The return of Nanny State

Will granny flats make a comeback?

Unless you live under a rock, you will be aware that New Zealand has faced significant housing supply and affordability challenges. The National Government proposed changes to granny flat legislation, which has cross-party support. These developments could benefit property investors, potentially boosting their yields and capital value.   

Granny flats, also known as accessory dwelling units (ADUs) or secondary dwellings, have long been a popular solution for expanding living space on residential properties.

The National Government's proposed changes aim to simplify and streamline the process of adding these units to existing properties. Secondary dwellings can be up to 60 square meters in size.

Key aspects of the proposed legislation include:

• Easing zoning restrictions: The new regulations would relax zoning laws, allowing secondary dwellings to be built in more residential areas without requiring extensive council approvals. 
• Reducing consent requirements: Many district plans already allow secondary dwellings without resource consent, but there needs to be more consistency across the country. The proposed changes allow property owners to face fewer bureaucratic hurdles, with a more straightforward consent process that reduces the time and costs of obtaining permits.  
• Increasing size limits: The proposed changes would increase the allowable size of secondary dwellings to as much as 60 square meters, making them more versatile and appealing to a broader range of tenants. 
• Encouraging sustainable practices: The legislation would promote environmentally friendly building practices, which could enhance the appeal of secondary dwellings. Any secondary dwelling will be of high quality and meet the requirements of the Building Act. 

How can Property Investors benefit?

These legislative changes present many opportunities for property investors to increase their yields. Here are some of the key benefits: 

• Higher Rental Income: Secondary dwellings provide an additional source of rental income without the need to purchase new land. Investors can significantly boost their rental income by adding a secondary dwelling to their existing properties. In regions with high demand for rental properties, this can substantially increase overall yield.  
• Diversified Rental Portfolio: Adding secondary dwellings to investment properties allows investors to diversify their rental portfolios. This diversification can help mitigate risks associated with vacancies and tenant turnover. With a separate dwelling on the same property, investors can attract different types of tenants, from young professionals to retirees, thereby stabilizing their income streams.  
• Increased Capital Value: Adding a secondary dwelling can enhance the overall value of a property. Prospective buyers often view properties with secondary dwellings as more versatile and valuable. This can lead to higher resale values and increased equity for investors, providing long-term financial benefits. 
• Tax Advantages: Investors may also benefit from various tax advantages associated with secondary dwellings. The costs of building and maintaining these units can often be deducted from taxable income, reducing the overall tax burden. Additionally, with the Government reverting to tax laws that allow investors to offset interest against income, you may have the added benefit of a reduced tax bill. 

Potential pitfalls to be aware of

While the proposed legislation changes offer significant advantages, property investors should also be aware of potential challenges and considerations: 

• Initial Investment Costs: Building a secondary dwelling requires an initial investment, which can vary depending on the size, design, and location. Investors need to carefully assess the costs and potential returns to ensure the project is financially viable. However, with the streamlined consent process, these costs are expected to be lower than the current regulatory framework. 
• Market Demand: Investors should conduct thorough market research to understand the demand for secondary dwellings in their area. While these units are popular in many regions, their success depends on local rental market conditions, demographics, and tenant preferences. You may find yourself reducing the market appeal of your property leading to increased vacancy rates. Understanding these dynamics is crucial to maximizing rental yields. 
• Management and Maintenance: Adding a secondary dwelling to a property introduces additional management and maintenance responsibilities. Investors must be prepared to accept that there could be additional maintenance costs. 
• Change of use of dwelling: You may be able to add a secondary dwelling onto the premises, but it may not necessarily mean that you can rent it out separately. You must be aware of your local Council bylaws as you may be changing the use of property, which may need approval from your local Council. Make sure you do your due diligence before renting as a separate dwelling. 

The National Government's proposed changes to secondary dwelling legislation present a significant opportunity for property investors to increase their yields. By easing zoning restrictions, reducing consent requirements, increasing size limits, and promoting sustainable practices, the legislation makes adding secondary dwellings to existing properties more accessible and attractive. 

For property investors, the potential for higher rental income, diversified portfolios, increased property value, and tax advantages make secondary dwellings a compelling investment option. However, careful consideration of initial costs, market demand, and management responsibilities is essential to ensure success. 

As these changes take effect, they will likely have a broader positive impact on the housing market, increasing supply, enhancing urban density, and stimulating economic activity. Overall, the proposed secondary dwelling legislation changes represent a win-win scenario for property investors, tenants, and the broader community, contributing to a more dynamic and resilient housing market in New Zealand. 

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