Common Mistakes When Buying an Investment Property

Buying rental property for income sounds straightforward until you sit down with actual loan applications and tax calculations.

The most important thing to understand upfront is that lenders treat investment borrowing differently to owner-occupied lending. Your borrowing capacity will be lower, your deposit requirements may be higher, and the way rental income is assessed can surprise people who assume their tenant's rent will cover the loan repayment. Add the recent Federal Budget changes to negative gearing and capital gains tax, and there's a fair bit to get your head around before you start looking at properties.

How Much Deposit Do You Actually Need?

Most lenders will lend up to 90% of the property's value for an investment purchase, meaning you'll need at least a 10% deposit plus costs.

If you're borrowing more than 80% of the value, you'll pay Lenders Mortgage Insurance, which can add several thousand dollars to your upfront costs. In Mount Eliza, where the property market includes a mix of older units closer to the village and larger homes near Canadian Bay, LMI on a unit might cost around $3,000 to $5,000, while a house at a higher price point could see LMI closer to $15,000 or more. That's a one-off cost, usually added to your loan amount, but it's still money you're borrowing and paying interest on.

If you already own a home and have built up equity, you might be able to use that equity as your deposit rather than saving cash. Lenders will typically let you leverage equity up to 80% of your current property's value, which means if your home is worth $800,000 and you owe $400,000, you could potentially access $240,000 without needing to sell. That's often how people fund their second property without waiting years to save a deposit.

Rental Income and How Lenders Actually Assess It

Lenders don't count 100% of your rental income when they calculate how much you can borrow.

Most will only use 80% of the expected rent, which accounts for periods when the property might be vacant, or you might have maintenance costs that eat into your cash flow. Some lenders are more conservative and only count 70%. If you're looking at a unit in Mount Eliza that might rent for $500 per week, the lender will probably assess it as $400 per week of usable income when they run your borrowing calculations. That difference can be the reason someone who thought they could borrow enough to buy a property ends up needing to adjust their budget or increase their deposit.

Consider a buyer who already owns a home in Frankston and wants to purchase a rental unit in Mount Eliza. They're earning $110,000 a year, their home loan repayment is $2,400 a month, and they've got $60,000 in equity they can use as a deposit. The unit they're looking at is listed with an expected rental return of $480 per week. On paper, that's $24,960 a year. But the lender assesses it at 80%, which brings it down to $19,968. After tax, depending on their marginal rate, the net benefit to their borrowing position is even lower. They're approved, but the loan amount is about $40,000 less than they initially thought they could borrow, which means they either need to find a lower-priced property or increase their deposit.

Interest Only vs Principal and Interest Repayments

Many property investors choose interest only repayments for the first few years of their loan.

The appeal is that your repayments are lower, which can help with cash flow, especially if the rent doesn't quite cover the full loan cost. At current variable rates, an interest only repayment on a $500,000 loan might sit around $2,100 to $2,400 per month, compared to $2,900 to $3,200 for principal and interest. The difference gives you more breathing room if you're negatively geared.

The downside is that you're not paying down the debt, so after five years, you still owe the full amount. If property values don't rise, or if you were relying on building equity through repayments to fund your next purchase, you might find yourself stuck. Interest only periods typically run for one to five years, after which the loan reverts to principal and interest unless you reapply. Some lenders are more flexible with renewing interest only terms for investors, others are not.

If your goal is to build wealth through property and eventually own the asset outright, or if you want to reduce your loan balance to improve your equity position for future purchases, principal and interest makes more sense from day one. If your goal is to maximise cash flow and tax deductions in the short term while you're in a high income phase, interest only can work well, provided you have a plan for what happens when the interest only period ends.

Fixed vs Variable Rates for Investment Lending

Fixed rates give you certainty, variable rates give you flexibility.

Investor interest rates are typically 0.10% to 0.30% higher than owner-occupied rates for the same product. A lender offering a three-year fixed rate of 5.89% for owner-occupiers might price the same term at 6.09% for investors. Variable rates sit in a similar range, and they fluctuate with the Reserve Bank's decisions and the lender's own funding costs.

If you fix your rate and the market drops, you're locked in. If you need to sell or refinance before the fixed term ends, you'll likely face break costs, which can run into the thousands depending on how much rates have moved. If you stay variable, you can make extra repayments or refinance without penalty, but your repayments will go up if rates rise.

Some investors split their loan, fixing part and leaving part variable. That gives you some protection if rates rise, but also some flexibility if you want to pay down debt or sell without paying break fees on the entire loan. It's not the most exciting part of property investing, but getting the rate structure wrong can cost you more than a bad property choice.

Recent Tax Changes and What They Mean for New Purchases

If you bought an established rental property before 12 May 2026, the old rules still apply to you.

