Industry experts say that rental yields of up to 15 per cent can be achieved on the backyard “granny” flat in what has become one of Australia’s hottest property markets, according to property and tax specialists.
While the soaring property and rental prices along with growing strong demand for rental accommodation have created rent-generating options for house owners with the spare room or an empty shed in their backyard, there is the other side of the story.
What happens if it all turns pear shaped, as plenty of these arrangements do?
In this podcast interview, estate planning lawyer and Partner Angela Harry discusses the risks and how you can best prepare for them.
Dan: Thanks, Angela, for joining me. Angela, why are granny flats becoming an attractive option for both ageing parents and their families?
Angela: Elderly parents may come to an accommodation arrangement with their family for a number of reasons. These may include convenience, bereavement, financial necessity or dependence, response to a financial proposal from a family member—usually a child—or if they have a need for companionship or accommodation. We see ageing population and the ever-increasing cost of age care, more families are looking strategies to keep elderly family members within the home for longer. Granny flats are a great tool for doing this.
Dan: There’s the other side to them as well, isn’t there? In fact, a neighbour of mine who vacated her rental property to go and live with her daughter and her husband and the kids. It sounded really, really great, and of course, six months later she was back in the rental accommodation next door. So there are some of those characteristics of the granny flat option that are riddled with a bit of risk, aren’t there?
Angela: Yes there are. In making such arrangements, there are many pitfalls and potential problems particularly in regards to relationships and legal consequences. There’s been a steady stream of cases coming before the Supreme Court which illustrate the dangers when things go wrong.
Dan: What are some of those risks?
Angela: One of the key risks to consider is the impact on the wills of the elderly parents. The elderly parent needs to be aware that once the property or money is given to the child in exchange for the granny flat interest, that asset no longer forms part of their estate, their right they’ve got only exists in their lifetime. This means that upon the death of the parent, any property or money handed over to the child won’t be distributed in accordance with their will. This can often cause issues with other children. Other risks to consider included situations where the child who is given the property or funds actually dies themselves, they lose capacity, they go through bankruptcy, or they go through a divorce themselves. But the most common risk to consider is what happens if the parties don’t get along? We often see friction arise between elderly parents and usually the daughter or son-in-law.
Dan: Which is exactly what happened to this neighbour, where initially their relationship was great, then it all turned very sour. And of course, the family had actually shelled out a lot of expense in building the granny flat. Now they’ve got this granny flat, I assume, that is no longer a granny flat. What are some of the steps that parties can take to minimise those risks?
Angela: In many of these cases in retrospect, it’s possible to see that the role of the lawyer can be helpful and constructive, if consulted by the parties before they actually enter into the accommodation arrangement. For one thing, advice before the commitment may help to avoid some of the problems I mentioned, like anticipating conflicts, what happens with death, insolvency, bankruptcy, family law disputes, and perhaps ensuring that there are alternative dispute resolution mechanisms in place. This way it might help to assist any family conflict that arises before it actually happens, and doesn’t necessarily lead to litigation.
It’s really important for everyone who is entering into the agreement to be clear about the terms under which they actually enter into the arrangement. No matter how close families are, it’s amazing how families have a falling out in these situations, and the parent who transferred the home wants their property back. There needs to be provisions for what happens if things turn sour.
Factors that should be considered and included in an agreement include:
- Who does what for whom?
- So who does the cooking?
- Who does the cleaning?
- Who does the washing?
- Who pays for what?
- Phone expenses
- How much privacy each person will have within the home.
- How much independence the elderly parent will have to lead their own lifestyle ( how much they’ll be tied down to the family’s timetable)
- Whether the elderly parent wants to spend time with grandchildren, and how much they want to be involved in child care.
- What is going to happen if the elderly person’s health deteriorates and they need care, so then they need to go into a care facility?
Dan: And by the sounds of it, I bet the majority of people just don’t go to the extent that’s necessary minimise those risks.
Angela: That’s correct.
Dan: What about Centrelink? It’s an interesting impact there as well, isn’t there?
Angela: Yes, any elderly parent who is looking at a granny flat arrangement should consult with Centrelink first, and also receive financial advice before doing so. For social security purposes, a parent can transfer their home or pay money to a child under the granny flat provisions for a lifetime right to use that granny flat. Normally, the transfer property or money would be deemed to be a gift and would affect the pension entitlement of the parent. However, the granny flat rule exemptions with Centrelink have allowed the property transferred or money paid to be exempt the usually deeming legislation. The requirements are pretty flexible. You don’t actually have to build a separate granny flat or a separate residence. As long as there’s a designated room or area that allows the parent’s exclusive occupancy, and there’s an agreement in place to support that, Centrelink will usually approve the arrangement.
Dan: Given that there’s so many moving parts to all this, when do you actually start in a practical sense, you as an experienced lawyer in this regard? Where do you start with somebody who comes to you and says, “Look, I am considering moving in with my youngest son and his wife. We’re going to build the granny flat.” What do you do, or where do you start with all that?
Angela: First point we check if they have spoken with Centrelink or received financial advice. If the haven’t done that, we recommend that they do that as a first point of call, to make sure that any pension entitlements won’t be affected. Second point of call is to sit down and go through all these issues I outlined before. So give consideration to what happens if their child passes away or loses capacity, or there’s a breakdown in the relationship of the child and their spouse. And also set out those matters that I went through before about who’s going to do what. I basically set out all the possible implications of what could happen if things go wrong and make sure the child and the parents are all on the same page.
Dan: And I bet it’s an eye opener.
Angela: It definitely is, because we often see families hat come in and they haven’t had these discussions, and they’ll have very different outlooks on how the arrangement is going to work.
Dan: Yeah, at first blush, it just sounds so easy, doesn’t it? I mean I’m seeing vehicles driving around saying “We’ll build you a granny flat.” There’s almost this push in a sense to divert interest away from retirement homes and move into the backyard with the kids. But it’s fraught with risks by the sounds of it.
Angela: It definitely is. That’s why it’s important to have a properly drafted agreement in place so that all of those issues are considered, and if there is any dispute that may arise, normally it’s been dealt with in the agreement.
Dan: Angela thanks for joining me.
Angela: Not a problem.
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