Smart Ways to Approach Your First Investment Property

Buying your first investment property before you own a home sounds counterintuitive, but it might be the only way to get into the market if you cannot afford to live where you want to own.

Rentvesting lets you rent in a suburb that suits your lifestyle while buying an investment property in an area where you can actually afford the deposit and repayments. The rental income from your investment helps cover the loan, and you start building equity now rather than waiting years to save a deposit for an owner-occupied home in a more expensive location.

How Much Deposit Do You Need for an Investment Property?

Most lenders will lend up to 90 per cent of the property value for an investment loan, which means you need at least a 10 per cent deposit plus costs for settlement, stamp duty and Lenders Mortgage Insurance.

Consider someone buying an apartment in Mulgrave, where a two-bedroom unit might be within reach. With a 10 per cent deposit, you would need genuine savings for the deposit itself, plus another amount set aside to cover LMI, stamp duty, legal fees and other upfront costs. Some lenders will allow you to capitalise the LMI premium into the loan amount, which reduces the cash you need at settlement but increases your total borrowing and your ongoing repayments.

What Interest Rate Will You Pay on an Investment Loan?

Investment loan interest rates sit higher than owner-occupier rates, typically by 0.3 to 0.6 percentage points depending on the lender and your deposit size.

Your actual rate depends on several factors including your loan-to-value ratio, whether you choose a variable or fixed rate, and whether you opt for principal and interest or interest-only repayments. Lenders also assess your total debt-to-income ratio under current lending rules, which limits how much you can borrow based on all your income and existing commitments. You can compare investment loan options across a wide range of lenders to find a product that suits your situation.

Can You Use Rental Income to Help You Qualify?

Lenders will include a portion of the expected rental income when they assess your borrowing capacity, but they do not count all of it.

Most lenders apply a shading factor, typically allowing 70 to 80 per cent of the gross rent to account for vacancy periods, maintenance costs and property management fees. So if the property you are buying would rent for $450 per week, the lender might only count $315 to $360 of that income when working out whether you can afford the loan. That shading can make the difference between getting approved and falling short, particularly if your salary on its own would not support the full loan amount.

Should You Choose Interest-Only or Principal and Interest Repayments?

Many property investors choose interest-only repayments for the first few years to keep their monthly costs lower and maximise their cash flow.

With an interest-only loan, you pay only the interest portion each month and the loan balance stays the same. This structure gives you more flexibility early on, particularly if your income is stretched or you plan to use surplus cash flow to save for your next property or an owner-occupied purchase. After the interest-only period ends, usually after one to five years, the loan reverts to principal and interest and your repayments increase. The drawback is that you are not reducing your debt during that initial period, so you will not build equity through loan repayment, only through any capital growth in the property value.

Principal and interest repayments cost more each month but reduce your loan balance over time. If your income can support the higher repayment, this approach builds equity more quickly and reduces your total interest cost over the life of the loan.

How Does Negative Gearing Work Under the Current Rules?

Negative gearing means your rental income is less than your total property costs, including loan interest, and you can claim that loss against your other income to reduce your tax.

Under legislation that came into force in mid-2026, properties purchased after 12 May 2026 are subject to different rules depending on whether the property is an established dwelling or a new build. For established properties purchased after that date, losses can only be offset against income from other residential properties or carried forward to offset future residential property income or capital gains. For new builds, losses can still be offset against all income including your salary. Properties purchased before 12 May 2026, or under contract before that date, continue to allow full negative gearing against all income.

If you are considering an investment property purchase, the tax treatment depends on the timing of your contract and whether the property qualifies as a new build under the rules. A licensed tax adviser can walk you through your specific situation.

Where Should You Look if Your Savings Are Limited?

Focus on suburbs where median prices sit well below the Melbourne average and where rental yields are high enough to make the numbers work.

Outer suburbs and regional centres within commuting distance of Melbourne often offer better value for first-time investors. Mulgrave, Clayton and Oakleigh South have historically attracted renters looking for access to Monash University, hospitals and industrial employment precincts. Units in these areas tend to offer higher rental yields than houses in inner Melbourne, which matters when your borrowing capacity is limited and you need the rent to cover a meaningful portion of your loan repayment.

Avoid assuming that the cheapest property is the right choice. Factor in body corporate fees for apartments, which can range from $2,000 to $6,000 per year depending on the size and age of the building and the facilities included. High body corporate fees reduce your net rental return and are not tax deductible in the same way that loan interest is, so they directly affect your cash flow.

What Happens If You Want to Buy a Home to Live In Later?

Keeping your investment property and buying an owner-occupied home later is possible, but your existing investment loan will reduce how much you can borrow for the new purchase.

Lenders assess your total debt position when you apply for a second loan. The investment loan repayments, even with rental income counted, will reduce your borrowing capacity for the owner-occupied loan. Some buyers choose to sell the investment property to free up deposit funds and borrowing capacity. Others hold onto it and buy a cheaper owner-occupied property than they originally planned, accepting that servicing two loans limits what they can afford. If you have built enough equity in your investment property, you may be able to use that equity as part of your deposit for the next purchase through equity release.

What Costs Can You Claim Against Your Rental Income?

Loan interest, property management fees, council rates, building insurance, repairs, and depreciation on the building and fixtures are all claimable expenses.

You cannot claim the cost of improvements that add value to the property, such as adding a second bathroom or renovating a kitchen. Those costs are added to your cost base and reduce your capital gains tax when you eventually sell. You also cannot claim the principal portion of your loan repayment, only the interest component. Keep detailed records of all expenses and rental income throughout the year, because the ATO may request evidence during an audit. Stamp duty and LMI premiums are not immediately deductible but can be claimed over several years under depreciation rules, depending on the loan term and the type of cost.

If you are unsure whether an expense is claimable, speak to a registered tax agent before lodging your return.

How Do You Get Started?

Call one of our team or book an appointment at a time that works for you. We will assess your income, savings and current commitments, then show you what you can borrow and which investment loan products suit your situation. We work with lenders across Australia, so we can compare rates, features and serviceability across a wide panel rather than being limited to one or two institutions. If your borrowing capacity is tight, we can also talk through options like using a guarantor or structuring your loan to maximise the rental income offset, depending on what your circumstances allow.

Frequently Asked Questions