What our analysis shows
Our calculations, data as of 23 October 2026
- On cash alone, a rented 60 m² flat beat a 6.2% mortgage offset in all 42 areas we tested. That comparison flatters the flat, because the building wears out while money in the offset does not.
- Once we charge for wear (the construction cost spread over 40 years, 2.1 points a year), the flat still beat the offset in 26 of 42 areas. Best: Gold Coast at 9.8%; worst: Wyndham at 4.4%.
- With rent 10% lower and the build 15% dearer, the flat beat the offset in only 4 areas. A granny flat is a good use of money where rents are strong, and close to break-even elsewhere.
- In NSW and Victoria a rented flat can also make part of your land taxable and part of a future sale subject to capital gains tax. On high-value land that can wipe out the margin over the offset.
Areas where the flat beats a 6.2% offset, by test
- Cash return only42 of 42
- After tax and wear26 of 42
- Whole build borrowed, after wear42 of 42 stay positive
- Rent 10% lower, build 15% dearer4 of 42
60 m² two-bedroom flat; government bond rents; our build costs; tax at 30% after the capital works deduction; wear = construction cost spread over 40 years.
The offset test
If you have $220,000 available, you can put it in your mortgage offset and save 6.2% a year in interest, without tenants, repairs or tax. Or you can build a flat. For each area we took the rent from government bond data and the build cost from our model, deducted running costs and tax at 30%, then took off 2.1% a year for wear, and compared the result with the offset. The tax figure already includes the 2.5% capital works deduction; the wear charge is the real loss of value that the deduction only partly offsets:
| Area | Cash yield after tax | After wear | vs 6.2% offset |
|---|---|---|---|
| Gold Coast (QLD) | 11.9% | 9.8% | +3.6 pts |
| Cairns (QLD) | 11.1% | 9.0% | +2.8 pts |
| City of Melbourne (VIC) | 10.8% | 8.6% | +2.4 pts |
| Newcastle (NSW) | 10.7% | 8.6% | +2.4 pts |
| Eastern Adelaide (SA) | 10.6% | 8.4% | +2.2 pts |
| Brisbane (QLD) | 10.3% | 8.2% | +2.0 pts |
| Sunshine Coast (QLD) | 10.3% | 8.2% | +2.0 pts |
| Wollongong (NSW) | 10.0% | 7.9% | +1.7 pts |
| Western Adelaide (SA) | 9.8% | 7.7% | +1.5 pts |
| Townsville (QLD) | 9.6% | 7.5% | +1.3 pts |
| Merri-bek (VIC) | 9.5% | 7.4% | +1.2 pts |
| Adelaide metro (SA) | 9.4% | 7.3% | +1.1 pts |
| Launceston (TAS) | 9.4% | 7.2% | +1.0 pts |
| Greater Sydney (NSW) | 9.3% | 7.2% | +1.0 pts |
| Monash (VIC) | 9.3% | 7.2% | +1.0 pts |
| Southern Adelaide (SA) | 9.2% | 7.1% | +0.9 pts |
| Hills and north-west (NSW) | 9.2% | 7.1% | +0.9 pts |
| Central Coast (NSW) | 9.2% | 7.1% | +0.9 pts |
| Darebin (VIC) | 9.2% | 7.0% | +0.8 pts |
| Whitehorse (VIC) | 9.2% | 7.0% | +0.8 pts |
| Toowoomba (QLD) | 8.8% | 6.7% | +0.5 pts |
| Rest of NSW (NSW) | 8.7% | 6.5% | +0.3 pts |
| Knox (VIC) | 8.6% | 6.5% | +0.3 pts |
| Greater Hobart (TAS) | 8.4% | 6.3% | +0.1 pts |
| North-west coast (TAS) | 8.4% | 6.3% | +0.1 pts |
| Northern Adelaide (SA) | 8.3% | 6.2% | +0.0 pts |
| Moreton Bay (QLD) | 8.3% | 6.2% | -0.0 pts |
| Greater Bendigo (VIC) | 8.2% | 6.1% | -0.1 pts |
| Greater Geelong (VIC) | 8.1% | 5.9% | -0.3 pts |
| Western Sydney (NSW) | 8.0% | 5.9% | -0.3 pts |
| Logan (QLD) | 7.9% | 5.8% | -0.4 pts |
| Ipswich (QLD) | 7.9% | 5.8% | -0.4 pts |
| Casey (VIC) | 7.9% | 5.7% | -0.5 pts |
| Frankston (VIC) | 7.9% | 5.7% | -0.5 pts |
| Redland (QLD) | 7.7% | 5.6% | -0.6 pts |
| Whittlesea (VIC) | 7.5% | 5.4% | -0.8 pts |
| Regional SA (SA) | 7.3% | 5.2% | -1.0 pts |
| Hume (VIC) | 7.2% | 5.1% | -1.1 pts |
