Secondary Dwellings (Granny Flats) in NSW: A Complete Homeowner’s Guide

Understanding NSW Planning Controls for Secondary Dwellings

What is a Secondary Dwelling? 

In New South Wales, a secondary dwelling (often called a granny flat) is defined as a self-contained home on the same lot as a principal house.

It can be attached to the main house, within it (like a converted section), or completely separate in the backyard.

Importantly, the secondary dwelling remains part of the same property title as the main house – it cannot be subdivided or sold separately.

Only one secondary dwelling is allowed per lot, accompanying one principal dwelling.

State vs Local Planning Rules: 

Secondary dwellings in NSW are governed by the State Environmental Planning Policy (Housing) 2021, often referred to as the Housing SEPP.

These state-level controls were previously under the Affordable Rental Housing SEPP 2009 and have now been incorporated into the Housing SEPP with essentially the same rules.

The Housing SEPP sets consistent requirements across NSW, which override local council rules (Local Environmental Plans, or LEPs) if there’s any conflict.

In practice, this means if the state policy says a granny flat is permitted and you meet the criteria, you can pursue approval even if your council’s LEP doesn’t explicitly allow it. We’ll explain how this works in a later section.

Where Can You Build a Granny Flat? 

Under the Housing SEPP, secondary dwellings are permitted in all standard residential zones – R1 General Residential, R2 Low Density, R3 Medium Density, R4 High Density, and R5 Large Lot Residential.

In these zones, if a normal house is allowed, a granny flat is also allowed as a matter of course.

Some councils also opt to allow secondary dwellings in other zones (like certain rural or large lot zones) through their LEP, but that varies.

(Recent changes let councils include an optional clause for rural zones with specific size and distance controls.

If you live in a rural or non-residential zone, you’ll need to check your local LEP or ask council whether a secondary dwelling is permissible there.

Generally, the Housing SEPP does not automatically apply to rural/environmental zones unless the council has adopted provisions for it.

Key Development Standards (Housing SEPP): 

The state policy sets several important standards that your secondary dwelling must comply with:

• Maximum Floor Area: The granny flat itself can be up to 60 square metres of living space (internal floor area). This 60 m² cap applies in most cases across NSW. (If your main house is very small, there was historically a rule tying the flat to a percentage of the main house size, but currently 60 m² is the typical limit in practice. When applying through council via a Development Application, the combined floor area of house + granny flat also must not exceed any overall floor space ratio (FSR) limits in your area.

  In simple terms, 60 m² is the magic number – roughly a two-bedroom granny flat. This size limit does not include things like patios, decks or garages. It’s the internal habitable space.

• Minimum Lot Size: The Housing SEPP itself does not set an absolute minimum lot size for building a secondary dwelling with council approval. However, for the faster complying development approval path (explained below), your lot must be at least 450 m². If your land is smaller than 450 m², you won’t qualify for a Complying Development Certificate, but you can still lodge a normal Development Application (DA) to council to seek consent. In fact, a council cannot refuse a granny flat DA on the sole ground that the lot is under their usual size requirement if your lot is at least 450 m². (If your lot is extremely small, under 450 m², approval is discretionary – council will consider the proposal on its merits, looking at privacy, design, etc., since it doesn’t meet the exempt standard.)

• Setbacks and Height: Secondary dwellings must comply with building setback rules similar to those for a house. For instance, you generally need to maintain a minimum side boundary setback of 0.9m (900mm) for a single-storey structure, and around 3m rear setback in many cases (though corner lots and other scenarios have their own formulas). Height is typically limited to keep the secondary dwelling relatively low-profile: as a complying development, the maximum height is 8.5m (which could allow a two-storey granny flat), but any second storey or height over about 3.8m will trigger greater setback requirements to protect neighbours’ privacy and sunlight. In practice, most backyard granny flats are single-storey and well under 8.5m tall.

• Other Site Requirements: The secondary dwelling must be on the same parcel as the main dwelling (no straddling lot boundaries). Also, if you’re in a heritage area or on environmentally sensitive land, you might be excluded from the quick approval pathway and need a full DA.

• Parking is one concern many people have – the state policy explicitly does not require you to add extra parking for a granny flat. This is a relief for many homeowners, as adding a new garage or parking spot isn’t mandatory. (Of course, if you remove an existing garage to build the flat, you might need to consider replacement parking depending on council conditions.) Finally, all construction must meet the Building Code of Australia standards – a secondary dwelling is a habitable building, so it must have proper insulation, fire safety (like smoke alarms), waterproofing, etc., just like any new home.

Approval Pathways – Complying Development vs DA: 

A big advantage of the Housing SEPP is that it allows many granny flats to be approved as Complying Development if they meet all the preset criteria.

A Complying Development Certificate (CDC) can be issued by a private certifier without the need for the full council DA process, making approval much faster (potentially in as little as 10 days).

To go the CDC route, your proposal must check every box of the specified standards – e.g. correct zoning, lot ≥450 m², under 60 m², proper setbacks, not on flood-prone or heritage land, etc.

If even just one criterion isn’t met, you’ll need to apply through council via a DA, but you can still rely on SEPP controls.

Even then, the Housing SEPP is on your side: if your project meets the SEPP’s general development standards, council is expected to approve it (with appropriate conditions) since the land use is permitted by state law.

The NSW Planning Department emphasises that if a proposal doesn’t qualify as complying development, it “may still be possible to lodge a development application” for a secondary dwelling with council for assessment.

In other words, falling outside the fast-track rules isn’t an automatic “no” – it just means a bit more process and possibly some design tweaks.

In summary, the NSW Housing SEPP has made it relatively straightforward to add a secondary dwelling in most residential areas.

You need to follow the size limits, keep it subordinate to the main house, and respect the building envelope controls, but you don’t have to provide extra parking or jump through unusual hoops.

If you stick to the rules, you can benefit from a simplified approval, giving NSW homeowners a clear path to build that backyard granny flat.

When Your Local Zoning Prohibits Granny Flats: What Are Your Options?

What if you look up your property’s zoning in your Local Environmental Plan and find that “secondary dwellings” are not listed as a permitted use on your particular block?

