When you have $190,000 to $255,000 to invest, the choices can feel overwhelming. Purchase shares? Buy a second investment property? Lock money into term deposits? Or build a granny flat on your existing property?
Each investment option carries different characteristics regarding returns, liquidity, management requirements, and risk profiles. Understanding how granny flat investments compare to alternative investment strategies helps you make informed decisions about where to deploy your capital for maximum returns.
Here’s a comprehensive comparison of granny flat investment against traditional investment alternatives available to Melbourne property owners in 2025.
Investment Comparison Table: Granny Flats vs Alternative Investments
| Investment Type | Initial Capital Required | Typical Annual Return | Liquidity | Management Effort |
|---|---|---|---|---|
| Granny Flat Investment | $190,000 – $255,000 | 10-14% gross rental yield + capital growth | Low (part of main property) | Low (tenant management only) |
| Second Investment Property | $100,000+ deposit + $10,000-$15,000 stamp duty | 3-4% rental yield + capital growth | Medium (can sell separately) | Medium (full property management) |
| Australian Shares/ETFs | Any amount (start from $500) | 7-10% average (dividends + growth) | High (sell anytime) | Low (mostly passive) |
| Term Deposits | Any amount (typically $5,000+) | 4-5% interest | Medium (locked for term) | None |
This comparison reveals why sophisticated Melbourne investors increasingly choose granny flat investments over traditional alternatives. Let’s examine each investment type in detail.
Granny Flat Investment: Superior Returns with Manageable Risk
Building a granny flat on your existing Melbourne property represents one of the most compelling investment opportunities available to homeowners in 2025.
Investment Requirements
Initial capital: $190,000 to $255,000 depending on specifications and finishes. Innovista’s Affordable 60 Series starts at $190,000 fully inclusive, whilst premium Lana Series packages reach $255,000 with enhanced features.
Ongoing costs: Property management fees (7-8% of rent), insurance ($650-$1,200 annually), maintenance provisions (0.5-1% annually), and proportional council rates.
Returns Profile
Rental yields: 10-14% gross rental yields significantly outperform traditional property investments. A $190,000 granny flat generating $450 per week delivers 12.3% gross yield, compared to 3-4% for typical Melbourne houses.
Capital growth: Your property’s overall value typically increases by $150,000 to $300,000 following granny flat completion, often exceeding construction costs and creating instant equity.
Tax benefits: Substantial depreciation deductions ($6,000-$8,000 annually in early years), full deductibility of interest and expenses, and potential CGT advantages create significant after-tax return enhancements.
Liquidity Considerations
Granny flats have low liquidity because they’re attached to your main property. You cannot sell the granny flat separately. However, this limitation is offset by consistent rental income that provides cash flow regardless of whether you sell.
When you do sell, the granny flat significantly increases your property’s marketability and sale price, often expanding your buyer pool to include investors and multi-generational families.
Management Requirements
Management effort is minimal. Professional property managers handle tenant selection, rent collection, maintenance coordination, and lease management for 7-8% of rental income. You’re managing a tenant relationship, not an entire separate property.
Why Granny Flats Stand Out
Superior yields: With gross rental yields of 10-14%, granny flats significantly outperform traditional property investments and provide more predictable returns than share market investments.
Leverage your existing asset: You’re improving a property you already own rather than taking on a completely new debt obligation. This means no stamp duty, no separate land tax, and no additional council rates on a standalone property.
Dual value creation: You simultaneously generate rental income AND increase your main property’s capital value. This creates wealth through two distinct mechanisms that compound over time.
Tangible asset: Unlike shares or managed funds, your granny flat is a physical asset you can see, touch, and control. You decide on quality, design, and tenant selection, maintaining direct oversight.
Lower transaction costs: Building a granny flat avoids the substantial transaction costs of buying a second property. You save on stamp duty ($10,000-$15,000), conveyancing ($1,500-$2,500), building inspections ($500-$800), and mortgage establishment fees.
