10 Property Investment Challenges and How to Solve Them

The Deposit Gap When You Already Have a Mortgage

You need enough equity in your current property to use as a deposit, plus coverage for stamp duty and settlement costs, without triggering Lenders Mortgage Insurance on the new loan. Lenders typically allow you to borrow up to 80% of your home's current value without LMI, which means you need at least 20% equity sitting unused in that property.

Consider a homeowner in Kings Park whose property has increased in value since purchase. They owe $420,000 on a home now valued at $650,000. At 80% lending, the maximum loan is $520,000, leaving $100,000 in accessible equity. After accounting for discharge costs and a buffer, around $95,000 remains available. If they want to buy an investment property without paying LMI, they need a 20% deposit plus roughly $30,000 for stamp duty and costs. That puts the target purchase price around $325,000 to $350,000, assuming they use all available equity.

If the investment property you want sits above that range, you have three options. You can wait and pay down more of your home loan to build equity. You can accept LMI and borrow above 80%, which increases your loan cost but gets you into the market sooner. Or you can look at investment loan options that allow higher lending ratios for specific property types or borrower profiles. Each choice has a different cost and timeline.

Rental Income Does Not Count at 100%

Lenders assess rental income at 70% to 80% of the expected amount to account for vacancy periods, maintenance, and management fees. If a property is advertised at $550 per week, the lender will use $385 to $440 per week in their serviceability calculation, not the full amount.

That reduced income often creates a gap between what the property earns and what you need to service the loan. If you borrow $450,000 at current variable rates on an interest-only basis, repayments sit around $2,100 per month. Rental income of $440 per week gives you roughly $1,900 per month after the lender's shading. You are short $200 per month, and that shortfall needs to come from your salary or other income sources. Lenders will check that your existing commitments, plus this shortfall, still leave enough room in your budget.

The smaller the gap between rent and repayments, the more likely you are to get approved without needing a large salary buffer. Choosing a property with strong rental yield relative to its purchase price helps, as does structuring the loan to keep repayments lower in the early years. Interest-only terms do this by deferring principal repayments, though you will pay more interest over the life of the loan.

Serviceability Tightens When You Keep Your Home Loan

When you apply for a second loan, lenders reassess your entire financial position, including your existing home loan. Even if you have been comfortably managing repayments for years, the addition of a new loan can push your debt-to-income ratio beyond what the lender allows.

Banks apply a serviceability buffer, typically adding 3% to the current interest rate when calculating whether you can afford the loan. If the variable rate is 6.5%, they assess your ability to repay at 9.5%. This buffer is applied to both your existing home loan and the new investment loan, which can reduce your borrowing capacity significantly. If your income has not increased since you first bought your home, you may find that you can no longer borrow the same amount, even though your equity has grown.

This is common among buyers in Kings Park who purchased a few years ago and are now looking to invest. Property values have risen, creating equity, but incomes have not kept pace with interest rate changes and cost-of-living increases. The result is a borrowing capacity that looks smaller than expected. Reducing other debts, such as car loans or credit card limits, before applying can improve serviceability. Alternatively, restructuring your home loan to interest-only for a period can lower your assessed commitments, though this needs to be weighed against the longer-term cost.

Choosing Between Principal and Interest or Interest-Only Repayments

Interest-only loans keep your repayments lower during the interest-only period, which improves cash flow and makes it easier to manage a rental shortfall. Once the interest-only period ends, usually after five years, the loan reverts to principal and interest, and repayments increase.

The advantage is flexibility in the short term. If the property is generating a loss each month after rent and expenses, keeping repayments low reduces the amount you need to top up from your salary. Interest-only terms also maximise your tax deductions, because all the interest you pay is claimable when the property is rented out.

The downside is that you are not reducing the loan balance, so you are not building equity in the investment property through repayments. You are relying entirely on capital growth. If property values do not increase as expected, or if you need to sell during a flat market, you may find the sale price barely covers what you owe.

Principal and interest repayments cost more each month, but they reduce your debt steadily and give you a clearer path to owning the property outright. The choice depends on whether your priority is cash flow now or debt reduction over time. Many investors start with interest-only and switch to principal and interest once their income increases or once they have built enough equity to feel comfortable.

The 2026 Budget Changes to Negative Gearing and Capital Gains Tax

From 1 July 2027, losses on established residential properties purchased after Budget night in May 2026 can only be offset against rental income or capital gains from residential property, not against your salary or wages. If you bought an investment property before 13 May 2026, the old rules still apply, and you can continue claiming the full loss against all income.

This change affects how much tax relief you receive in the early years when most properties run at a loss. If your property costs $3,000 more per year to hold than it earns in rent, and your marginal tax rate is 37%, you would previously have saved around $1,110 in tax. Under the new rules, you can only use that $3,000 loss to reduce tax on future rental profits or capital gains from residential property. You do not lose the deduction entirely, but the timing shifts, and the benefit may be years away.

Capital gains tax is also changing. The current 50% discount for assets held longer than 12 months is being replaced with an inflation-adjusted cost base and a minimum 30% tax on gains from 1 July 2027. Investors buying new builds can choose between the old 50% discount and the new system, whichever is more favourable. This creates a stronger incentive to buy newly constructed property, because you keep the option of the 50% discount while established property buyers do not.

If you are planning to invest, the changes are worth factoring into your timeline. Buying before the rules take effect preserves the existing tax treatment. Buying after means you need to account for the reduced tax benefit and potentially lower after-tax returns. Speaking to a tax adviser or financial planner will clarify how the changes affect your specific situation.

