Is a Nanny Flat the Smartest Investment for Your Melbourne Property?
Building a nanny flat (also called a granny flat, secondary dwelling, or dependent person’s unit) is becoming one of the smartest ways to unlock hidden potential in Melbourne properties. Whether it’s for family accommodation, extra rental income, or boosting property value, a well-planned and legally compliant nanny flat can deliver incredible returns.
But in Victoria, there’s more to it than just designing and building. From planning permits and council regulations to building codes, taxes, and investment strategy, every step needs careful consideration.
At Radevo Living, we’ve helped Melbourne homeowners and investors navigate these complexities—transforming underused backyards into stylish, functional, and profitable living spaces. This guide takes you through everything you need to know before you build.
Why Are Nanny Flats Booming in Melbourne?
Melbourne’s property market is changing, and nanny flats are emerging as a solution to multiple needs:
Housing affordability pressures – Families want to support adult children or elderly parents without the cost of separate homes.
Rental demand – With vacancy rates at record lows, renters are seeking affordable options like granny flats.
Property investors – Dual dwellings mean multiple income streams from one block.
Lifestyle flexibility – Nanny flats are now used for studios, offices, gyms, and Airbnb rentals.
Understanding the Legal Landscape
What’s the Difference Between a Dependent Person’s Unit (DPU) and a Secondary Dwelling?
DPU (Dependent Person’s Unit) – Must house someone reliant on the main household (elderly parent, family member). It usually must be removable and cannot be leased to unrelated tenants.
Secondary Dwelling – Treated as a completely separate residence. Requires stricter council approval, minimum lot sizes, setbacks, and sometimes parking provisions.
The choice between these two will determine your permit pathway.
Do You Need a Planning Permit?
Every council in Victoria has its own rules, but in most cases:
Yes, a planning permit is required if you’re building a new self-contained dwelling.
Exemptions may apply if your DPU is small, temporary, and removable.
Key factors councils assess include:
Zoning of your land (General Residential, Neighbourhood Residential, Mixed Use)
Lot size and coverage
Setbacks from boundaries
Whether it impacts neighbourhood character
Radevo Living tip: Don’t assume “what worked for my neighbour” will apply to you. Even within Melbourne, councils in Boroondara, Bayside, and Yarra have very different rules.
The Building Permit Process
Once you clear planning, you’ll need a building permit issued by a registered building surveyor. This ensures your nanny flat meets the Victorian Building Authority (VBA) standards for:
Structural safety
6-star energy rating minimum
Plumbing and electrical compliance
Fire safety
Accessibility standards (if required)
Skipping this step could render your dwelling illegal—making it difficult to insure, rent, or sell.
How Big Can a Nanny Flat Be in Victoria?
Size limits vary, but common council restrictions include:
Maximum 60–70 sqm internal floor space.
Must remain a “secondary” use on the property.
Outdoor space requirements (private open space or shared yard).
That said, clever design can make even a 45–55 sqm unit feel spacious with open-plan layouts, smart storage, and natural light.
Design & Functionality: Building for Value
A nanny flat should be more than just compliant—it should be attractive to both occupants and future buyers. At Radevo Living, we design with ROI in mind:
Kitchens & bathrooms – Full-function, modern, durable fittings.
Energy efficiency – Solar panels, double glazing, and insulation for lower bills and sustainability.
Accessibility – Step-free entry and wide doors for long-term appeal.
Outdoor flow – Private courtyard or decking space boosts livability.
Smart layouts – Making compact spaces feel bigger.
Financing a Nanny Flat in Victoria
Funding can be one of the biggest barriers for homeowners. Options include:
Equity release from existing home loan – Common for homeowners with growing property values.
Construction loans – Structured to cover progressive build costs.
Personal loans – For smaller, relocatable DPUs.
Self-managed super funds (SMSF) – In some cases, investors use SMSFs for property improvements.
Tip: Always compare the cost of finance against potential rental income or property value uplift to avoid overcapitalisation.
Tax Implications
Rental Income: Must be declared, but expenses (maintenance, interest, depreciation) may be deductible.
Capital Gains Tax (CGT): If you sell, CGT may apply depending on how the dwelling was used.
GST: Usually not applicable for residential rent, but may apply if you build and sell multiple dwellings as a business.
Rental Potential & Profitability
- Inner suburbs: High demand for secondary rentals but stricter council controls.
- Middle-ring suburbs: Good balance of demand, block size, and council leniency.
- Outer suburbs: Larger blocks, cheaper build costs, but sometimes lower rental demand.
In Melbourne, nanny flats in well-connected suburbs can generate $300–$500 per week in rental income.
A well-designed granny flat can increase your property’s total rental yield from 3.5% to over 5.5%.
Resale Value: Do Buyers Want Nanny Flats?
Yes—when they’re legal, compliant, and well-designed. Buyers see value in:
Multi-generational living flexibility
Dual rental income streams
Airbnb/short-stay opportunities
Future-proofing (home office, guest space, aged care)
Properties with a compliant secondary dwelling can command 10–20% more in resale value compared to similar homes without one.
Common Mistakes to Avoid
Skipping council approval – Risk of demolition orders or fines.
Overcapitalising – Spending $200k on a unit that only returns $250/week rent.
Poor design – Tiny, dark spaces that renters avoid.
Not planning for utilities – Sewer, stormwater, and power can add hidden costs.
DIY builds – Using unlicensed builders can void insurance and permits.
Sustainability & Future Trends
The nanny flat trend is also evolving with:
Eco-friendly builds – Using sustainable materials and solar.
Modular construction – Faster, cheaper, and removable if required.
Flexible-use designs – Spaces that switch between office, studio, and rental.
Ageing population demand – More Victorians seeking care-at-home options.
Radevo Living stays ahead of these trends to ensure your build remains future-proof.
Case Study: Backyard to Dual Income
A Radevo Living client in Glen Waverley added a 65 sqm secondary dwelling.
Build Cost: $155,000
Rental Return: $420/week (approx. $21,800 annually)
Resale Uplift: Estimated +$180,000 in property value
With council approvals, smart design, and professional management, their backyard became a long-term income stream.
FAQs
Ready to build a compliant, high-performing nanny flat?
Whether it’s for family or financial growth, Radevo Living delivers peace of mind, quality construction, and real results.
