You’ve got $150,000 to $250,000 to invest in your Melbourne property. Should you renovate your existing home with a new kitchen, bathrooms, and modernised living spaces? Or should you build a granny flat in your backyard and create an income-generating asset?
Both strategies improve your property, but they deliver fundamentally different outcomes. Renovations enhance your lifestyle and potentially increase capital value. Meanwhile, granny flats generate immediate rental income whilst also boosting property values.
Here’s your complete comparison of granny flats versus renovations for Melbourne properties, covering costs, capital value impact, rental income potential, and which strategy delivers superior returns for different property owner goals.
The Fundamental Difference
Before comparing costs and returns, understand the core distinction between these strategies.
| Strategy | What It Is | Primary Benefit | Income Generation | Best For |
|---|---|---|---|---|
| Renovation | Improves existing dwelling’s amenity, aesthetics, functionality | Lifestyle improvement + potential capital value increase | $0 (unless you rent the property) | Owner-occupiers prioritising comfort |
| Granny Flat | Creates entirely new self-contained dwelling | Immediate rental income + capital value increase | $20,800-$25,000+ annually | Investors prioritising income |
This fundamental difference shapes which strategy suits different property owners’ goals.
Cost Comparison: Granny Flat vs Major Renovation
Understanding actual costs helps compare strategies fairly.
Major Renovation Costs Melbourne 2026
Kitchen renovation (complete): $35,000-$60,000
- New cabinetry, stone benchtops, appliances, tiling, lighting, plumbing
Bathroom renovation (complete): $25,000-$40,000 per bathroom
- New fixtures, tiling, vanity, shower screen, waterproofing
Living area updates: $20,000-$40,000
- New flooring, painting, lighting, built-in storage
Master bedroom/ensuite addition: $60,000-$100,000
- New room construction, ensuite bathroom, robes
Energy efficiency upgrades: $15,000-$30,000
- Double-glazed windows, insulation, solar panels
Total major renovation: $150,000-$250,000+
Granny Flat Costs Melbourne 2026
Innovista Affordable 60 Signature: $190,000 (complete, fully inclusive)
- 60m², two bedrooms, one bathroom, full kitchen, living area
- Stone benchtops, premium appliances, double-glazed windows
- All approvals, warranties, project management included
Innovista Affordable 60 Luxe: $205,000 (complete, fully inclusive)
- Same as Signature plus premium finishes and upgraded features
Additional costs (both strategies):
- Landscaping restoration: $5,000-$15,000
- Fencing (granny flat only): $3,000-$6,000
Cost Comparison Reality
At similar investment levels ($190,000-$205,000), you can either:
- Completely renovate your existing home’s kitchen, bathrooms, and living areas
- Build a complete, income-generating granny flat that pays you $450-$480 weekly
The question becomes: which delivers better returns?
Capital Value Impact: Renovation vs Granny Flat
Both strategies increase property values, but through different mechanisms and at different rates.
| Investment Type | ROI on Investment | Capital Value Example ($200K Investment) | 10-Year Income Generated | Total Return (10 years) |
|---|---|---|---|---|
| Major Renovation | 50-80% of costs added to value | Adds $100,000-$160,000 to property value | $0 | $100,000-$160,000 |
| Granny Flat | 80-120%+ of costs added to value | Adds $150,000-$240,000 to property value | $168,000-$200,000 (net after expenses) | $318,000-$440,000 |
Why Renovation Returns Are Lower
Typical return on investment: 50-80% of renovation costs added to property value
Why not 100% return?
- Renovations combat depreciation and obsolescence
- Many improvements restore properties to market expectations rather than exceeding them
- Over-capitalisation risks in some suburbs limit value addition
- Personal taste influences value perception
Best value renovations:
- Kitchen and bathroom updates in older homes
- Energy efficiency improvements
- Adding bedrooms or bathrooms to under-equipped properties
- Cosmetic improvements to obviously dated properties
Why Granny Flat Returns Are Higher
Typical return on investment: 80-120%+ of construction costs added to property value
Why higher returns?
- Adding entirely new dwelling to the property
- Creating additional legal residence increases buyer pool
- Investment properties attract investor buyers willing to pay premiums
- Rental income capitalises into property value
Capital value addition factors:
- Quality of construction and finishes
- Granny flat size and bedroom configuration
- Suburb rental demand strength
- Overall property presentation and appeal
Real Melbourne Example: Werribee Property
Original property value: $680,000 (established 3-bedroom house)
Scenario A (Renovation – $200,000 spent):
- Complete kitchen/bathroom renovation, new flooring, fresh paint
- Property value increase: $120,000-$140,000
- New property value: $800,000-$820,000
- Capital gain: $120,000-$140,000
- Annual income: $0
Scenario B (Granny Flat – $190,000 spent):
- Affordable 60 Signature constructed
- Property value increase: $170,000-$190,000
- New property value: $850,000-$870,000
- Capital gain: $170,000-$190,000
- Plus ongoing rental income: $23,400 annually
The granny flat delivers superior capital growth plus generates income that renovations cannot match.
Income Generation: The Decisive Difference
This is where granny flats dramatically outperform renovations.