Vacant Land and Off-the-Plan Purchases Complicate Lending

Buying land now and building later splits the process into two stages, each with different lending requirements. When you buy vacant land, lenders treat it as a non-income-producing asset. You cannot claim any tax deductions because there is no rental income, and you are paying interest on a loan without receiving rent to offset it.

Once construction starts, you will need a second loan or a construction facility to fund the build. Lenders reassess your serviceability at that point, and if your financial situation has changed, or if lending policies have tightened, you may not be approved for the full amount you need. This leaves you partway through a project without the funds to complete it.

Off-the-plan purchases carry a different risk. You sign a contract and pay a deposit, but settlement may be 12 to 24 months away. Property values can move during that time. If values drop and the completed property is worth less than the contract price, some lenders will only lend based on the new, lower valuation. You are then required to make up the difference in cash at settlement, which can be tens of thousands of dollars you were not expecting to need.

Both scenarios require careful planning and a lender who understands the structure. Not all lenders offer construction loans, and not all will provide pre-approval that holds for the length of an off-the-plan contract. If you are considering either option, it is worth discussing buying your first investment property structures with a broker early, before you commit to the purchase.

Borrowing Across State Lines When You Live in New South Wales

Buying an investment property in another state adds complexity because you cannot inspect the property as easily, and lenders view interstate purchases as slightly higher risk. They will still lend, but they may require a larger deposit or apply stricter serviceability criteria.

The bigger issue is choosing the right location without local knowledge. Vacancy rates, tenant demand, and rental yields vary significantly between suburbs, and what works in Kings Park does not necessarily translate to another city. Investors sometimes choose interstate properties based on lower purchase prices without checking whether the area has strong rental demand or projected growth.

If you are looking interstate, focus on areas with low vacancy rates, established infrastructure, and proximity to employment hubs. Regional areas can offer higher rental yields, but they also carry higher vacancy risk if the local economy is tied to a single industry. Lenders are aware of this and may limit how much they will lend against property in certain postcodes.

Working with a buyers' agent or property manager in the target area can reduce the risk, because they understand the local market and can identify properties that will attract tenants. Your broker can also check that the property will be accepted as security by the lender before you make an offer, which avoids the situation where you go under contract only to find that no lender will approve the loan.

Strata Title Properties and Lender Restrictions

Apartments and townhouses come with body corporate fees, and lenders treat these as an ongoing expense that reduces your serviceability. If body corporate fees are $1,500 per quarter, that is another $6,000 per year that needs to be covered, and it comes out of your rental income before you calculate whether the property is positively or negatively geared.

Some lenders also have restrictions on the type of strata property they will accept as security. They may refuse to lend against buildings with certain cladding types, or buildings where a large portion of units are rented rather than owner-occupied. If more than 50% of the building is tenanted, some lenders consider it higher risk and either decline the application or lend a lower percentage of the property's value.

This can catch buyers by surprise, especially if they have already signed a contract subject to finance. If the lender declines the loan due to the building's characteristics, you may not be able to get approval elsewhere, and you risk losing your deposit if you cannot settle. Checking with your broker before making an offer ensures the property will be accepted by at least one lender on reasonable terms.

Refinancing Investment Loans Without Losing Tax Deductions

When you refinance an investment loan, the deductibility of the interest depends on what the borrowed funds are used for. If you refinance purely to get a lower rate and the loan amount stays the same, the interest remains fully deductible. If you increase the loan and use the extra funds for personal purposes, such as renovations on your own home or paying off a car loan, that portion of the interest is not deductible.

This becomes an issue when investors try to consolidate debt or access equity for non-investment purposes. The Australian Taxation Office treats each loan purpose separately, so you need to keep the investment loan quarantined if you want to maintain full deductibility. Mixing purposes within a single loan creates a split deductibility situation, which adds complexity to your tax return and may reduce the benefit of negative gearing.

If you want to access equity from your investment property for another investment, the interest on that additional borrowing is also deductible. This is the basis of strategies like debt recycling, where you gradually replace non-deductible debt with deductible debt by using investment property equity to pay down your home loan and then reborrowing against the investment to invest further. Done correctly, it increases your deductible debt over time and improves your tax position. Done incorrectly, it creates a record-keeping problem and potential disputes with the ATO.

If you are thinking about investment loan refinancing, keep the purpose of each loan clear and document what the funds are used for. Your accountant will need that information at tax time, and your broker can structure the loans to keep everything separate from the start.

Building a Portfolio When Serviceability Is Already Tight

Once you own one investment property, adding a second becomes harder because lenders assess your total debt position, not just the new loan. If your first investment property is negatively geared, that loss reduces your borrowing capacity for the next purchase. Even if the property is performing well in terms of capital growth, the lender only cares about the monthly cash flow.

Investors looking at expanding your property portfolio often find they need to increase their income, reduce other debts, or wait for the first property to become positively geared before they can proceed. Alternatively, they switch to properties with higher rental yields, even if the capital growth potential is lower, because it improves serviceability and keeps the door open for further purchases.

Another option is to use equity from your home rather than equity from the investment property for the next deposit. This keeps the investment loan separate and can improve how lenders assess your application. The downside is that you are increasing the debt against your home, which carries more risk if your income changes or if property values fall.

Call one of our team or book an appointment at a time that works for you. We will look at your current loans, your equity position, and your income to work out what is possible now and what needs to change before you can move forward.

Frequently Asked Questions