How to Choose the Right Investment Property

What Makes a Property Suitable for Investment

A suitable investment property generates income that covers most or all of its holding costs, has potential for capital growth, and fits within your borrowing capacity after applying the serviceability buffer. For Tasmanian government employees with stable employment, the deposit and loan structure matter more than the property type, provided the location shows consistent rental demand.

Consider a buyer earning $95,000 annually through the Tasmanian State Service who has saved a 10 per cent deposit. Lenders assess serviceability at the loan rate plus 3.0 percentage points, which reduces the maximum borrowing amount compared to the rate you actually pay. If you can borrow $450,000 after serviceability tests, you need to find a property in that range where the rental income offsets most of the interest, insurance, rates and body corporate fees. At current variable rates, an interest-only loan of $450,000 costs roughly $2,200 per month in interest alone. If the property rents for $500 per week, that covers $2,165 per month, leaving you to fund the shortfall plus other holding costs from your salary. That shortfall is what you claim as a deduction.

The revised negative gearing rules matter if you buy an established property now. From the 2027-28 income year, losses on established properties purchased after 12 May 2026 can only be offset against income from other residential properties, not your salary. Losses carry forward until you have property income or a capital gain to absorb them. Properties you already own, or those under contract before that date, continue under the old rules. New builds retain full negative gearing regardless of when you buy.

Should You Target New or Established Stock

New builds offer full negative gearing and the choice of capital gains tax treatment when you sell, but they generally cost more per square metre and rent for less than equivalent established properties in the same suburb. Established properties bought after 12 May 2026 limit your loss deductions to property income only, but they often deliver higher rental yields and start with some capital growth already built into the location.

In Glenorchy, a three-bedroom unit in an older complex might rent for $450 per week, while a new townhouse in the same catchment rents for $480 per week but costs $80,000 more to purchase. If you are borrowing close to your serviceability limit, the lower purchase price of the established property might be the only option that fits within your borrowing capacity. The rental yield on the established unit is higher, but the loss you make each year after all costs can only be claimed against other residential property income under the new rules. The new townhouse lets you claim the loss against your salary and offers more flexibility on capital gains tax when you sell, but you need a larger deposit and higher borrowing capacity to make the purchase work.

For Tasmanian government employees who already own their home and are adding a first investment property, the established option often makes more sense if cash flow is tight. The loss restriction matters less if you plan to build a portfolio over time, because the losses from multiple properties can offset each other and any future capital gain. If you are salary sacrificing or expect a promotion in the next few years, the new build might suit better because the immediate tax benefit helps with cash flow now.

How Location Affects Borrowing Capacity

Lenders assess investment loans based on the rental income the property can generate and your ability to service the loan at a higher rate. The location directly affects both. A property in Hobart's northern suburbs with a vacancy rate below 1 per cent and a median rent of $500 per week will support more borrowing than a property in a regional area with a 4 per cent vacancy rate and lower rent.

If you are looking at Kingborough or Clarence, lenders use the actual rental appraisal or a percentage of the market rent to calculate serviceability. Most lenders apply a shading factor, using 80 per cent of the rent to account for vacancy and management costs. They then add that income to your salary and assess whether you can service both your home loan and the new investment loan at the loan rate plus 3.0 percentage points. A property that rents for $520 per week gives you $21,632 in rental income for serviceability purposes after shading, which might increase your maximum borrowing capacity by $80,000 to $100,000 depending on your other commitments.

Debt-to-income limits also apply. From February 2026, lenders can only write 20 per cent of their new investor loans to borrowers with total debt exceeding six times their gross income. If you earn $95,000 and already owe $400,000 on your home, you can borrow another $170,000 before hitting the six-times threshold. Most Tasmanian government employees with secure ongoing roles and moderate home loan debt will not hit this limit on a first investment purchase, but it matters more when you are expanding your property portfolio or refinancing existing debt.

Interest-Only or Principal-and-Interest Loans for Investment Properties

Interest-only loans keep your monthly repayments lower, which reduces the cash flow shortfall you need to fund from your salary each month. Principal-and-interest loans cost more each month but reduce the loan balance over time and may qualify for a slightly lower interest rate depending on the lender.

For a $450,000 investment loan at current variable rates, an interest-only loan costs roughly $2,200 per month. The same loan on principal-and-interest repayments over 30 years costs roughly $2,800 per month. If the property rents for $500 per week, you are funding a $35 shortfall each month on interest-only or a $635 shortfall on principal-and-interest, before accounting for other holding costs such as insurance, rates and management fees. The principal-and-interest loan builds equity faster, but the interest-only loan is easier to service if you are also managing a home loan and want to keep more cash available for other purposes.

Most lenders offer interest-only periods of up to five years on investment loans. After that period, the loan reverts to principal-and-interest unless you apply to extend the interest-only term. Some lenders allow longer initial interest-only periods, but loans with interest-only terms above five years and a loan-to-value ratio above 80 per cent are classified as non-standard under the prudential framework, which increases the capital cost to the lender and usually results in a higher interest rate.