This is a common point of confusion.

The good news for homeowners is that in many cases the state policy still allows you to build a granny flat despite the local zoning prohibition.

Here’s why: the NSW Government introduced the Affordable Housing SEPP in 2009 specifically to encourage more secondary dwellings statewide as a form of affordable housing and flexible living.

Those provisions (now carried into the Housing SEPP) essentially override local prohibitions in residential zones.

The SEPP says that if your land is zoned residential (R1–R5) and you can have a house there, then you can also have a secondary dwelling there as a matter of course.

Your council’s zoning table might not have been updated to list secondary dwellings, but the state policy has legal weight that trumps the LEP for this issue.

In plain language: even if the LEP is silent or negative on granny flats in your zone, the state rules allow it, and council cannot refuse it simply because their own LEP wouldn’t normally permit it.

Using the SEPP to Get Approval: 

If you find yourself in this situation, you have two main routes to pursue:

• Complying Development (Private Certifier): If your proposal meets all the SEPP standards (zoning, size, setbacks, etc. as outlined earlier), you can bypass the council’s discretionary approval altogether. A private certifier can issue a Complying Development Certificate under the Housing SEPP provisions, and council’s zoning prohibition is effectively overruled by the state law. Many homeowners choose this route because it’s quicker and avoids any subjective decision-making by the council. So, even if your LEP says “granny flats not permitted in Zone X,” the certifier will rely on the SEPP’s authority to approve it, provided you meet the letter of those requirements.

• Development Application (Council Consent): If you can’t go the CDC route (for example, maybe your block is slightly under 450 m² or you have a heritage-listed property), you will need to lodge a DA with your local council. In your development application, you would cite the Housing SEPP as the environmental planning instrument that permits the development. Essentially, you’re telling the council “the state planning policy allows this secondary dwelling on my land.” Council planners are obliged to assess your application with regard to the SEPP. They cannot simply say “our LEP prohibits it, so refused”; they must acknowledge that the SEPP permits the use. As long as your proposal is reasonable and meets the intent of the controls, the council can grant consent even though their LEP on its own wouldn’t have allowed it. In fact, the law specifically prevents councils from refusing a granny flat DA on certain grounds – for example, they cannot reject it purely due to lot size if you have ≥450 m², as noted earlier

• The council can, however, impose conditions or require modifications to ensure things like privacy, stormwater drainage, fire safety, and other local considerations are addressed. In some cases, councils might apply a development contribution fee (a type of infrastructure charge) for the new dwelling, which was something not uniformly applied in the past but some councils have introduced in recent years. Always check if any local contributions plan might require a fee for a secondary dwelling (for instance, some councils started charging a few thousand dollars for granny flats after 2020).

Why Does the State Policy Override the LEP? 

State Environmental Planning Policies are instruments made by the NSW Government to deal with issues of state significance or to achieve uniform planning outcomes.

By making secondary dwellings permissible statewide, the government intended to boost housing supply and affordability.

Local councils initially had varied approaches – some didn’t allow granny flats at all, others had onerous requirements – which contributed to an under-supply of this type of housing.

The SEPP basically levelled the playing field by saying: if you have a normal residential lot, you get the right to add a small second dwelling, full stop.

This benefits homeowners (who gain rental income or space for family) and communities (by gently increasing rental stock without changing neighbourhood character too much).

Legally, when a SEPP and an LEP are inconsistent, the SEPP generally prevails to the extent of the inconsistency. So you’re not asking the council for an “exception” – you’re invoking higher-level planning law that they must follow.

Do Councils Ever Push Back? 

In the early days of the granny flat policy, some councils were reportedly unhappy with having to allow them, especially in low-density suburbs.

However, over a decade later, secondary dwellings have become an accepted part of the planning landscape.

If you go through the Complying Development route, the council doesn’t have much say at all – they’re usually just notified of the approval.

If you go through a DA, the council will evaluate things like design, privacy and compliance with standards, but they should not decline it outright if it aligns with the Housing SEPP.

They may attach reasonable conditions (e.g. requiring landscaping to maintain street amenity, or a privacy screen on a balcony facing a neighbour’s yard) – those are normal.

In some circumstances, a council might try to argue a site is unsuitable (for example, extreme cases like a floodway or significant bushfire risk area), but those issues would typically be caught by exclusions in the SEPP anyway.

By and large, councils now routinely approve granny flats submitted via DA as long as they’re well within the guidelines, because they know any refusal could be overturned on appeal given the state policy support.

If your local zoning says “no” but the state policy says “yes,” you can usually proceed.

Do your homework or get professional planning advice to ensure your proposal is solid.

Many homeowners in NSW have successfully built secondary dwellings in zones that, on the surface, didn’t allow them – thanks to the Housing SEPP.

This is an empowering bit of knowledge: you’re not at the mercy of outdated local rules.

As long as you follow the NSW guidelines, you have a legitimate pathway to approval.

Kit Homes vs. Custom Builds for Secondary Dwellings

Once you know you can build a secondary dwelling, another big decision arises: Should you buy a pre-fabricated “kit” or modular granny flat, or have one custom-designed and built from scratch? 

There are two main approaches to constructing a granny flat:

• Kit or Modular Secondary Dwelling: These are essentially pre-designed homes, often prefabricated in components. You might order a “granny flat kit” that comes with a set floor plan and a bundle of materials (walls, roof, etc.), possibly even pre-built sections that get assembled on your site. Some companies offer flat-pack kits for owner-builders, while others offer modular units largely constructed off-site and then trucked in. There’s also the possibility of DIY (Do-It-Yourself) vs. Professional Assembly with kits – some homeowners consider buying a kit and then either building it themselves or acting as the owner-builder managing trades.

• Custom-Built Secondary Dwelling: This means hiring a designer/architect to create a plan tailored to your needs and site, then engaging a builder to construct it on-site like any traditional house build. “Custom” can still range from using a standard design adjusted to your block, up to a completely unique architectural granny flat. In any case, a custom build is done piece-by-piece on your property by a licensed builder (or by yourself if you go down the owner-builder route without a kit).

