is meant to be declared in tax returns.