Second Investment Property: Higher Capital, Lower Returns
Purchasing a second investment property represents the traditional approach to property investment, but the numbers reveal significant disadvantages compared to granny flat investment.
Investment Requirements
Initial capital: $100,000+ deposit for a median Melbourne property ($700,000+) plus $10,000-$15,000 stamp duty. Total upfront capital exceeds $110,000-$115,000 before considering conveyancing, inspections, and mortgage costs.
Ongoing costs: Full property management (8-10% of rent), complete building and contents insurance ($2,000-$3,500 annually), comprehensive maintenance ($3,000-$5,000+ annually), council rates ($1,500-$2,500), land tax (if applicable), and utilities during vacancy.
Returns Profile
Rental yields: Traditional Melbourne investment properties deliver 3-4% gross rental yields. A $700,000 property renting for $550 per week generates only 4.1% gross yield, less than one-third of typical granny flat yields.
Capital growth: Long-term Melbourne property growth averages 6-8% annually, though this varies significantly by location and timing. Capital growth potential exists but requires larger capital deployment.
Tax benefits: Similar depreciation and deduction benefits to granny flats, but applied across a larger asset base, creating higher absolute tax benefits but lower percentage returns.
Liquidity Considerations
Medium liquidity. You can sell the investment property independently of your principal residence, providing flexibility. However, property sales involve 6-12 week settlement periods, agent commissions (1.5-3%), marketing costs, and significant transaction expenses.
Management Requirements
Full property management is required, including tenant management, comprehensive maintenance coordination, dealing with body corporate (if applicable), managing rates and insurance, and handling all property-related issues. Whilst professional managers handle day-to-day tasks, oversight and decision-making demands remain substantial.
Key Disadvantages Compared to Granny Flats
Substantially higher capital requirements: Needing $110,000-$115,000+ versus $190,000-$255,000 might seem comparable, but stamp duty and transaction costs represent dead money that generates zero returns.
Dramatically lower yields: 3-4% yields cannot compete with 10-14% granny flat yields, creating significant income differences over investment lifetimes.
Higher ongoing costs: Full property expenses substantially exceed granny flat costs, eroding net returns.
Separate debt obligation: You’re taking on an entirely new mortgage versus leveraging equity in property you already own.
Australian Shares and ETFs: High Liquidity, Moderate Returns
Share market investments through direct shareholdings or Exchange Traded Funds (ETFs) represent accessible investment alternatives with distinct characteristics.
Investment Requirements
Initial capital: Technically any amount, though practical investment typically starts from $500-$1,000 to justify brokerage costs. No stamp duty, no building inspections, minimal establishment costs.
Ongoing costs: Brokerage fees ($10-$30 per trade), fund management fees for ETFs (0.05%-0.95% annually), and potential capital gains tax on frequent trading.
Returns Profile
Average returns: Australian share markets historically deliver 7-10% average annual returns comprising dividends (3-4%) and capital growth (4-6%). However, returns vary dramatically year-to-year, with significant volatility.
Income characteristics: Dividend income is typically inconsistent and uncertain compared to rental income. Companies can reduce or eliminate dividends during downturns, creating income volatility.
Tax benefits: Dividend imputation credits benefit Australian taxpayers, and 50% CGT discount applies to assets held longer than 12 months. However, depreciation benefits available to property investors don’t apply.
Liquidity Considerations
Extremely high liquidity. Shares can be sold within seconds during trading hours, with settlement occurring within 2 business days. This provides unmatched flexibility for accessing capital quickly.
Management Requirements
Minimal management for passive ETF investors. Active stock pickers require significant time researching companies, monitoring portfolios, and making trading decisions. Most investors adopt passive strategies requiring minimal ongoing attention.
Key Disadvantages Compared to Granny Flats
Lower average returns: 7-10% average returns fall short of 10-14% granny flat yields, creating meaningful differences over decades.