Both approaches can yield a quality result – a fully functional little home in your backyard – but there are clear pros and cons to each in terms of cost, time, flexibility, and risk. Let’s break them down:

Pros and Cons of Kit Granny Flats

Pros of Choosing a Kit or Modular Build:

• Potential Cost Savings: Kits are marketed as a budget-friendly option. The base price of a kit home is often lower than a full custom build. For example, a simple kit granny flat might be advertised between $50,000 and $100,000 for the materials package, which can be significantly cheaper than hiring a builder for a turnkey project. Because a lot of the construction is standardised and done off-site in bulk, the per-unit cost of materials can be lower.

• If you are an owner with building skills (or you’re willing to coordinate subcontractors yourself), a kit can save you the builder’s margin and some labor costs. Essentially, you’re paying for the “parts” and doing more of the assembly management on your own. This can work out cost-effective for those experienced in construction management or remote area owners where bringing in a full build team is costly.

• Faster Construction (On-Site): Since kits come pre-cut or pre-made, the on-site assembly can be relatively quick. Many modular or kit home companies boast short construction times – sometimes a matter of weeks – because wall panels, frames, or even entire rooms are fabricated in a factory. A kit home might take only 3–5 weeks in the factory and another 10–12 weeks on site to complete on average which is faster than many custom builds. The initial “shell” of a flat-pack kit can often be erected in just a few days by a small team. A quicker build means you can start using or renting out the dwelling sooner, and you’ll typically incur less expense on labor (since tradespeople spend fewer total hours on-site).

• Simplified Choices (Less Design Hassle): Kits usually offer a set range of designs and finishes. While that means less customisation (see cons), it also means you have fewer complex decisions to make. For homeowners who find the design process overwhelming, a kit provides a tried-and-true layout and a menu of finishes. This can reduce “decision fatigue” and make the project feel more manageable. The stress level can be lower since you’re not agonizing over every detail – many aspects are predetermined. You know what floor plan you’re getting, and often the kitchen, bathroom, and exterior style are part of the package.

Cons of Choosing a Kit or Modular Build:

• Hidden Costs and Extra Work: The headline price of a kit can be misleading. Often, what’s provided in the kit is only part of the total picture. Foundations, utility connections, council approval fees, site works, and interior fit-outs might not be included. It’s important to understand exactly what the kit includes. Homeowners who opt for kits sometimes discover they need to source additional materials or hire trades for things the kit didn’t cover (plumbing, electrical, paint, floor coverings, etc.)

• If you’re acting as an owner-builder, these “extras” require project management skills. There’s a risk of budget blowout if you underestimated these costs. In fact, one report found nearly 40% of DIY builders exceed their budget due to unforeseen expenses

• The Housing Industry Association (HIA) has noted that DIY granny flat projects can end up costing up to $20,000 more than if they were built by professionals, largely because of these overlooked items and inefficiencies.

• Less Customisation: By nature, kit homes are less flexible. You typically cannot alter the floor plan dramatically – you choose from a catalog of designs. While some modular builders allow a bit of customisation, you’re still working within the constraints of what can be prefabricated. If you have a tricky site (odd shape, significant slope) or special design desires, a kit may not accommodate those well. Changes during construction are also very limited; with a kit, once it’s fabricated, you can’t easily move walls or change windows without significant cost. So, you sacrifice design freedom – the end product might not perfectly match your vision or utilize every nuance of your site.

• Owner-Builder Challenges: Many kits are marketed to the DIY enthusiast. But building even a small house is a complex project. Without experience, an owner-builder can run into problems: scheduling trades in the right order, ensuring all work passes inspection, and meeting all legal requirements. The average granny flat build takes around 900 hours of work. If you’re doing this on weekends, that could stretch many months. Delays are common and can be stressful.

• There’s also no builder warranty when you do it yourself – if something is faulty or goes wrong, it’s on you to fix (potentially at your expense). Some homeowners start a kit build only to find it overwhelming; there have been cases of half-finished kit homes where owners had to call in a professional to complete the job.

• Quality and Resale Considerations: A well-built kit home can be just as sound as a custom one, but if corners are cut, it might show. Future buyers can usually tell if a secondary dwelling was a DIY job versus a professional build. Issues like uneven finishes, ill-fitting joinery, or incomplete certification can hurt your property’s value. If a kit home isn’t certified correctly or is done to a lower standard, it might even be seen as a liability by buyers.

• Also, kit homes might use more lightweight materials and simpler finishes which are perfectly functional but could be perceived as lower quality compared to a custom build with high-end materials. Thus, the resale value increase from a granny flat might not be as high if it’s an obvious kit/DIY project, unless finished impeccably.

Pros and Cons of Custom-Built Granny Flats

Pros of a Custom Build:

• Design Freedom: With a custom project, you can design the secondary dwelling exactly as you want (within planning limits). You aren’t constrained by a preset layout – you can configure the rooms to suit your yard, match the style of your main house, or accommodate specific needs (e.g. an accessible design for an elderly parent). The choice of materials, fixtures, and finishes is up to you and your builder. This means the granny flat can be made to complement your existing property beautifully, potentially adding more value. You can also optimise the design for the site (maximize natural light, preserve a cherished tree, etc.). Essentially, you get a unique product tailored to your requirements, which is a big draw for many homeowners.

• Turnkey Convenience (with a Builder): Hiring a professional builder (especially a company specialising in granny flats) means they handle the project management and all the construction details. They will include things like plumbing, electrical, internal finishes, and obtaining the occupation certificate at the end. Reputable builders also include or assist with the design and approval process. This one-stop service can be far less stressful than coordinating everything yourself. While you pay for this service, you gain peace of mind that experts are ensuring the building is up to code and high quality. At completion, you get a “turnkey” home – ready to move in or rent out immediately. For most homeowners not experienced in construction, this full-service approach is invaluable.

• Warranty and Quality Assurance: A licensed builder in NSW must provide a warranty on the construction (under Home Building laws). Typically, there’s a defects liability period (for example, 12 months for minor defects, and longer statutory warranties for structural issues). This means if something isn’t right, the builder is obligated to fix it. With a custom build by a professional, you also have the benefit of their expertise to navigate any surprises that come up (such as tricky soil that needs special foundations or council requirements). In terms of longevity, a well-built custom granny flat can last for decades with minimal issues, and you’ll likely have fewer maintenance problems down the line compared to a hastily assembled kit.

