Avoid These 5 Mistakes with Positive Gearing

A positively geared investment property generates rental income that exceeds all holding costs, including loan repayments, council rates, insurance and maintenance.

Investors pursuing this strategy in Victoria often assume the primary goal is to maximise rental yield, but that thinking leads to decisions that undermine both cash flow and capital growth over time. A positively geared property should support itself and contribute to serviceability for future purchases, not just cover its own costs. The structure of your investment loan determines whether that outcome is achievable.

Choosing Interest-Only Because It Feels Conservative

Interest-only repayments reduce your monthly outgoings, which might seem like a logical step toward positive cash flow. However, the loan balance remains unchanged, which increases your portfolio risk if property values stagnate or decline.

Consider a buyer who purchases a unit in Geelong with strong rental demand at a purchase price within the suburb's current range. The property generates $450 per week in rent. On an interest-only loan at current variable rates, the investor achieves positive cash flow of around $80 per week after all expenses. The same loan on principal and interest terms would reduce that surplus to roughly $20 per week, but the investor would be reducing debt by approximately $1,200 per month. Over five years, that reduction in loan balance improves the loan to value ratio and creates usable equity for a second purchase without relying solely on capital growth. The marginal weekly cash flow difference is less valuable than the equity position it sacrifices.

Interest-only terms make sense when you are holding for a short period or when cash flow is genuinely tight, but they should not be the default choice for a positively geared property intended as a long-term hold.

Ignoring the Debt-to-Income Limit When Planning a Second Purchase

APRA's debt-to-income lending limit, active from February this year, restricts lenders to providing no more than 20 per cent of new investor loans to borrowers with total debt exceeding six times their gross income. This cap applies to each lender's portfolio and is measured quarterly.

If you earn $90,000 per year, your maximum borrowing under the DTI limit would be $540,000 across all loans, including your owner-occupied home loan and any existing investment debt. If your owner-occupied loan is $420,000, you have $120,000 of borrowing capacity remaining before hitting the DTI threshold, even if your serviceability assessment would otherwise support a larger investment loan amount. A positively geared property improves your serviceability calculation because the rental income offsets the loan repayments, but it does not change the arithmetic of the DTI ratio. Investors who structure their first investment loan without considering this ceiling often find they cannot proceed with a second purchase, even when they have strong cash flow and a clean credit file.

Using a Rate Discount as the Primary Selection Criterion

Lenders price investment loans differently depending on the borrower's overall exposure, the LVR, and whether the loan is interest-only or principal and interest. A lender offering a 0.75 per cent rate discount on a variable investment loan may apply a higher base rate than a competitor offering 0.50 per cent off a lower starting point.

Variable interest rates for investment loans are influenced by the risk weight applied under Prudential Standard APS 112. Investment loans attract higher risk weights than owner-occupied loans at the same LVR, which flows through to pricing. An interest-only investment loan at 85 per cent LVR will generally carry a higher rate than a principal and interest loan at 80 per cent LVR, even from the same lender. The absolute rate matters more than the discount, and both matter less than the loan's flexibility to adjust repayments or refinance without penalty if your circumstances or the rate environment change.

Some lenders also apply portfolio pricing, where the rate on your investment loan is affected by your total borrowing with that institution. Consolidating all borrowing with one lender may deliver a better rate on paper but reduces your ability to move one loan independently if a more suitable product becomes available.

Structuring the Loan Without Separation from Personal Debt

Investment loan interest is deductible against rental income, but only to the extent the borrowed funds are used to acquire or hold the investment property. If you redraw from your investment loan to pay for personal expenses, renovations to your owner-occupied home, or a holiday, the interest on that redrawn amount is no longer deductible.

This issue arises most often when investors use a single loan facility with an offset account that mixes personal and investment funds, or when they establish a line of credit secured against the investment property and draw on it for purposes unrelated to the property. The ATO does not assess deductibility based on the security provided; it assesses deductibility based on the use of the borrowed funds. If you need to access equity from your investment property for personal purposes, that equity should be split into a separate loan facility at the time of drawdown to preserve the deductibility of interest on the investment portion.

Underestimating the Impact of Vacancy and Maintenance on Cash Flow

A property generating $450 per week in rent produces $23,400 in gross annual income. If the property sits vacant for four weeks during a tenant changeover, that income drops to $21,600. If you also incur $1,800 in maintenance costs during that year, your net rental income falls by $3,600, or roughly $70 per week.

Victoria's vacancy rate varies by location and property type, but a positively geared investment property is only positively geared when it is tenanted. Investors often calculate cash flow based on 52 weeks of occupancy and zero unplanned maintenance, which is not a realistic assumption over a 10 or 15 year hold period. A more reliable approach is to assume at least two to three weeks of vacancy per year and to set aside a portion of the positive cash flow as a maintenance reserve rather than treating the entire surplus as distributable income. This does not mean the property is no longer positively geared, but it does mean the annual cash flow contribution is lower than the weekly calculation suggests.

Properties in regional centres and outer suburban areas often deliver higher gross yields but may experience longer vacancy periods and higher tenant turnover than properties closer to employment and transport hubs. A unit in a well-maintained block in Ballarat or Bendigo may generate a 5.5 per cent gross yield compared to 3.8 per cent in inner Melbourne, but the cash flow advantage diminishes if the property is vacant for eight weeks instead of two.

A positively geared investment property is a tool for building serviceability and supporting portfolio growth, but only if the loan structure, the borrowing strategy, and the cash flow assumptions reflect the limitations that apply to residential investment lending in Victoria. If you are considering a positively geared investment or want to review the structure of an existing investment loan, call one of our team or book an appointment at a time that works for you.

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