| South-west Sydney (NSW) | 7.1% | 5.0% | -1.2 pts |
| Brimbank (VIC) | 7.1% | 4.9% | -1.3 pts |
| Ballarat (VIC) | 6.7% | 4.6% | -1.6 pts |
| Wyndham (VIC) | 6.6% | 4.4% | -1.8 pts |
If rent is lower and the build dearer
Our build costs are typical figures, and rents are medians; half of all flats rent for less. We reran the test with rent 10% below the median and the build 15% above our estimate. The flat then beat the offset in 4 of 42 areas. The ones that dropped out are mostly outer suburbs and regional cities where two-bedroom rents are lowest.
What the yield leaves out
- Wear is in our test above: about $4,675 a year on the Sydney flat. A well-kept flat may last longer than 40 years, which would improve the result.
- Land tax. Renting the flat can make part of your land taxable in NSW and Victoria, and may reduce the exemption in South Australia. On land worth $1.5 million or more this can cost thousands a year. See granny flat land tax.
- Capital gains tax. When you sell, the rented share of the property may be taxable. See capital gains tax.
- Your yard and privacy. A 60 m² flat with its own outdoor space takes 100 m² or more of the backyard, and a tenant lives next to you.
- Your time. Even with an agent, a second dwelling on your land is a second set of repairs and tenant changes.
Western Australia and the ACT are not in the table because they publish no comparable bond medians. In Perth, a 60 m² flat needs about $525 a week in rent to beat the offset on the same test.
Before any of this, check that your block qualifies: in NSW the fast-track route needs a 450 m² lot with 12 m of frontage, in Victoria 300 m², and caps run from 60 to 90 m² by state. The rules checker tests your lot.
When the numbers are not the point
Many flats are built for a parent or an adult child. Then the comparison is with what the alternative housing costs: rent elsewhere for a child, or a retirement village entry contribution or aged care for a parent. A flat that lets a parent stay near family for five more years is often worth more than its rental yield, and with no rent charged it leaves your home's capital gains tax and land tax exemptions untouched. See a granny flat for your parents.
Our verdict by situation
| Situation | Our view |
|---|---|
| Flat block, sewer close, strong local rents | Usually worth it; the return beats paying down the mortgage |
| Steep or bushfire-rated block | Check carefully; site costs can add $50,000+ and cut the yield by a third |
| High-value land in NSW or Victoria | Price the land tax first; it can halve the advantage |
| Planning to sell within five years | Rarely worth it for the money alone; buyers seldom pay the build cost back |
| Housing a parent or adult child | Judge it against their other housing options, not against rent |
This week's worked example
Week of 19 October 2026. A new example, rule and owner report every Monday.
A 60 m² two-bedroom flat with a standard finish on a steep block, services 12 m from the house, in Greater Hobart: our model puts it at $225,900 turnkey ($199,000–$253,000), or $3,770 per m². At the area's median 2-bedroom bond rent of $520 a week it would return 9.4% net and pay back in 13.8 years after tax.
Rule check: NSW land tax thresholds are frozen from 2025 at $1,075,000 (general) and $6,571,000 (premium); the general rate is $100 plus 1.6% of value above the threshold.
From an owner (Australia, 2018): A renter counted about 10 new granny flats among 100 listings in one area, at $250–400 a week, against $300–450 for older standalone two-bedroom houses.