Victoria's granny flats can now be 80m²: what it means for property investors

That extra 20m² can turn a compact studio into a genuine two-bedroom home. For investors, that may mean higher rent and a broader pool of tenants. But there's an important catch in the building rules, and the investment case needs careful numbers.

This article explains what changed, what didn't, and how lenders typically assess funding for a second dwelling on an investment property.

What changed

The change came in under Amendment VC306, which updated the definition of a small second dwelling in clause 73.03 of the Victoria Planning Provisions and in every planning scheme in the state.

The key changes are:

• Size: the maximum floor area rose from 60m² to 80m².
• Measurement: floor area is measured to the outside of the external walls. Roofed decks, verandahs and other roofed structures attached to the dwelling don't count towards the 80m², so a covered outdoor area can be added without eating into it.
• Access path: the planning requirement for an access pathway to the second dwelling has been removed.

In most residential and rural zones, an 80m² granny flat can be built without a planning permit.

What hasn't changed

• Lot size: a small second dwelling normally needs no planning permit on a lot of 300m² or more. Below that, in a residential zone, a planning permit is required.
• Overlays: some planning overlays, including heritage, bushfire and flood overlays, can bring back the need for a permit.
• Building permit: a building permit is always required.
• No separate sale: the granny flat must be on the same lot as an existing home. A planning permit can't be granted to subdivide it onto its own lot, so it can't be sold separately.
• No gas: under current building rules, a small second dwelling can't be connected to reticulated natural gas.

The catch: building rules still say 60m²

The planning rules have changed, but the building rules haven't caught up. The Building Regulations still define a small second dwelling as a building of no more than 60m². So for a larger design, the building surveyor needs to confirm the building approval pathway.

The investment case

More space, broader appeal

At 80m², a second dwelling can comfortably fit two bedrooms, a proper living area and better storage. That may suit couples, small families and downsizers, not just singles.

Rental income, with realistic assumptions

A second dwelling can add rental income from land the investor already owns. But rent growth has slowed sharply. National rents rose just 0.5% in the September quarter as tenants reached an affordability ceiling. Base the investment case on today's rents, not last year's growth. See Rents have hit a ceiling.

Construction costs

Building costs remain high, and new dwelling prices rose 4.7% over the year to September. Get firm quotes and allow a contingency.

Effect on value

Because the granny flat can't be sold separately, it adds value to the whole property rather than creating a separate asset. Valuers will typically consider comparable properties with similar second dwellings. The value added may be less than the cost of building it, so it's worth testing this before committing.

Holding costs

Land tax applies to Victorian investment properties above the threshold, and both major parties have promised to raise that threshold at the November election. See Victoria's election: what the land tax and property tax promises mean for investors and business owners.

How lenders typically assess funding for a second dwelling

For investment and business-purpose scenarios, lenders usually look at:

• Approvals: confirmation that the project qualifies without a planning permit (or that a permit has been granted), plus the building permit, and the building surveyor's confirmation for designs over 60m².
• The builder and contract: a registered builder, a clear contract and a realistic price. See Before you sign: checking your builder before you take out a construction loan.
• "As if complete" valuation: what the whole property is expected to be worth once the second dwelling is finished, compared with today's "as is" value.
• Rental evidence: a realistic rental estimate for the second dwelling, and how it affects the property's income.
• Equity and LVR: how much equity the investor has in the existing property and how the project is funded, whether through construction finance, an equity release or a second mortgage behind an existing bank loan.
• Exit: whether the investor plans to refinance to a long-term loan once the dwelling is complete and tenanted, or hold it on the current facility.

Practical steps for investors

• Check the lot: size, zone and any overlays.
• Speak to a building surveyor early, especially for designs over 60m².
• Get firm construction quotes and allow a contingency.
• Test the numbers: rent, construction cost, holding costs and likely change in value.
• Plan the funding before signing a building contract, including how and when the loan will be refinanced or repaid.

The Funding Door view

The move to 80m² makes second dwellings far more practical and could improve returns for well-located investment properties. But it isn't a shortcut: the building-rules gap, construction costs and slower rent growth all need careful planning. Investors who get the approvals, costs and funding structure right first are best placed to benefit.