• Additionally, professionally built dwellings often attract better rental outcomes – one source noted that professionally built granny flats tend to have higher rental yield and attract better quality tenants than DIY builds.

• Flexibility During Construction: If you’re working closely with a builder, you sometimes have the ability to make minor changes or customisations as the build progresses (for example, shifting a window, or upgrading a finish mid-way). While changes can add cost and are not always advisable last-minute, the point is that a stick-built project has some adaptability. In contrast, a prefabricated kit is largely fixed once manufacturing begins. With custom builds, if you realize you want an extra power outlet or a different paint colour, those adjustments are usually possible with your builder – you have more control throughout the process.

Cons of a Custom Build:

• Higher Cost: All the benefits of custom design and full service do come at a price. Custom builds are generally more expensive than kits – sometimes significantly. You’re paying for personalised design work, potentially more premium materials, and the contractor’s overhead and profit. As a rough guide, a basic, small custom-built one-bedroom granny flat might start around $100,000, and a larger two-bedroom could range from $130,000 to $200,000 depending on inclusions. High-spec or architect-designed projects can exceed $200,000. This is notably more than the bare-bones kit costs. For some homeowners, the added investment is worth it for the quality and ease, but budget-conscious projects might lean toward kits or very simple builds. Also, custom projects can sometimes encounter scope creep – where you decide to add features or upgrades and the cost increases. It requires discipline to stick to a budget.

• Longer Build Time: A traditional custom build usually takes longer than a prefab. You might be looking at several months of construction on-site (commonly around 3-4 months for a granny flat build by a contractor, depending on weather and complexity). Some builds, especially those with complications or busy builders, can stretch to 6 months or more. In contrast to the speedy assembly of a kit, a custom build’s timeline will include site preparation, pouring a slab, framing, roofing, interior fit-out, etc., all sequentially on your property. This could mean a longer period of disruption (noise, tradespeople coming and going, part of your yard cordoned off). For example, a custom project might run 4–5 months from breaking ground to handover, whereas a kit might be done in half that time if everything goes perfectly.

• More Decisions and Involvement: With complete freedom comes the burden of choice. You’ll be making many decisions in a custom build – from the layout to exterior cladding, paint colors, kitchen design, appliances, lighting fixtures, and so on. Some people enjoy this process; others find it stressful. Miscommunication or indecision can lead to delays. You also need to be more involved in reviewing plans, attending site meetings, and checking that the work meets your expectations. Essentially, the project will demand more of your time upfront (and potentially during construction) than simply ordering a pre-designed kit.

• Upfront Design Costs: While many kit packages have minimal design fees (since they use standard plans), a custom secondary dwelling will incur professional design or drafting fees. Engaging an architect or designer could cost a few thousand dollars. One estimate for designing a granny flat ranges from $6,000 up to $20,000 in design fees, depending on complexity and whether you need things like engineering drawings or consultant reports (e.g. for bushfire assessment, flooding, etc.). Some design-build firms roll this into the total price, but essentially it’s part of the overall higher cost. Additionally, going through a DA with council for a custom design can have costs for reports and possibly a planning consultant to prepare the application. These are usually not huge relative to construction, but they add to the project budget and need to be accounted for.

Which to Choose? 

It ultimately depends on your priorities. If you have a very tight budget and are somewhat construction-savvy (or willing to manage a project), a kit granny flat might be appealing – just go in with eyes open about the hidden costs and effort required.

On the other hand, if you value your time, want a higher-end finish, or need a design that perfectly suits your block, a custom build by professionals is likely worth the extra cost.

Many homeowners find that after adding up all the “extras” needed to finish a kit home, the price difference to a turnkey custom build isn’t as large as expected.

In fact, some builders argue there’s little savings at all, and a lot more hassle, in doing a DIY kit.

Carefully price out both options and consider getting quotes from a few builders and kit suppliers.

Also consider a middle ground: some companies offer customized modular builds – a hybrid where you get a semi-custom design but built with modular techniques for some cost/time savings.

The NSW market has plenty of providers in both categories, so do some research and maybe speak to past customers of each to gauge their experiences.

Secondary Dwelling vs Studio: What’s the Difference?

You might have also heard the term “studio” or “garden studio” in relation to backyard buildings.

It’s important to understand the distinction between a secondary dwelling (granny flat) and a studio, because they serve different purposes and have different approval considerations.

Secondary Dwelling (Granny Flat): 

As discussed, this is a permanent self-contained residence. It has all the features of a small home – typically a kitchen, bathroom, bedroom/living areas, and laundry facilities.

It’s meant for someone to live in as their home, potentially as an independent household.

A secondary dwelling is a defined land use in planning terms, which the Housing SEPP explicitly permits (in the zones we covered). When you build a granny flat, you are creating a fully functional second dwelling on your lot.

Studio (Ancillary Structure): 

A “studio” in the context of a backyard building usually means a habitable structure that is not a separate dwelling.

Think of it as an external room or shed that is associated with the main house.

For example, it could be a home office, art studio, teenage retreat, music room, or guest room.

The crucial difference is that a studio is not designed or approved for someone to live there permanently as an independent residence.

In practical terms, a studio might have an open living area, maybe a small kitchenette (or just a bar fridge and microwave but not a full kitchen), and possibly a bathroom.

It might even have a bed for guests.

But it will not have a full kitchen for cooking or laundry for washing – because the presence of those would classify it as a dwelling.

A studio is meant to be used by members of the main household (or non-paying guests), not rented out as a separate home.

Size and Regulatory Differences: 

Under many local development control plans, studios or similar outbuildings are limited in size and use. For instance, one common rule some councils have is an area limit around 36 m² for a studio (if it’s to remain ancillary).

This is smaller than the 60 m² allowed for a secondary dwelling.

The idea is to keep studios clearly subordinate and not easily convertible to full-time residences.

