How to determine if you can afford an investment property

Buying an investment property is a popular way to grow your wealth. Around 2.2 million Australians (around 20% of the tax-paying population) own at least one investment property.¹ 

If you’re interested in buying an investment property, it’s essential to plan effectively so you know what you’re getting into and can make smart decisions. Otherwise, you may find yourself with an ‘investment’ that drains you financially.  

Before you take a step onto the property investment ladder, make sure you have a thorough understanding of what you can afford upfront and how much it will cost you to rent out the property. Keep in mind that the upfront and ongoing costs of a rental property can be substantial, and it will take time to recoup these costs under normal market conditions. 

Your borrowing capacity 

Your Mortgage Choice broker can help you determine your borrowing capacity, so you understand your budget when it's time to start looking for a property. 

 The discussion with your mortgage broker will include: 

• whether you will need a cash deposit or if you can use equity from an existing property 
• your ability to meet your loan repayments and expenses, including in tough times – e.g. if the property isn’t tenanted for weeks or months 
• how much you can afford to spend on property upgrades such as renovations, repairs and landscaping 
• how much you will need for upfront costs and ongoing maintenance expenses  
• what type of loan (e.g. fixed rate loan, interest only line of credit) is right for you. 

Once your broker has a solid understanding of your financial situation and investment goals, they can give you an indication of your borrowing capacity and help you apply for pre-approval for an investment loan. Lenders will assess your borrowing capacity in the same way they do for an owner-occupied loan; however, they’ll also take the potential rent into account as an additional source of income for you. 

Budgeting for ongoing costs 

As a landlord you will incur a variety of expenses associated with owning and tenanting your investment property. This includes rates and body corporate fees, as well as insurances to protect your asset.  

You may be able to claim most of your rental property expenses on your tax return, which makes the bills more manageable (always check with your accountant). These expenses may include: 

• advertising for tenants 
• accountant's fees 
• interest on your investment loan 
• council rates, body corporate fees, land tax and strata fees 
• repairs, maintenance, pest control, cleaning and gardening 
• insurance on your rental property 
• depreciation on the building and some fixtures and fittings. 

While the ongoing costs can be substantial, they’re essential for protecting your investment and keeping the property in good condition. This ensures that the property is appealing for renters and also to a potential buyer when you’re ready to sell. It’s better to overestimate how much you may need for these costs, so you’re not caught short. Your Mortgage Choice broker can help you with this. 

What is negative gearing? 

Negative gearing occurs when the cost of owning a rental property outweighs the income it generates each year. This creates a taxable loss, which can normally be offset against other income including your wage or salary, to provide tax savings. 

It is advisable to speak to your tax advisor or accountant for practical advice. 

[1] ATO, Taxation Statistics 2020-21, published 8 June 2023