Higher volatility: Share prices fluctuate daily, creating emotional stress and potential losses if selling during downturns. Property values move more slowly and predictably.
No leverage benefits: Shares typically require 100% cash investment. Property allows leveraging with mortgages, amplifying returns through borrowed capital.
No tangible asset: Shares represent ownership claims on companies, not physical assets you control. This intangibility creates different psychological and practical investment experiences.
Term Deposits: Safety with Minimal Returns
Term deposits represent the most conservative investment option, prioritising capital preservation over growth.
Investment Requirements
Initial capital: Technically any amount, though practical term deposits start from $5,000 to access competitive rates. No establishment costs, no ongoing fees.
Ongoing costs: Nil. Interest is automatically credited, and no management or administrative costs apply.
Returns Profile
Fixed interest: Current Australian term deposit rates range from 4-5% annually for 1-5 year terms. These returns are guaranteed but fail to meaningfully exceed inflation (averaging 2.5-3.5% annually).
Real returns: After accounting for inflation and taxation, real returns from term deposits are minimal or even negative for higher-income earners.
Tax treatment: Interest income is taxed at marginal rates with no deductions, imputation credits, or CGT discounts. For investors in the 37% tax bracket, 4.5% interest becomes 2.8% after-tax return.
Liquidity Considerations
Medium liquidity. Capital is locked for the term duration (typically 1-5 years). Early withdrawal usually incurs penalty interest rate reductions, eliminating most or all returns.
Management Requirements
Zero management. Interest accrues automatically, and no decisions or actions are required during the term.
Key Disadvantages Compared to Granny Flats
Dramatically lower returns: 4-5% returns are less than half of granny flat yields, creating massive opportunity costs over investment lifetimes.
No capital growth: Term deposits provide interest only. Your capital remains static whilst property investments grow in value, compounding wealth creation.
No leverage opportunities: You cannot borrow to invest in term deposits, eliminating return amplification available through property investment.
No tax advantages: Interest receives the worst tax treatment with no deductions, depreciation, or capital gains discounts.
Comparing Total Returns Over 10 Years
Understanding how these investments perform over meaningful timeframes reveals the true differences in wealth creation potential.
Investment Scenario Assumptions
Starting capital: $200,000 available for investment
Investment period: 10 years
Tax rate: 37% (typical professional investor)
Granny Flat Investment Results
Initial investment: $200,000 (Lana 60 Signature)
Annual rental income: $24,700 ($475/week)
Annual expenses: $4,200 (management, insurance, maintenance)
Net annual income: $20,500
10-year total income: $205,000
Depreciation tax benefits: $48,000 (total over 10 years)
Capital growth (property value increase): $180,000 (conservative $18,000/year)
Total return before tax: $385,000
After-tax return: $301,000 (accounting for tax on income and eventual CGT)
Total return percentage: 150.5% over 10 years
Second Property Investment Results
Initial investment: $200,000 (deposit + costs on $700,000 property)
Annual rental income: $28,600 ($550/week)
Annual expenses: $12,800 (management, insurance, rates, maintenance)
Net annual income: $15,800
10-year total income: $158,000
Depreciation tax benefits: $32,000 (older property, lower depreciation)
Capital growth: $336,000 (6% average on $700,000)
Total return before tax: $526,000
After-tax return: $398,000
However: You borrowed $500,000, paid $250,000 in interest over 10 years
Actual net return: $148,000 after loan repayment and interest
Total return percentage: 74% over 10 years
Australian Shares (ASX 200 ETF) Results
Initial investment: $200,000
Annual average return: 8.5% (historical average)
10-year total return: $256,000 (including dividends and growth)
Tax on dividends and capital gains: $38,000
After-tax return: $218,000
Total return percentage: 109% over 10 years
Term Deposit Results
Initial investment: $200,000
Annual interest: 4.5%
10-year total interest: $113,000 (compounded)
Tax on interest: $42,000
After-tax return: $71,000
Total return percentage: 35.5% over 10 years
Comparison Summary
| Investment Type | 10-Year After-Tax Return | Return Percentage | Annual Average Return |
|---|---|---|---|
| Granny Flat | $301,000 | 150.5% | 15.05% |
| Shares/ETFs | $218,000 | 109% | 10.9% |
| Second Property | $148,000 | 74% | 7.4% |
| Term Deposits | $71,000 | 35.5% | 3.55% |
This comparison demonstrates why sophisticated Melbourne investors increasingly choose granny flat investments for superior wealth creation.
