Do you know which property type suits your first investment?

What property type should you choose for your first investment?

The property type you choose affects how much you can borrow, the rental return you'll receive, and how lenders assess your application. Units typically offer lower entry prices and higher rental yields in Melbourne's inner and middle suburbs, while houses may deliver stronger capital growth over time but require a larger upfront commitment.

Consider a buyer looking at their first investment property in Clayton. A two-bedroom unit close to Monash University might be valued around the median for the area, produce strong rental demand from students and hospital workers, and require a smaller deposit than a standalone house. However, lenders will factor in body corporate fees when calculating serviceability, and some lenders apply loan-to-value ratio overlays to units in high-density developments. The same buyer looking at a three-bedroom house in the same suburb would face a higher purchase price and lower gross rental yield, but avoid body corporate costs and potentially qualify for a higher loan amount relative to the property value.

First-time investors often assume that choosing a property type is purely a question of affordability, but lenders treat different property types differently when assessing your investment loan application. A unit in a building with more than 50 per cent non-owner-occupied dwellings may be capped at 80 per cent LVR by some lenders, even if you're willing to pay Lenders Mortgage Insurance. A studio apartment under 50 square metres may be excluded altogether by certain banks. Townhouses and terraces usually sit somewhere in the middle, attracting fewer restrictions than units but offering a more accessible price point than detached houses.

How lenders assess units and apartments

Lenders apply stricter criteria to units and apartments than to standalone houses. Most will review the strata report to confirm the building is well managed, check whether the development has been completed for at least 12 months, and verify that owner-occupiers make up a reasonable proportion of residents.

In suburbs like Glen Waverley and Box Hill, where high-rise developments have reshaped the local housing stock, lenders may reduce the maximum LVR or increase the interest rate margin if more than half the units in a building are tenanted. They'll also examine the body corporate financials to ensure the sinking fund is adequate and no special levies are pending. If you're looking at a studio or one-bedroom apartment, some lenders will decline the application outright, while others will lend but apply a higher interest rate or lower valuation.

Body corporate fees reduce your net rental income and affect how much you can borrow under the serviceability buffer. A unit returning $2,200 per month in rent but costing $400 per month in body corporate fees delivers $1,800 in net income before other expenses. Lenders use net rental income when assessing whether you can service the loan, so higher body corporate fees mean lower borrowing capacity, even if the gross yield looks attractive.

Why houses deliver different borrowing and tax outcomes

A standalone house gives you full control over maintenance, no body corporate fees, and typically fewer lending restrictions. Lenders will lend up to 90 per cent LVR on most houses without additional overlays, and you can claim the full cost of repairs, insurance, rates and interest as deductions against your rental income.

The downside is price. In middle-ring Melbourne suburbs such as Mount Waverley or Blackburn, the gap between a unit and a house can be substantial. That means a larger deposit, higher stamp duty, and potentially a longer timeframe to build equity. Rental yields on houses are often lower in percentage terms than units, because the purchase price is higher while weekly rents don't increase proportionally. If your strategy depends on rental income covering most of your loan repayment, a house may not deliver the yield you're after.

One scenario we see regularly involves an investor who can afford a house deposit but finds that the rental income doesn't cover enough of the repayment to satisfy the lender's serviceability test. Switching to a well-located unit in the same area can reduce the loan amount, increase the percentage of the repayment covered by rent, and improve serviceability, even though the gross rent in dollar terms is lower.

Townhouses and terraces as a middle option

Townhouses and terraces combine some of the benefits of both units and houses. You'll usually have your own title or a small body corporate shared with only a few other dwellings, which reduces fees and simplifies management. Lenders treat most townhouses the same way they treat houses, provided the body corporate fees are modest and the number of dwellings on title is low.

In areas like Chadstone, Oakleigh and Mulgrave, townhouses are common and appeal to young families and professionals who want more space than a unit but can't stretch to a full house. Rental demand tends to be steady, and vacancy rates are often comparable to units. The main consideration is whether the townhouse has its own land title or forms part of a larger owners corporation. A standalone title gives you more flexibility if you want to renovate or subdivide in future, while a shared title may come with restrictions on what you can change.

Investment property types and the new negative gearing rules

From 1 July 2027, rental losses on residential properties acquired after 7:30pm AEST on 12 May 2026 can only be offset against residential rental income or carried forward, unless the property qualifies as an eligible new build. Properties held or under contract before that date continue under the existing rules, and eligible new builds purchased after that date retain full negative gearing.

An eligible new build is defined as a dwelling constructed on previously vacant land, or a development where the number of dwellings increases. A knock-down rebuild that replaces one house with one house does not qualify, even if the new dwelling is larger or higher quality. If a new build is occupied for more than 12 months before being sold to you as an investor, you lose access to negative gearing.

For first-time investors, this creates a choice. You can buy an established unit, house or townhouse and accept that rental losses will be quarantined from your salary, or you can buy an eligible new build and retain the ability to offset those losses against your other income. The new build may cost more and be located further from the suburbs you prefer, but the tax benefits can be significant if you're in a higher tax bracket and expect the property to run at a loss in the early years.

How property type affects your long-term strategy

Your first investment property is rarely your last. The property type you choose now will shape your ability to borrow again in future, either to expand your portfolio or to buy your own home.

A unit with strong rental yield and low maintenance can generate surplus cash flow that strengthens your serviceability when you apply for a second loan. A house that delivers stronger capital growth may allow you to release equity sooner, giving you a deposit for the next purchase without needing to save from your salary. Investors who plan to build a portfolio over time often start with a high-yield unit to establish cash flow, then use the equity and improved serviceability to purchase a house as their second or third property.

The key is to choose a property type that aligns with your current deposit, your borrowing capacity, and your medium-term plans. If you're likely to want to upgrade to your own home within three to five years, buying an investment property that requires minimal cash input and generates strong rental income will leave you in a better position to borrow for an owner-occupied purchase later. If your focus is on building wealth over ten or more years, a house in a suburb with consistent capital growth may serve you better, even if the rental yield is lower and the holding costs are higher in the short term.

Call one of our team or book an appointment at a time that works for you. We'll review your deposit, income and investment goals, then show you which property types give you the strongest position for this purchase and the next one.

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