Un-approved granny flats

Hi all,

I am looking at some properties for investment and I saw quite a few properties that have granny flats or studios but they are not council approved. For example:

• They built granny flats but could not get council approval for some reasons (might be costly to rectify)
• They convert garage to a studio and never get approval, probably cant get it anyway

My questions are:

1. What would the property manager say about managing "unapproved" granny flats?
2. What happen to the insurance like building insurance or landlord insurance?
3. Similarly, some houses convert lower level for another / separate living with kitchen even though I dont think that is officially in house plan. What would PM and insurers say about that?

Thanks.

 

Hey Alex

Generally speaking in regards to these GF builds / conversions that are not approved - I would stay away from it or purchase allowing for the removal of it, rather than factoring the rent into your purchase calculations.

To answer the other questions:

1. A decent property manager would not take on these managements (that's not to say that they all don't, but decent ones don't want the risk
2. Possibility that it will be void - you will pay the usual annual premiums but if anything major happens they will usually do a review and it could void the cover
3. As above.

Hope that helps.

 

Homes with an unapproved GF will usually call them a 'teenagers retreat'. There's nothing wrong with buying something with other structures on the land, but to rent them out separately from the main building is not allowed. Sometimes they are quite well built and a private certifier can get them approved with a few changes. Other times they've been built for the home owners benefit, like a backyard studio, or even for storage, etc. Then you get the real dodgy ones that blind Freddy can see would be trouble.

 

Thanks for the replies. So if I read it right, I need to be careful buying those properties with unapproved granny flat. Perhaps we can still rent it as part of the main house, but very hard to rent it out separately if it is not approved. Might get a bit higher rent with this GF, but not as much as separate rental.

Seem quite common in Perth for this "teenagers retreat", but in Sydney, separate GF can have a significant rental income. 2-bed GF can get as much as $400/week; and I looked at one property that they converted the garage into a studio (not approved) and currently renting for $320/week - that impacts cash flow calculation significantly.

 

I had a property with lower-level rented separately. Insurance is harder because not all insurance companies will insure building with two unrelated people occupying the property. I paid double insurance $1800/year. Only one tenant was able to enjoy NBN as two connections were not allowed. Water and electricity was nightmare unless you want to do rewiring and add sub/feeder meter. Tenants were not high quality as well.

Not all outbuilding required council approval. You can buy a house with an outbuilding which can use as an extra room. However, some council can be a bit funny about having a separate kitchen. PCA is not allowed to convert not habitable structure class 10b to habitable structure class 1. Change of use required DA and council will make your life hell. It will cost cheaper to build granny flat rather exploring this avenue.

 

$320/week looks good on the books but you will be paying water bills, you will be paying higher PM fees, someone need to read meter count on feeder meter so electricity bill can be divided as per the usage. Unauthorised studio won't have two sets of bins and letter box, can't have 2 nbn connection. You get noisy tenants occupied garage and play loud music till late night. Neighbour lodged noise complaint to council and council will issue demolition order. It is very risk proposition. People buy it in hot market without thinking...

 

@ParraEels hits the nail on the head.
Last year when I was looking to buy properties I saw some superbly dodgy ones - we are talking two storey houses where the Internal Stairs had been closed and a set of External Stairs built (top floor was a granny flat)

And another 2 bedroom GF in the backyard that was unapproved and looked like it would fall down. Properties like these look great from a yield perspective (this place was 8% yield in Sydney!)

However, I decided to balance the risk and buy a property with a Council Approved GF whereby I only had a 6% yield for a better piece of mind. This came in really useful a few months down the track where I had to get a second NBN connection for the property and also additional bins from Council.

 

Can it be covered with Stewart Title insurance? I think the cover structures upto $160K.

I am not sure if this applies to GFs.

 

Earlier this year I saw a property with a GF in the backyard which was converted from a large garage and the GF was council approved. During the marketing campaign council issued a notice to ask the vendor to return the GF to its original state, ie, the garage. As a result the property couldn't be sold as a dual income property, the vendor had to reduced its asking price for about 100K, and also he wasted his money in the conversion.

Imagine if the council only issues that notice after the property is sold, that means the buyer would have paid 100K extra for the property thinking it is dual income, and soon after he bought it he would have to spend the money to return the GF back to a garage.

 

Clearly the GF wasn’t council-approved in the first place!

 

This!

If it's approved, they're not going to ask you to remove it prior to selling.

 

I was meant to write 'was converted from a large garage and the GF was NOT council approved', I missed out the most important word!