Proven Tips to Choose Your Investment Property

What Makes a Property Worth Buying as an Investment?

A property is worth buying as an investment when the rental income covers most of your holding costs and the asset has strong prospects for long-term value growth. Your decision comes down to two things: can you service the loan comfortably, and does the property fit a strategy you can hold for years, not months.

Paddington offers a mix of character terraces, modern apartments and a few larger family homes within walking distance of cafes, Oxford Street and public transport. Buyers are drawn to the suburb for lifestyle, but investors need to focus on rental demand and the type of tenant the property will attract. A two-bedroom terrace with parking near Paddington Markets may appeal to professional couples who value location over space. A three-bedroom house with a yard suits young families, but fewer of those properties come onto the market and they typically trade at higher price points.

Consider a buyer looking at a one-bedroom apartment in Paddington. The rental yield might appear strong on paper, but body corporate fees, council rates and strata levies can erode net income quickly. If the buyer intends to claim those expenses and offset them against rental income, the property may still deliver a negative return each year. That's not a problem if the buyer can service the shortfall and expects capital growth over time, but it does mean the property must be held long enough for that growth to occur. Selling within two or three years rarely delivers a return once you account for stamp duty, selling costs and the capital gains tax on any profit.

When lenders assess investment loan applications, they apply a haircut of at least 20 per cent to expected rental income, meaning only 80 per cent of the rent is counted toward your borrowing capacity. For a property generating $600 per week in rent, the lender will assess serviceability using $480 per week. If you're also paying interest on the loan at current variable rates, plus body corporate fees and insurance, the gap between income and expenses can widen quickly.

Rental Yield and Holding Costs in Paddington

Rental yield is the annual rent divided by the property price, expressed as a percentage. A property generating $31,200 per year in rent would deliver a gross yield of around 4 per cent at the suburb's current price levels. That's before you deduct holding costs such as rates, insurance, strata fees, property management and maintenance.

In Paddington, older terraces often come with heritage overlays and council restrictions on modifications. Repairs to sandstone facades, roof tiles or internal timber floors can be more involved than standard maintenance on a newer property. If the property is part of a strata scheme, you may face additional levies for building works or shared infrastructure. Those costs are tax-deductible, but they still need to be funded out of your cash flow or rental income.

A two-bedroom apartment in a modern complex might generate slightly lower rent than a terrace, but ongoing costs are typically more predictable. Body corporate fees cover building insurance, common area maintenance and sinking fund contributions. Vacancy periods still need to be planned for. If the property sits vacant for four weeks between tenants, that's roughly 8 per cent of annual rental income gone. Lenders expect you to demonstrate capacity to cover loan repayments even if the property is vacant for a short period, which is why they apply the rental income haircut during assessment.

How Interest-Only Loans Affect Your Investment Strategy

An interest-only loan lets you pay only the interest portion of your loan for a set period, usually one to five years, before reverting to principal and interest repayments. This reduces your monthly repayments during the interest-only term, which can help with cash flow if rental income doesn't fully cover your costs.

Lenders assess interest-only loans on your ability to meet principal and interest repayments over the remaining loan term once the interest-only period ends. A 30-year loan with a five-year interest-only term is assessed on your capacity to repay principal and interest over the remaining 25 years. That means the repayment you'll eventually need to make is higher than it would be on a standard 30-year principal and interest loan, so your borrowing capacity may be reduced.

Many investors choose interest-only structures to maximise tax deductions, since all interest on an investment property loan is deductible against rental income and other property-related earnings. Principal repayments are not deductible, so paying down the loan during the investment phase offers no immediate tax benefit. If you're planning to hold the property for several years and expect your income or equity position to improve, an interest-only loan can keep repayments lower in the early years. Just make sure you understand what the repayments will look like once the interest-only period expires.

Loan to Value Ratio and Lenders Mortgage Insurance

Loan to value ratio is the size of your loan divided by the value of the property. If you borrow $600,000 to purchase a property, your LVR is 80 per cent. Lenders generally require LMI on investment loans where the LVR exceeds 80 per cent, and the premium is calculated on a sliding scale based on the loan amount and LVR.

LMI protects the lender if you default and the property is sold for less than the outstanding loan balance. It does not protect you as the borrower, but it does allow you to purchase with a smaller deposit. The premium can be paid upfront or capitalised into the loan, meaning it's added to your loan balance and repaid over time. For investment loans, capitalising the premium increases the loan amount and therefore the interest you'll pay over the life of the loan, but it preserves cash flow at settlement.

Some lenders offer higher LVR lending for investment properties if you have significant equity in another property or meet specific income or occupation criteria. Those policies vary by lender and are not available to all borrowers. If you're considering an LVR above 80 per cent, it's worth comparing the LMI premium across lenders, as premiums can vary significantly even for the same loan amount and LVR.