Studios are often assessed as an “outbuilding” or “cabana” in planning terms.

They may sometimes be approvable as Exempt or Complying Development under the NSW Codes SEPP if under certain size/height limits (for example, a tiny 20 m² workshop might even be exempt from approval).

If larger or if they have a bathroom, typically you’d lodge a DA to council describing it as a studio or detached habitable room.

Use and Rental: 

By regulation, a studio is considered a non-inhabitable space for planning purposes, which means you aren’t supposed to lease it out as a separate dwelling.

It’s there for the enjoyment of the household.

Some councils might allow short-term or incidental use – for example, you might rent it out as a workspace to someone who comes during the day (not living there), or occasionally have an exchange student or family friend stay, similar to renting a room in your house.

But you cannot legally have someone living there full-time as their address, because that would essentially make it a dual-occupancy without approval.

In contrast, a secondary dwelling can be rented to anyone – a family member or a tenant – with no restriction in the SEPP on who lives there or whether you charge rent.

(There is no affordable housing rent control on granny flats; the term “Affordable Housing SEPP” was just because it was expected that these smaller dwellings would be more affordable by nature.)

Building Code Classification: 

A secondary dwelling is a Class 1a building (same as a house) or part of a Class 2 (if it’s attached in a two-storey configuration) under the Building Code of Australia.

A studio might be considered a Class 1 (if habitable space) but not a separate dwelling – sometimes it’s just seen as part of the main house for occupancy purposes.

If it doesn’t have facilities for separate habitation, it strengthens the argument that it’s not a dwelling. This distinction matters in how you justify the project to authorities.

Approval and Statement of Environmental Effects (SEE): 

When you apply for approval, you will typically need to submit a Statement of Environmental Effects (SEE) – basically a written report explaining the proposal and addressing how it meets planning requirements and impacts the environment/neighbours.

The content of the SEE will differ slightly for a secondary dwelling versus a studio:

• SEE for a Secondary Dwelling: Here you’ll emphasise compliance with the Housing SEPP. The SEE should state that the development is a secondary dwelling as defined in the SEPP, is permissible on the land under that policy, and meets the specific development standards (list how it complies with floor area, height, parking, etc.). You’d also address general considerations like: it will not adversely impact neighbors in terms of privacy or shadowing more than a typical single-storey addition (especially if it’s under the same controls as any house extension). You might note that the appearance will be in keeping with the residential character, and any potential environmental issues (tree removal, stormwater drainage, bushfire risk) are being managed. Essentially, you justify that this is a small-scale addition of housing that has been anticipated by planning policies, and any minor impacts are acceptable or mitigated. For example, if your design has windows facing a neighbour, you might propose privacy screens or frosted glass to address overlooking, and mention that in the SEE. The goal is to convince the consent authority that the granny flat “will not have significant environmental or amenity impacts and is consistent with planning objectives.”

• SEE for a Studio: In this case, you must be very clear that the structure will not be used as a separate dwelling. The SEE would likely state something like, “The proposed detached studio is an ancillary structure to the existing dwelling, providing additional hobby/storage space and occasional guest accommodation. It contains no full kitchen or laundry facilities and is not intended for separate occupancy.” By clarifying this, you address the key concern upfront – that you’re not quietly creating a second dwelling without calling it one. You’d then focus on similar impact matters: the studio’s size is modest (within the allowed 36 m² or whatever local guideline), its height is low, design matches the backyard aesthetic, and it won’t generate extra traffic or demand for parking since it’s not a new household. You’d discuss how it’s sited to preserve open space and not detract from neighbors (maybe it’s tucked behind the house or screened by landscaping). Essentially, the SEE for a studio tries to justify that this building is like a glorified shed or extra room, not a new dwelling – therefore it should be viewed more leniently in terms of planning impact. This can be important if your LEP doesn’t allow dual occupancies in your zone; you’re distinguishing this project from a dual occupancy by stressing its ancillary nature.

Why choose one over the other? 

If your goal is to have a rentable unit or independent living for someone, you need to go the secondary dwelling route and meet those requirements.

If, however, your council truly doesn’t allow a secondary dwelling and you can’t use the SEPP (say you’re in a very restrictive zone), sometimes people opt to build a “studio” instead as a workaround.

They’ll build a structure without a kitchen, get it approved as a studio, but perhaps later (quietly) add a kitchenette or use it in quasi-dwelling fashion.

Be cautious with this approach: if it’s not approved as a habitable dwelling, renting it out could be considered illegal and unsafe.

Another reason to choose a studio is if you genuinely just need the space for personal use – for example, you work from home and want an office separate from the main house, or an art studio to pursue a hobby.

In those cases, not having a full kitchen is no big deal, and the simpler approval can be beneficial.

Also, you can have both – one interesting note is that some properties can have a secondary dwelling and a separate studio structure, since by definition the studio isn’t a dwelling.

It’s possible to end up with three structures on one lot: the main house, a granny flat, and a detached studio – as long as the studio is truly separate and used differently.

This is something someone might do if they want, say, a home gym or office (studio) in addition to a rental unit (granny flat).

The decision between a granny flat vs a studio comes down to habitation: a granny flat is a small house; a studio is an extra room.

Make sure you apply under the correct category to avoid issues later.

If you intend to generate income by renting it out long-term, go for the secondary dwelling approval.

If it’s purely for your own use and you want to keep things simpler and smaller, a studio might suffice. Just be clear in your plans and SEE so the authorities see it the same way you do.

Costs: From Design to Construction (Kit vs Custom)

Building a secondary dwelling is a significant project financially.

Homeowners should budget for several components of cost: design and planning approvals, and the construction itself. 

We will outline typical cost expectations for both a kit-based project and a fully custom build.

Keep in mind costs can vary widely based on location (Sydney metropolitan vs regional NSW), site conditions (flat vs sloping, soil type), level of finish (basic vs luxury), and the current market (material and labor costs in 2025).