Renovation Income Generation
Owner-occupied: $0 annual income (you live in the improved property)
Investment property: Potentially $1,000-$3,000 additional annual rent if renovations justify higher rent for your existing dwelling
Opportunity cost: The $200,000 renovation capital generates no income if you’re owner-occupying
Granny Flat Income Generation
Annual rental income: $20,800-$25,000+ (at $400-$480/week)
Gross rental yield: 10-13% on $190,000-$205,000 investment
Net annual income: $16,000-$20,000 after expenses (management, insurance, maintenance)
Rental guarantee option: $20,800 minimum guaranteed annually for 5 years
10-Year Income Comparison
Renovation (owner-occupied):
- Total income generated: $0
- Value: Lifestyle improvement and capital growth only
Granny flat (rented):
- Total income generated: $208,000-$250,000 (10 years of rent)
- Less expenses: -$40,000-$50,000
- Net income: $168,000-$200,000 over 10 years
- Plus capital growth
This $168,000-$200,000 income difference over 10 years is the decisive advantage granny flats hold over renovations for investment-focused property owners.
Tax Implications Comparison
Tax treatment differs significantly between strategies.
| Tax Aspect | Renovation (Owner-Occupied) | Granny Flat (Investment) |
|---|---|---|
| Construction Costs | No tax deductions available | Cannot claim immediately (capital works) |
| Depreciation | Not applicable | $6,000-$8,000 annually (years 1-5) |
| Ongoing Expenses | Not deductible | Fully deductible (management, insurance, maintenance, interest) |
| CGT on Sale | No CGT (main residence exemption) | Proportional CGT on granny flat portion only |
| Annual Tax Benefit (37% bracket) | $0 | $3,000-$4,000+ per year |
Tax advantage example (37% tax bracket):
- Year 1 depreciation: $7,000 = Tax saving: $2,590
- Ongoing expense deductions: $4,000 annually = Tax saving: $1,480 annually
Granny flats deliver superior tax benefits through depreciation and expense deductions that renovations don’t provide for owner-occupiers.
Lifestyle Impact Comparison
Beyond financial returns, consider lifestyle implications.
Renovation Lifestyle Impact
Positive impacts:
- Improved daily living experience in modernised spaces
- Enhanced functionality (better kitchens, updated bathrooms)
- Increased comfort (energy efficiency, modern amenities)
- Pride of ownership in beautiful, updated home
Negative impacts:
- Construction disruption during renovation (3-6 months typically)
- Living in construction zones or temporary accommodation
- Stress of managing contractors and decision-making
- No income generation unless renting the property
Granny Flat Lifestyle Impact
Positive impacts:
- Passive rental income improves financial security
- Minimal main house disruption during construction
- Potential for family use (aging parents, adult children) when not renting
- Property value increase
Negative impacts:
- Tenants living on your property (privacy considerations)
- Landlord responsibilities (maintenance, tenant management)
- Reduced backyard space
- Ongoing property management requirements
The “right” choice depends on whether you prioritise immediate lifestyle improvement or long-term financial returns.
Which Strategy Suits Which Property Owner?
Choose Renovation If You:
Prioritise lifestyle over income: Your home is dated or doesn’t meet your family’s needs, and improving daily living experience outweighs financial returns.
Have insufficient land: Properties under 400-450m² may not accommodate granny flats whilst maintaining adequate private open space.
Plan short-term ownership: Selling within 3-5 years means you won’t capture sufficient rental income to justify granny flat investment.
Want no tenant involvement: You don’t want tenants living on your property or landlord responsibilities.
Over-capitalisation isn’t a concern: Your suburb supports significant renovation spending without hitting value ceilings.
Choose Granny Flat If You:
Prioritise income generation: You want rental income to offset mortgage costs, fund retirement, or build wealth.
Have investment mindset: You view property decisions through financial return lens rather than purely lifestyle considerations.
Have adequate land: Your property exceeds 450m² with space for a granny flat whilst maintaining private outdoor areas.
Accept tenant presence: You’re comfortable with professional property management and tenants on your property.
Want capital growth plus income: You seek both property value increase and ongoing cash flow.
Long-term ownership planned: Holding property 7+ years allows you to capture substantial rental income over time.
Combining Strategies: The Best of Both Worlds
Some property owners pursue both strategies sequentially for maximum benefit.
Staged Approach
Year 1-2: Build granny flat first
- Generate immediate rental income
- Increase property value
- Use rental income to fund future renovation
Year 3-5: Use accumulated rental income to fund main house renovation
- Granny flat rental income has generated $60,000-$100,000 over 3-5 years
- Use this income to renovate main house without additional borrowing
- Achieve both improved lifestyle and ongoing rental income
This staged approach delivers income-generating asset first, then uses that income to fund lifestyle improvements later.
The Bottom Line: Granny Flat vs Renovation
For pure financial returns, granny flats outperform renovations decisively:
- Superior capital value addition (80-120% vs 50-80% return on investment)
- Substantial ongoing income ($168,000-$200,000 over 10 years)
- Better tax benefits through depreciation and expense deductions
- Income that renovations simply cannot generate
However, renovations deliver lifestyle improvements that granny flats don’t provide. If your primary goal is enhancing daily living experience in your existing home, renovations achieve that objective effectively.
The investment verdict: For property owners prioritising financial returns, wealth building, or passive income, granny flats deliver dramatically superior outcomes compared to renovations at similar investment levels.
The lifestyle verdict: For property owners prioritising immediate home improvement, enhanced daily comfort, or avoiding landlord responsibilities, renovations achieve lifestyle goals that granny flats don’t address.
Contact Innovista Group to discuss whether a granny flat or renovation better suits your property, financial goals, and lifestyle priorities.