Fixed Rate, Variable Rate and Loan Features

Variable rate loans allow you to make extra repayments and access features like offset accounts, which can reduce the interest you pay over time. A fixed rate loan locks in your interest rate for a set period, usually one to five years, which provides repayment certainty but typically comes with restrictions on extra repayments and no offset account.

For investment properties, an offset account linked to a variable rate loan can be useful if you're holding surplus cash or saving for your next purchase. Every dollar in the offset account reduces the balance on which interest is calculated, so you pay less interest without actually making extra repayments. The loan balance stays the same, which means your tax deductions remain unchanged.

Some investors split their loan between fixed and variable components to balance certainty with flexibility. You might fix 50 per cent of the loan to lock in a portion of your repayments, and keep the other 50 per cent variable with an offset account. This structure lets you make extra repayments or save in the offset without triggering break costs if rates move. Loan splitting is not offered by all lenders, and some charge separate fees for each split portion, so check the total cost before committing.

Tax Deductions and Negative Gearing from 2027-28

Interest on borrowings used to acquire or hold a rental property is deductible against assessable income. Other holding costs, including rates, insurance, property management fees, repairs and depreciation, are also deductible for the period the property is rented or genuinely available for rent.

From the 2027-28 income year, net rental losses on established residential investment properties purchased after 12 May 2026 can only be offset against income from other residential properties, including capital gains. Losses cannot be offset against salary, wages or other income. Properties held before that date, and eligible new builds purchased after that date, can continue to offset losses against all income. If you purchase an investment property in Paddington after 12 May 2026 and it's not a new build, any net rental loss from 2027-28 onward will need to be carried forward and used against future residential property income or capital gains. That changes the cash flow position for some buyers, particularly those relying on the tax refund from negative gearing to help fund the annual shortfall.

Capital gains tax rules are also changing from 1 July 2027. For properties purchased before that date and sold after it, the gain will be split into a pre-July 2027 portion, taxed under current rules, and a post-July 2027 portion, taxed using cost base indexation and a 30 per cent minimum rate on real gains. For eligible new builds, investors can choose between the 50 per cent discount or the indexation method. The detail matters, and it's worth speaking to an accountant before committing to a purchase if you're buying close to those dates.

Borrowing Capacity and Serviceability Assessment

Lenders assess your capacity to service an investment loan by adding the proposed loan repayments to your existing commitments and comparing the total to your income. The loan repayment is calculated at an interest rate at least 3 percentage points above the loan product rate, so even if you're offered a rate of 6 per cent, the lender will assess serviceability at 9 per cent or higher.

Rental income is included in the assessment, but only after applying a haircut of at least 20 per cent. If the property will generate $650 per week in rent, the lender will use $520 per week in the serviceability calculation. If you have other debts, including credit cards, personal loans or an existing mortgage, those commitments reduce the amount you can borrow. Credit card limits are particularly relevant, as lenders assess the full limit, not the balance you currently owe.

Your borrowing capacity is also affected by whether you choose principal and interest or interest-only repayments. An interest-only loan is assessed on the eventual principal and interest repayment over the remaining term, which means the assessed repayment is higher than the interest-only amount you'll actually pay in the first few years. That can reduce the loan amount you're approved for, even though your actual repayments will be lower initially.

What You Need to Apply for an Investment Loan

You'll need proof of income, recent payslips or tax returns if you're self-employed, bank statements showing your savings and expenses, and identification documents. Lenders will also want details of the property, including a signed contract of sale or rental appraisal if the property isn't tenanted yet.

If you're using equity from another property as part of your deposit, the lender will require a valuation of that property to confirm the available equity. If the property you're buying is part of a strata scheme, the lender may ask for a copy of the strata report, including details of the sinking fund balance, any planned works and building insurance. For older buildings or those with known issues, some lenders may decline the application or require a larger deposit.

Settlement costs include stamp duty, which varies by state and is calculated on the purchase price, plus legal fees, building and pest inspections, and lender fees. In New South Wales, foreign buyers face an additional surcharge, and foreign owners are subject to an annual vacancy fee if the property is not occupied or genuinely available for rent for at least 183 days in a year. Those rules are administered by the ATO, and compliance is enforced through an audit program.

Call one of our team or book an appointment at a time that works for you. We'll walk through your income, existing commitments and the type of property you're looking at, and explain what loan amount and structure makes sense for your situation. If you're comparing properties or want to understand how the numbers stack up before you make an offer, we can run the scenarios and show you what the repayments and cash flow look like under different structures.

Frequently Asked Questions