Design and Approval Costs

Before a shovel hits the ground, you’ll spend money on preparing the project:

• Design/Plans: Unless you’re purchasing a ready-made kit with included plans, you’ll need drawings. For a custom design, hiring an architect or building designer for a granny flat might cost anywhere from a few thousand dollars up to around $6,000–$15,000 for full services on a simple project. This usually covers concept designs, the DA/CDC drawings, and coordinating any required engineering. Many granny flat specialist builders offer pre-designed plans at low or no upfront cost (their design fee is built into the construction cost). If you go with a kit, the kit provider often supplies standard plans (sometimes you still need a draftsperson to adapt them to your site or add details for approval). Budget at least a small amount for drafting in case adjustments are needed for council or certifier.

• Council/Certifier Fees: Whether you use a certifier or council, there are fees for approval. A Complying Development Certificate from a private certifier might cost on the order of $3,000 to $5,000, which includes their inspections. A council Development Application fee will depend on your project’s estimated cost; for example, a $150,000 project might incur a council lodgement fee of perhaps $400–$1,000 (varies by council). Additionally, there could be fees for required reports: common ones include a BASIX certificate (energy efficiency report, a few hundred dollars) and specialised assessments if needed (e.g. bushfire report $500).

• Development Contributions: Some councils levy a developer contribution (Section 7.11 fee) for secondary dwellings. This wasn’t always the case – earlier, granny flats were often exempt or had a nominal $0 contribution to encourage them. However, policies have shifted in some areas. For instance, Wollondilly Shire now charges contributions for granny flats approved after mid-2020. The fee could be a set amount or a small percentage of the project cost (it might range anywhere from a couple thousand dollars to over $10,000 in high-demand areas). Many councils still have no contribution for secondary dwellings up to 60m² (seeing them as minor development), but it’s essential to check your local council’s contribution plan. If a fee applies, it will be payable before you can get the construction certificate or occupation certificate.

• Services and Site Prep: Include in your plan the cost for connecting services like water, sewer, and electricity to the new dwelling. If your existing systems can be extended, great; if not, you may need upgrades (for example, a larger hot water system or an additional sewer connection point). These costs are construction-related but should be considered early as part of the budget.

In summary, for planning and design stage, a rough ballpark could be $3,000–$12,000 in soft costs (design, approvals, reports) before construction.

If you use a one-stop company, they might roll these into the contract price – just ensure you know what’s included.

Construction Costs: Kit vs Custom

This is the big ticket item. We’ll compare typical costs for a kit home scenario versus a custom build scenario:

• Kit Build Construction Costs: If you are buying a kit for DIY or to assemble with minimal hired help, you might find basic one-bedroom kit packages as low as around $40,000–$60,000, but remember that’s not the all-in cost. Let’s assume a more realistic approach where you buy a kit and hire trades for plumbing, electrical, slab, etc. The kit itself (for a two-bedroom 60m² unit) could be in the ballpark of $70,000–$100,000 for the materials. Then you need to add labor for assembly and finishing – perhaps another $40k or more. Some data suggests that when all is said and done, DIY projects can end up costing more than professional ones. However, if executed efficiently, you might complete a modest granny flat for around the lower end of the market range. Real-world anecdotes vary, but an often-quoted average range for granny flats is $80,000 to $160,000 total.

• A kit-built project might aim for the lower portion of that range. If you personally do a lot of the work, you might hit, say, ~$90k total outlay. If you end up hiring a builder to finish your kit, the cost could climb toward or even beyond what a custom would have been (because the builder is inheriting someone else’s partially-done project, which can be inefficient).

  Example: A homeowner in Sydney buys a 2-bed kit for $75k, spends $10k on a slab, $5k on electrician/plumber, $5k on bathroom/kitchen fixtures not in kit, and $15k on various finishes and labour help. They might total around $110k. If that same homeowner had gone to a builder, the builder might have quoted $130k for a similar turnkey build. The kit saved them a bit, but they also invested their own time managing it.

• Custom Build Construction Costs: For a custom build by a licensed builder, current market averages in NSW (2024-2025) put a standard granny flat in the range of $100,000 to $160,000. The exact figure depends on size and specifications. A basic 1-bedroom (around 40m²) might be closer to $100k. A full 60m² two-bedroom with nice finishes might be $150k or more. If you opt for higher-end materials, complex design (like an ultra-modern style or high ceilings), or difficult site work, costs can exceed $180k. Indeed, some granny flat builders report that high-spec custom builds can top $200,000. On the other hand, many companies advertise package deals: for instance, “2-bedroom granny flat from $135,000”or “1-bedroom from $100,000”. These usually include everything (basic inclusions). It’s wise to compare what each quote includes: some cheaper quotes might exclude things like floor coverings, blinds, landscaping, or connection to services, whereas more expensive ones might be truly all-inclusive.

  
  

• Example: A reputable granny flat specialist gives a quote of $170,000 for a 2-bed 60m² unit, including design, council approval, construction, and standard inclusions (kitchen, bathroom, paint, etc.). This would be on the higher side but presumably comes with minimal hassle and a fixed price contract. Another general builder might quote $140,000 for a simpler design 2-bed but add that the owner is responsible for paint and floor finishes, etc. Always compare apples to apples with quotes.

If you have the skill and time, a kit/DIY build could save you maybe 10-20% on paper. But if mismanaged, it could also cost the same or more than a builder. A custom build guarantees you know the price up front (often a fixed contract) and you get the keys ready to go. You pay a premium for that convenience and quality assurance.

Also consider financing: If you need a loan for the build, banks might be more willing to lend for a contracted build (with a fixed price contract) versus an owner-builder project (which they find riskier). That might influence your decision if you’re not funding it entirely with savings.

Finally, remember to keep a contingency (10% of the budget, for example) aside for unexpected issues. Ground conditions, material delays, or minor plan changes can add costs.

Return on Investment (ROI) of Secondary Dwellings

Building a secondary dwelling isn’t just about the upfront cost – it’s also an investment that can yield returns over time.

Homeowners typically look at two forms of ROI: rental income generated and increase in overall property value.

Rental Income and Yield: 

One of the primary motivations for adding a granny flat is the rental income it can produce.

In NSW, especially in sought-after suburbs or those with high demand for rentals, a two-bedroom granny flat can often rent for a substantial amount.

Typical rents might range from around $200 up to $600 per week depending on location and quality.