Making Your Investment Decision
Each investment option serves different purposes and suits different investor profiles, goals, and risk tolerances.
Choose Granny Flat Investment If You:
- Own property with sufficient land for a secondary dwelling
- Seek superior rental yields and dual income/capital growth benefits
- Want tangible asset control with manageable risk
- Prefer leveraging existing property equity over new debt
- Can commit capital for medium-term horizons (7-15 years)
- Value tax benefits through depreciation and deductions
Choose Second Property Investment If You:
- Have substantial capital for deposits and transaction costs
- Seek diversification across multiple properties
- Accept lower yields for potential long-term capital growth
- Want the option to sell properties independently
- Can manage higher ongoing costs and management complexity
Choose Shares/ETFs If You:
- Need high liquidity for potential capital access
- Accept market volatility for potential higher long-term growth
- Prefer minimal ongoing management requirements
- Want to start with smaller capital amounts
- Seek diversification across asset classes
Choose Term Deposits If You:
- Prioritise capital preservation over growth
- Need guaranteed returns with zero risk
- Have short-term savings goals (1-5 years)
- Cannot tolerate any capital value fluctuations
- Want zero management responsibilities
The Bottom Line on Investment Comparison
For Melbourne property owners with $190,000 to $255,000 available capital, granny flat investment delivers superior returns compared to alternative investment options.
The combination of 10-14% rental yields, substantial capital growth, significant tax advantages, manageable risk, and rental guarantee protection creates a compelling investment proposition that outperforms traditional property, shares, and term deposits on risk-adjusted return metrics.
Understanding how granny flats compare to alternatives helps you make informed decisions about where to deploy capital for maximum wealth creation over the next decade and beyond.
Important Investment Disclaimer
General Information Only: All investment calculations, return projections, and comparative analyses in this article are provided for illustrative purposes only based on typical market conditions and historical averages. They do not constitute financial advice or guaranteed outcomes.
Individual Results Will Vary: Actual investment returns depend on numerous factors including property location, market conditions, tenant quality, interest rates, tax position, and individual circumstances. Your results may be substantially higher or lower than examples provided.
Past Performance ≠ Future Results: Historical returns do not guarantee future performance. All investments carry risk, including potential loss of capital.
Seek Professional Advice: Before making any investment decision, consult with:
- A licensed financial adviser regarding your specific circumstances
- A qualified accountant for tax implications and structuring
- A mortgage broker for financing options
- Independent legal and property professionals
No Guarantees: Innovista Group makes no guarantee regarding rental income, capital growth, vacancy periods, or market conditions. Investment property carries substantial risks including market downturns, unexpected costs, and potential capital loss.
Rental Guarantee Conditions Apply: Rental guarantee programs are subject to specific terms, conditions, eligibility requirements, and property management arrangements. Not all properties or investors qualify.
Tax and Legal Complexity: Tax laws are complex and change regularly. Australian tax implications vary significantly based on individual circumstances. Always obtain professional advice specific to your situation.
Liability Limitation: Innovista Group accepts no liability for investment decisions made based on this information. All investment decisions are made at your own risk. This content does not constitute a Product Disclosure Statement or Financial Services Guide under the Corporations Act 2001 (Cth).
Contact Innovista Group for a comprehensive investment analysis specific to your property and financial situation. Our expertise ensures you understand the true investment potential of building a quality granny flat compared to alternative investment strategies available to Melbourne property owners.