If you're buying an established property from 13 May 2026 onwards, the new Federal Budget rules will affect both your tax deductions and your capital gains tax from 1 July 2027. Under the new arrangements, if your property costs more to run than it earns in rent, you can only claim that loss against other rental income or future capital gains from residential property. You can't offset it against your wage or salary anymore, which was the main appeal of negative gearing for many investors.

Losses aren't lost entirely, they're carried forward, so if you sell the property down the track and make a gain, those accumulated losses reduce your taxable capital gain. But the immediate tax benefit that helped with cash flow each year is gone for new purchases of established properties.

The capital gains tax discount is also changing. Instead of the 50% discount that's been in place for years, you'll pay tax on your inflation-adjusted gain, with a minimum 30% tax on capital gains. For new builds, you can choose between the old 50% discount and the new arrangements, whichever works out in your favour.

If you're buying in Mount Eliza and you're tossing up between an established unit near the village or a new townhouse development closer to Kunyung Road, the tax treatment from mid-2027 onwards will be materially different. That doesn't mean new builds are always the right choice, they often come with higher body corporate fees and lower land-to-asset ratios, but it's a factor worth weighing up alongside location, rental demand, and long-term growth potential.

Claimable Expenses and Maximising Deductions

You can still claim a wide range of expenses on a rental property, regardless of when you bought it.

Interest on your loan, property management fees, council rates, water rates, building insurance, landlord insurance, repairs and maintenance, and depreciation on the building and fixtures are all deductible. Stamp duty isn't immediately deductible, but it forms part of your cost base when you eventually sell, which reduces your capital gain.

Depreciation is one of the most overlooked deductions. If you buy a newer property or one that's been recently renovated, you can claim depreciation on things like carpets, blinds, hot water systems, and the building itself if it was built after 1985. A quantity surveyor's report will set out exactly what you can claim and for how long. The report costs around $600 to $800, but it can unlock deductions worth several thousand dollars a year.

For investors who bought before the recent Budget changes, these deductions reduce your taxable income across the board. For investors buying established properties after 12 May 2026, the deductions still exist, but from 1 July 2027 they can only offset rental income or residential capital gains, not your salary. That's a meaningful difference if you're in a high tax bracket and were relying on the tax refund to support your cash flow.

When Refinancing Makes Sense

Refinancing your investment loan can save you money if your current rate is no longer competitive, or if you want to access equity for your next purchase.

Lenders regularly adjust their rates, and the discount you negotiated two or three years ago might not be the sharpest rate available now. If you're paying 6.40% on a variable rate and another lender is offering 5.99% with similar features, that's a difference of around $170 a month on a $500,000 loan. Over a year, that's more than $2,000.

Refinancing also lets you pull equity out of your property if it's increased in value or if you've paid down the loan. If your Mount Eliza rental was worth $650,000 when you bought it and it's now valued at $720,000, and you've paid the loan down to $480,000, you've got equity you can use. Lenders will typically let you borrow up to 80% of the current value, which in this case is $576,000, giving you access to around $96,000 in usable equity.

Refinancing isn't without cost. You'll pay for a valuation, discharge fees from your old lender, and sometimes application fees with the new lender. If you're moving from a fixed rate before the term ends, break costs can be significant. A loan health check every couple of years helps you figure out whether refinancing makes sense or whether you're just shuffling paperwork for no real gain.

What Happens When Your Property Sits Vacant

Every rental property will have periods without a tenant.

In Mount Eliza, vacancy rates tend to be lower than in some other parts of the Mornington Peninsula, partly because of the village amenity and proximity to schools, but you should still budget for at least two to four weeks vacant per year. If you're switching tenants, you'll often have a gap while the property is being cleaned, repaired, and advertised. If the market softens, that gap gets longer.

During vacancy, you're still paying the mortgage, insurance, rates, and any body corporate fees if it's a unit. If your loan repayment is $2,200 a month and you've got two months without rent, that's $4,400 out of your pocket. Most investors keep a buffer of at least three months' worth of repayments set aside to cover vacancies and unexpected repairs, but not everyone does, and that's when cash flow becomes a problem.

Property managers charge around 6% to 8% of the weekly rent, plus letting fees when they find a new tenant. For a property renting at $500 per week, that's $30 to $40 per week in management fees, or around $1,560 to $2,080 per year. It's worth it if they're proactive about finding tenants, handling maintenance, and keeping you compliant with rental laws, but it's another cost that eats into your rental return.

Call one of our team or book an appointment at a time that works for you. We'll walk you through the numbers, help you compare investment loan options from lenders across Australia, and make sure your finance structure supports the income and growth strategy you're actually trying to achieve.

Frequently Asked Questions