For example, in outer suburbs or regional towns you might get $250/week, whereas in Sydney metro areas with higher rents (e.g., North Shore or Inner West with tight rental markets), $500–$600/week is not uncommon for a well-built two-bed granny flat.

To put that in perspective yearly: $300/week is ~$15,600 per year; $500/week is $26,000 per year. If your build cost was say $130,000, a rent of $26k/year is a 20% gross rental yield on the construction cost – which is exceptionally high compared to most property investments.

Even $15k/year on $130k is about 11.5% yield. Many sources cite expected granny flat yields in the range of 10–20% per annum on the initial investment.

This suggests a potential payback period of roughly 5 to 10 years just from rent, after which the continued income is profit (not considering maintenance and other costs for now).

Of course, yields will vary: if you spent quite a lot (e.g. $200k build) and can only rent for $400/week ($20.8k/year), that’s about 10.4% yield; still strong, but on the lower end of that spectrum.

These yields are much higher than a typical investment property purchase, because the cost is lower (you’re not buying land, just building on land you have) and the rent, while not as high as a whole house, is substantial.

Essentially, a granny flat often ends up positively geared – meaning the rent exceeds any financing costs – which can help pay off your mortgage or provide extra cash flow.

Property Value Increase: 

Beyond the income stream, adding a secondary dwelling can significantly boost your property’s market value.

There was a notable study by CoreLogic and Archistar in 2019 that quantified this: it found that building a granny flat could increase a property’s value by up to 30% and boost the rental income potential by about 27%.

For instance, on a $800,000 house, a 30% uptick implies a $240,000 increase, which is well above the cost of construction – a tidy profit if realised.

Not every case will see the full 30%, but it shows the scale of impact can be large.

The report gave an example that for a house worth $500k, the granny flat might add roughly $150k in value (which is that same 30% figure).

It also emphasised the rental boost: essentially, a property with dual income (house + flat) is very attractive to investors and can command a premium price.

Anecdotal sales evidence supports this. Cited examples include a home in Sans Souci (Sydney) that sold for $2.2 million because it had a granny flat, whereas similar homes without one were around $1.08 million.

That difference is huge, though it may also reflect the house being larger (since with the granny flat, the total bedrooms increase, etc.).

Another example: in Cromer, a house with a granny flat sold for about 25% more than the suburb median.

These are individual cases, but they indicate buyers do value the additional dwelling.

Especially for investment buyers, a house with a legal secondary dwelling means two rental incomes from one purchase – often a positively geared investment from day one.

For owner-occupiers, knowing they could rent out the flat for extra income (or use it for family) also adds value.

How Long Will it Take to Recoup Costs? 

If you rent out the secondary dwelling, the income can eventually cover what you spent and then some.

For example, imagine you spent $120,000 building it. If you rent it for $400/week, that’s ~$20,000 a year. In just 6 years, you’d gross $120k, essentially paying back the cost (not accounting for interest, vacancy or expenses for simplicity).

Everything after that continues to be income, plus your property value is higher (so when you sell, you likely get back the capital as well).

Many owners find that a granny flat “pays for itself” in under a decade in terms of rental yield.

If you occupy it with a family member (no rental income), then your ROI is more intangible – but maybe you save on costs like not having to support that family member’s separate housing, etc., and your property is still worth more later.

ROI Caveats: High returns are possible, but remember to account for costs like maintenance (a tenant will cause wear and tear, you might need to repaint or fix things periodically) and management (if you hire a property manager, that’s typically ~7% of rent).

Also, while you can charge rent, you’ll be paying tax on that rental income (after expenses) at your income tax rate. Still, even after expenses and taxes, many find the granny flat yields a nice net positive.

Positive Cash Flow Asset: 

If you still have a mortgage on your main property, a granny flat’s rent can help service it.

For example, $300/week could allow an extra mortgage payment that significantly cuts down the loan term.

Meanwhile, because it’s on the same title, you typically maintain a single set of council rates (though some councils might charge a bit more for the extra dwelling in the rates calculation) and one set of land tax (if applicable).

In other words, you’re squeezing more income out of the same piece of land.

Depreciation and Tax Benefits: 

Investors also note that a new build comes with depreciation benefits.

You can depreciate the construction cost (over 40 years for the structure, plus faster for fixtures) on your tax if it’s rented out, which can reduce your taxable income.

Market Demand: 

The ROI is of course tied to demand for such rentals. In many parts of NSW, there is high demand from groups like students, young couples, single professionals, or older downsizers for these small, affordable dwellings.

The vacancy rates for granny flats tend to be low when located in areas with amenities.

They often compete with apartment rentals; someone might prefer a quiet granny flat over an apartment unit.

That strong rental demand underpins the ROI figures we’re discussing.

Overall, research and experience show building a secondary dwelling can be one of the better investments a homeowner can make on their property. 

It’s not without effort and cost, but the dual benefits of immediate income and increased equity are compelling.

Many homeowners see a granny flat as “turning dead space into cash flow” – monetising a backyard that was just grass before.

As always, do some due diligence: check typical rents in your suburb, talk to local real estate agents about resale value impact, and ensure your build cost doesn’t overcapitalise beyond what your area can support.

But in general, in NSW’s housing market, a well-executed secondary dwelling project often yields a strong ROI and can be a stepping stone to financial goals (like paying off your home sooner or providing rental income in retirement).

Renting Out Your Secondary Dwelling: Rules and Responsibilities

Once your secondary dwelling is approved, built, and ready to occupy, you’ll want to ensure you follow the proper rules when renting it out.

Renting out a granny flat is much like renting any residential property, but there are a few nuances to be aware of:

Occupancy and Use Conditions: 

First and foremost, make sure you have obtained the Occupation Certificate for the secondary dwelling from your certifier or council. This legally certifies the building is fit to live in.

You cannot legally rent it to tenants until you have this certificate in hand.

Check if your development consent has any specific conditions on the use of the secondary dwelling.

Generally, in NSW, there are no special occupancy restrictions – you do not have to rent it to a relative or anything like that (that used to be a myth – the law explicitly allows you to rent it to anyone or let family/friends live there, with no occupancy condition or rental cap.

