Welcome to our winter Wealth Management update

Buying an Investment Property

With interest rates at record lows, interest in investment properties has boomed. This article explores the pros and cons of buying investment properties.

How can I fund an investment property?

If you have equity in your own home, most financial institutions will allow you to borrow up to 80% of the combined value of your own home and the proposed property. This is subject to meeting serviceability criteria (which is essentially having sufficient cashflow, after tax and living expenses, to be able to service the monthly repayments).

Example: Joel owns a home worth $800,000 with a mortgage of $400,000. Joel earns $80,000 per annum. He wants to buy an investment property but is unsure about how much he can borrow and whether or not it is affordable.

Joel could borrow the lesser of the maximum permissible loan amount under the loan to valuation ratio (LVR) calculation or that worked out under the serviceability calculation, as follows:

Part a: maximum amount borrowed under LVR criteria


Part b: credit assessment (serviceability) Under the LVR calculation, Joel could theoretically borrow a maximum sum of $1,200,000. However, when the bank applies their credit assessment criteria, it becomes clear that he would not be able to service a loan of that size. Using their methodology, he would have an income shortfall of approximately $23,448 per annum, calculated as follows:

Investment property value
Stamp duty
Loan required

Maximum Borrowing Amount Actual Assesssed
Groos income 120,000 120,000
Gross rent 57,500 57,500
less: rental expenses (14,375) (11,500)
163,125 166,000

Tax payable 23,058 23,058
Living expenses 30,000 30,000
Home loan repayments(25yrs@7.00%pa) 33,925 33,925
Invesments loan repayments(30yrs@6.00%pa) 71,924 101,669

158,908 188,653
Net Surplus/(Loss) $ 4,217 $ (22,653)

Note: Tax estimate $
Assessable Income 163,125
Interest expense on property 71,924
Taxable income 91,201
Tax on taxable income $ 23,058

Part c: maximum loan amount under serviceability criteria

Under the serviceability criteria, the maximum
amount Joel could borrow would approximate $591,000,
calculated as follows:

Investment property value
Stamp duty
Loan required

Maximum Borrowing Amount Actual Assesssed
Gross income 120,000 120,000
Gross rent 28,500 28,500
less: rental expenses (7,125) (5,700)

141,375 142,800

Tax payable 28,720 28,720
Living expenses 30,000 30,000
Home loan repayments(25yrs@7.0%pa) 33,925 33,925
Invesments loan repayments(30yrs@6.0%pa) 35,468 50,137

128,114 142,782
Net Surplus/(Loss) $ 13,261 $ 18

Note: Tax estimate $
Assessable Income 141,375
Interest expense on property 34,468
Taxable income 105,907
Tax on taxable income $ 28,720

What potential return could I expect on my investment?

The potential return from investment properties are dictated by a number of variables including:

  • the rental return generated
  • the growth potential
  • the amount borrowed
  • the marginal tax rate of the investor
  • the actual rental expenses
  • depreciation and/or building allowances
  • ultimate gain or loss


Joel decides to borrow the maximum amount possible to buy an investment property worth $570,000. He holds the property for 10 years and then sells it. It proves to be a sound investment. The annualised return equates to 12.36%, calculated as follows:


Purchase price
Marginal Tax Rate of investor
Interest rate on borrowings (p.a)
Interest prepaid annually in advance
Rental expenses (as a % of gross rent)
Rental yield (p.a)
Annual rent increases
Depreciation (as a % of initial cost)
Growth rate per annum

Cashflow details
Year 0 Year 1 Year 5 Year 10
Capital transactions
$ $ $ $
Initial investments

Loan establishment fess (est. 0.5%)

Borrowings (up to 100% of investment)

Stamp duty (NSW rates)

Projected sale proceeds

CGT refunded/(paid)
- - - (37,736)
Post tax cashflow
(3,095) - - 137,296
Income transactions

Gross rent
- 28,500 29,657 31,170
Rental expenses

(7,125) (7,414) (7,793)
Interest expense
- (41,370) (41,370) (41,370)
Pre tax cashflow
- (19,995) (19,127) (17,992)
Income tax refunded/(paid) Note:1 - 12,462 12,041 11,491
Post tax cashflow
- (7,533) (7,086) (6,502)
Combined post tax cashflows ($)
$(3,095) $(7,533) $(7,086) $130,794

Project After-tax IRR 12.36%

What are the potential benefits of owning an investment property?

  • Investment properties provide a long term income stream that typically rises over time.
  • Property markets in Australia have historically enjoyed moderate long term growth. Should this continue, your investment should grow in value.
  • There are tax advantages associated with negative gearing. Where the expenses exceed the income generated, the loss can be applied against other income, reducing tax otherwise payable.
  • There are other tax benefits including the ability to depreciate fixtures and fittings over time. You may also be entitled to a building allowance deduction.

What are the potential risks of owning an investment property?

  • There is a risk that the value of your property may be worth less than what you paid for it. Any capital loss is magnified when leverage is involved.
  • There is a risk that your property may not always be tenanted. In a worst case scenario, you may be forced to sell.
  • There is a risk that a tenant could damage your property, become unruly or become difficult to evict.
  • There is a risk that repairs and maintenance expenses could become significant (e.g. concrete cancer or termites).
  • There is a risk that interest rates could rise, impacting your ability to service your loan.
  • There is a risk that you could become unemployed and no longer benefit from the tax deductions provided by negative gearing.

Who can I talk to about my loan requirements?

Moore Stephens Wealth Management now has a dedicated mortgage broker, Lino Abruzzese. Lino has over 25 years' experience in the industry and so is well equipped to provide you with professional and practical advice. Should you be looking for a new loan or considering refinancing an existing loan, please do not hesitate to contact Lino, who is happy to discuss your needs obligation free. He can be contacted on 0422 708 369 or 02 8236 7761.

Conclusion: To buy or not to buy?

Many Australians have an emotional attachment to property. This is understandable given the long period of price growth that has occurred since the mid 1990's. When considering residential property as part of a diversified portfolio, investors should consider the following:

  1. Is the return generated commensurate with the risks undertaken? If your property investment generates net returns after expenses lower than a term deposit (but with far greater risk), you need to consider the validity of the investment. Any investment involves a risk/ return trade-off. If alternate assets provide a better risk/return profile then property may not be the immediate answer.
  2. If your circumstances change, or problems arise, do you have an exit strategy in place? If you lose your job or can no longer fund the investment property expenses, you need to have a back-up plan in place so that you do not have to become a forced seller. Access to a line of credit or savings can buy you time in such situations.
  3. Does the investment have merit purely on the income it generates, or are you reliant on speculative capital growth? Many property investors undertake a negative gearing strategy in the hope that asset prices will continue to rise indefinitely. Australian residential property markets were relatively immune to the big falls in property prices experienced in the United States and Europe during the Global Financial Crisis. This does not mean we will be so lucky when the next recession comes along. Often the best property investments are those that generate enough income on a standalone basis without the need for capital growth.

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