Granny flat rental yield in Sydney: a realistic look

Rental yield on a granny flat is the annual rent divided by what it cost to build, expressed as a percentage. The calculation is simple. The reason most published yield figures are useless is that they use someone else’s rent, someone else’s build cost, and leave out the ongoing costs entirely.

This article shows you how to run the numbers with your own figures, and what to include so the answer means something.

Gross yield = annual rent ÷ total build cost × 100

Net yield = (annual rent − annual costs) ÷ total build cost × 100

Gross yield is the number people quote. Net yield is the number that reflects what you actually keep. The gap between them is larger than most people expect.

Do not use a general figure. Do this instead:

• Search current rental listings in your suburb for granny flats, secondary dwellings, and one and 2-bedroom units
• Filter to the size you are building
• Take the median of what is currently listed, not the highest
• Adjust down slightly if your granny flat will have less privacy, no dedicated parking, or a shared entry

Listed rent and achieved rent are not the same thing. A local property manager can tell you what is actually being signed in your suburb, and that conversation costs nothing.

Not the advertised build price. The total, which means:

• The build
• Site costs, including excavation, rock and retaining
• Approvals, survey, soil test, engineering, BASIX
• Utility connections
• Council contributions
• Driveway, fencing, landscaping
• Floor coverings and window furnishings

If you use the advertised price instead of the total, your yield will look better than it is.

The ones most calculations skip.

Vacancy is the one most often set to zero in optimistic calculations. Assuming a property is tenanted 52 weeks a year, every year, is not realistic.

Fill in your own figures rather than borrowing anyone else’s.

Run it twice. Once with the rent you hope for, once with the rent at the lower end of current listings. If the project only works at the optimistic number, that is worth knowing before you build.

A yield figure ignores several things that matter.

• Capital value effect. Covered in our article on whether a granny flat adds value.
• Tax treatment. Depreciation, deductions and capital gains implications can materially change the real return. This is accountant territory.
• Non-financial value. If the granny flat houses a parent or an adult child, the return is not measured in yield at all. Housing a family member who would otherwise be paying rent elsewhere has real value that never appears in the calculation.
• Risk. A single tenancy in a single property is not a diversified position.

You will find plenty of granny flat pages quoting a specific percentage return.

We are not going to, because the number depends on your suburb’s rent, your block’s site costs, your finance position and your tax circumstances, and any figure published without those is a marketing number rather than a forecast. Two identical granny flats a few suburbs apart can produce materially different yields.

What we can do is give you an accurate total cost for your block. That is one of the 3 inputs, and it is the one a builder is actually qualified to provide.