However, if you are in a rare situation of a council in a rural zone that only allowed it for dependent housing (some rural LEPs have such clauses), then you’d need to adhere to that (e.g., maybe a condition that it only be occupied by a family member or farm worker).

For the vast majority of cases under the Housing SEPP, any person can live in the secondary dwelling and you’re free to charge market rent.

Tenancy Agreement: 

When renting to a non-family tenant, it’s best practice (and legally required if charging rent) to have a written Residential Tenancy Agreement – the standard lease in NSW.

This lease should clearly outline the rented premises.

If the tenant is only renting the granny flat, make sure it’s clear what areas they have access to (e.g., do they have a portion of the yard, a designated parking spot, etc.?).

Even though the flat is on the same title as your house, from a tenancy perspective it can be treated as a separate dwelling with its own lease.

You’ll also need to lodge any bond they pay with the NSW Rental Bond Board, just as you would for any rental property.

Landlord Obligations: 

As a landlord of a granny flat, you must comply with the Residential Tenancies Act and other relevant laws.

Key obligations include: maintaining the premises in a safe and habitable condition, attending to repairs, and ensuring it meets safety requirements (like having functional smoke alarms).

NSW law mandates smoke alarms in all residential dwellings – so make sure you have properly installed smoke detectors in the secondary dwelling (and check them annually).

If the property is furnished, you’ll want to ensure any supplied appliances (like a stove, hot water system, heater) are safe and well-maintained.

Do an initial condition report when the tenant moves in, and follow usual procedures for inspections, notices, etc., as any landlord would.

Even though you may live next door, it’s wise to keep the landlord-tenant relationship professional.

Utilities and Bills: 

Decide how you will handle utilities. Some setups have separate electricity meters for the granny flat, allowing the tenant to pay their own electricity usage. If not, you might include an agreed amount in the rent to cover utilities or have a clause on how it’s split.

Water in NSW cannot be separately charged unless the granny flat has a separate meter and is separately water-efficient.

Often, landlords just incorporate reasonable water usage into the rent. Internet can be tricky – if the flat can tap into the main house’s connection (Wi-Fi), you might share it, or the tenant may install their own line if needed.

Clarify these arrangements upfront in the lease to avoid disputes.

No Strata or Separate Title: 

Remember, you cannot subdivide the land to create a separate title for the granny flat, and you also generally cannot separately strata title it.

This means you can’t sell it off nor have a different official address for it (it will usually be something like “Flat 1, 10 Smith St” and “Flat 2, 10 Smith St” if needed for mail).

For renting purposes, that’s fine – you’ll just use the same property address.

But as the owner, you’ll be responsible for all council rates and property upkeep for the whole lot.

You might consider adjusting your insurance: inform your home insurance provider that you have a secondary dwelling that’s tenanted.

You may need landlord insurance for that structure to cover tenant-related risks (damage, liability, etc.), in addition to your normal home insurance.

Parking and Neighbours: 

While the SEPP didn’t require extra parking, in practice if you rent out the flat, that tenant will likely have a car.

Make sure there’s clarity on where they can park.

If only on-street parking is available, it might be courteous to inform neighbours that a new resident will be parking on the street.

Good relationships can prevent friction. Similarly, having an open dialogue with your granny flat tenant about living adjacent to you (or your other tenants if you rent both dwellings) can help set expectations about noise, shared access ways, etc.

It’s unique because you’re in very close quarters with your tenant compared to a typical rental scenario, so mutual respect goes a long way.

Short-Term Rentals: 

Some owners consider renting the granny flat on platforms like Airbnb for short stays instead of having a full-time tenant.

This is legal (the secondary dwelling is an approved dwelling), but note that NSW has a code of conduct for short-term rentals.

If you (the host) are not living on site, there are limits in certain areas on how many days per year it can be rented short-term (180 days in some Sydney areas, for instance).

However, if you reside on the property (in the main house) and just rent the flat to tourists occasionally, those restrictions are generally looser (you’re considered a “hosted” STRA).

Make sure to register the dwelling on the NSW short-term rental accommodation register if doing Airbnb, and have safety measures like fire extinguishers and information for guests as required by the STRA Fire Safety standards.

Tax Implications: 

Renting out the granny flat will typically mean declaring the rental income on your tax return.

The upside is you can deduct expenses related to that income (a portion of property insurance, maintenance costs, etc., proportional to that part of the property).

One catch: if you rent out part of your principal home (which your granny flat is, legally), it may impact your Capital Gains Tax (CGT) exemption for the family home.

Usually, your principal residence is CGT-free when you sell.

But if a part of it was used to produce income, that portion might be subject to CGT on sale for the period it was rented.

For example, if the granny flat comprises 25% of the property value, then roughly 25% of the capital gain from the time it was rented could be taxable.

This is a complex area – it might be worth consulting an accountant for advice on the implications. (There are also new laws providing a CGT exemption for formal “granny flat arrangements” for elderly parents or disabled family members – but that only applies in those family situations where a formal agreement is in place, not for ordinary rentals.)

Maintenance and Council Compliance: 

Treat the secondary dwelling like a small home that needs upkeep.

Gutters will need cleaning, the garden around it needs tending (whether you assign that to the tenant or handle it).

Ensure any separate fencing or dividing of yards is safe and well-maintained.

Also, remain compliant with any approval conditions – for instance, if you had a condition to maintain certain landscaping for privacy, don’t let that landscaping die off.

If you ever want to modify the granny flat (extend it, etc.), you’ll need further approval, just as you would for the main house.

In essence, renting out a secondary dwelling is straightforward – you become a landlord of a second dwelling on your property.

NSW tenancy laws and standards apply the same as if it were an apartment or house you were renting out.

There’s no special granny flat rental permit or anything; once it’s approved as a dwelling, you can lease it.

Many homeowners successfully manage this and enjoy the extra income.

Just be prepared for the responsibilities: finding a good tenant, possibly hearing the occasional noise of another household on your land, and being responsive to maintenance issues.

If done right, it can be a harmonious and financially rewarding arrangement for both you and the tenant.