If you plan to use equity from the investment property to fund a second purchase in a few years, the interest-only structure makes sense because you are not drawing down the loan balance and the property's capital growth increases your available equity. If you are focused on reducing debt or the property is a long-term hold without plans for further purchases, principal-and-interest might suit better.

Does Your Deposit Affect the Property You Should Choose

Your deposit determines whether you pay Lenders Mortgage Insurance and how much borrowing capacity the lender will approve. A deposit of 20 per cent or more avoids LMI. A deposit below 20 per cent triggers LMI, which is calculated on a sliding scale based on the loan amount and loan-to-value ratio.

Tasmanian government employees may access LMI waivers for public servants through specific lenders, which allows you to borrow up to 90 per cent of the property value without paying LMI. That waiver applies to investment loans as well as owner-occupied loans, depending on the lender's policy. If you have a 10 per cent deposit and access to an LMI waiver, you can purchase a property valued at $500,000 with $50,000 in savings, whereas without the waiver you would either need to save an additional $50,000 to reach 20 per cent or pay several thousand dollars in LMI and associated stamp duty on the premium.

The deposit also affects your interest rate. Lenders price investment loans based on the loan-to-value ratio, with lower rates available for loans below 80 per cent LVR and higher rates for loans above that threshold. The difference is typically 0.10 to 0.30 percentage points depending on the lender and your overall borrowing profile.

If you are using equity from your home to fund the deposit, the lender assesses both loans together for serviceability purposes. Releasing equity increases the debt against your home, which reduces your overall borrowing capacity. In that scenario, choosing a property at the lower end of your budget leaves room for future purchases and avoids over-leveraging on your first investment.

Tax Deductions You Can Claim From Day One

Interest on the investment loan is deductible for the portion of the year the property is rented or genuinely available for rent. Other holding costs including council rates, water rates, insurance, property management fees, body corporate fees, repairs and depreciation are also deductible. You cannot claim interest or holding costs for any period the property is used for private purposes.

If you settle in October and the property is tenanted from November, you can claim 8 months of interest and holding costs in that financial year. If you borrow $450,000 at current variable rates, that is roughly $17,600 in interest for the 8 months, plus rates, insurance and other costs. Total deductions might reach $20,000 to $22,000 for that partial year. At a marginal tax rate of 32.5 per cent, that reduces your tax by roughly $6,500 to $7,150, which partially offsets the cash flow shortfall.

Under the new negative gearing rules, if you bought an established property after 12 May 2026, those deductions reduce your taxable income from residential properties only from the 2027-28 income year onward. If you have no other property income in that year, the loss carries forward. You can claim it in a future year when you have rental income from this property or another residential property, or when you sell and realise a capital gain. If you bought a new build, you can still claim the loss against your salary regardless of when you purchased.

Depreciation is a non-cash deduction that reduces your taxable income without requiring any outlay. New builds and recently renovated properties generate higher depreciation claims than older established properties. A quantity surveyor prepares a depreciation schedule for a fee of $600 to $800, which sets out the annual deduction you can claim for the decline in value of the building and fixtures. You claim the depreciation each year until the schedule expires or the deduction reduces to zero.

What Happens When You Want to Sell or Refinance

When you sell, the capital gain is calculated as the sale price minus the purchase price and associated costs such as stamp duty, legal fees and selling costs. For properties held longer than 12 months, individuals are entitled to either the 50 per cent capital gains tax discount or cost base indexation depending on when the gain accrued.

For gains accruing before 1 July 2027, the 50 per cent discount applies. For gains accruing from 1 July 2027 onward, you index the cost base by inflation and pay tax on the real gain only, subject to a 30 per cent minimum rate. If you bought before 1 July 2027 and sell after that date, the gain is split. You can either obtain a valuation as at 1 July 2027 or use the ATO's apportionment method to divide the gain between the two periods. For new builds, you can choose the treatment that results in the lower tax.

If you are receiving a government payment such as the Age Pension or JobSeeker in the year you sell, you are exempt from the 30 per cent minimum tax rate for that year. If you are still working, the minimum rate applies to the post-1 July 2027 portion of the gain if your effective rate on that portion would otherwise fall below 30 per cent.

Refinancing an investment loan works the same way as refinancing a home loan. You can refinance to access equity, reduce your interest rate, or switch from interest-only to principal-and-interest. Investment loan refinancing allows you to consolidate debt, release equity for a second purchase, or move to a lender offering a lower rate or different loan features. The new lender reassesses your serviceability at the time of refinancing, so your borrowing capacity might change depending on your income, other debts and current interest rates.

Call one of our team or book an appointment at a time that works for you. We work with Tasmanian government employees to structure investment loans for public servants that fit your income, deposit and plans for the property, and we can walk through the tax changes and borrowing options that apply to your circumstances.

Frequently Asked Questions