Smart Ways to Approach Positive Gearing in Property

What Positive Gearing Actually Means for Property Investors

A positively geared property generates more rental income than it costs to hold. After deducting all expenses including loan repayments, rates, insurance, and maintenance, you're left with surplus cash each week.

Consider an investor who purchases a dual-occupancy property in Templestowe Lower. The combined rental income is $950 per week. Their loan repayment at current variable rates is $520 per week, with another $180 per week covering all other holding costs including body corporate fees. The property delivers $250 per week in positive cash flow before tax. That surplus income is taxable, which means it's added to their assessable income each year. Unlike negative gearing, there's no loss to offset against salary, but the property funds itself and provides passive income from day one.

This approach appeals to investors in East Doncaster who want portfolio growth without relying on ongoing subsidies from their salary. The eastern suburbs attract strong rental demand from families seeking proximity to Westfield Doncaster, The Pines shopping centre, and schools within the Manningham Council area. Properties that appeal to this demographic, particularly those with multiple living zones or dual income potential, can achieve vacancy rates well below the metropolitan average.

Why the 2027 Tax Changes Make Positive Gearing More Attractive

From 1 July 2027, established residential properties purchased after 12 May 2026 will no longer allow full negative gearing deductions against wage income. Losses from those properties can only be offset against residential rental income or capital gains, not your salary. This changes the calculation for many investors who previously relied on tax deductions to make negatively geared properties viable.

A positively geared property bypasses this issue entirely because there's no loss to claim. You pay tax on the surplus income, but the property supports itself financially regardless of your ability to claim deductions elsewhere. For investors acquiring established properties after Budget night, positive cash flow becomes a more relevant strategy than it was under the previous tax settings.

The changes don't affect properties purchased before 12 May 2026, and new builds retain access to the 50% CGT discount along with full negative gearing deductions. However, for those entering the market now with established stock, structuring for positive cash flow offers a clear path to financial independence without depending on tax treatment that may shift over time.

How Loan Structure Affects Cash Flow Outcomes

The difference between positive and negative gearing often comes down to how the investment loan is structured. An interest-only loan reduces weekly repayments significantly compared to principal and interest, which can turn a marginally negative property into a positively geared one.

Using the earlier Templestowe Lower example, if the investor had chosen principal and interest repayments instead of interest-only, their weekly loan repayment would increase by approximately $150 to $180 per week depending on the loan term. That would reduce their $250 weekly surplus to around $70 to $100, or potentially push the property into negative territory if holding costs were higher. The loan structure directly determines whether the investment generates surplus income or requires ongoing subsidy.

Interest-only periods typically run for one to five years depending on the lender, after which the loan reverts to principal and interest unless renewed. Lenders assess interest-only applications more closely for investment property finance, particularly at higher loan to value ratios. They want evidence that rental income can service the loan and that you have a sound property investment strategy beyond simply minimising repayments. Serviceability is calculated on principal and interest even if you're applying for interest-only, so the cash flow advantage doesn't extend to borrowing capacity.

Deposit Size and Rental Yield Expectations

Positive gearing becomes more achievable as your deposit increases. A lower loan amount means lower repayments, which improves cash flow even if rental income remains constant. Investors who rely on a minimum deposit often find themselves negatively geared unless they're purchasing in areas with exceptionally high rental yields, which are uncommon in established eastern suburbs.

In East Doncaster, median rental yields for houses typically sit below 4% given the area's capital growth history and lifestyle appeal. Units and townhouses closer to Doncaster Road or within walking distance of the Westfield precinct can achieve slightly higher yields, particularly if they attract young professionals or downsizers who value proximity to retail and transport links. Dual-occupancy or duplex-style properties offer another path, as combined rental income from two dwellings on one title often exceeds the cost of a single loan.

Investors targeting positive cash flow in this area generally need at least a 30% to 40% deposit, or they look at property types that deliver higher income relative to purchase price. Alternatively, some choose to leverage equity from an existing home to fund a larger deposit, reducing the investor loan amount and improving weekly cash flow from the outset. This approach requires careful assessment of how releasing equity affects the serviceability of your entire portfolio, not just the new purchase.

Fixed Rate vs Variable Rate for Positive Cash Flow Properties

Locking in a fixed rate provides certainty around repayments, which makes cash flow forecasting more reliable. You know exactly what the loan will cost each week for the fixed period, and you can budget accordingly. Variable rates fluctuate, which means your surplus income can shrink or expand depending on rate movements.

However, fixed rates typically don't offer the same flexibility as variable products. Most fixed loans restrict additional repayments and don't allow access to offset accounts or redraw facilities, which can limit your ability to manage surplus cash flow efficiently. If your positively geared property is generating $250 per week in surplus income, you may want to park that cash in an offset account linked to your home loan or another investment loan to reduce interest charges elsewhere. A variable rate product supports that strategy, while a fixed rate generally doesn't.

Rate discounts also vary between fixed and variable products. Lenders often reserve their sharpest pricing for variable rate loans or offer deeper discounts to borrowers with larger deposits and strong serviceability. If you're comparing investor interest rates across different lenders, consider both the headline rate and the features you'll actually use. A slightly higher variable rate with full offset and unlimited redraws may deliver better financial outcomes than a lower fixed rate that locks your surplus cash flow into a structure you can't access.

Principal and Interest vs Interest-Only for Long-Term Wealth

Interest-only loans maximise short-term cash flow, but they don't reduce your debt. After five years of interest-only repayments, you still owe the full loan amount. Principal and interest repayments build equity with every payment, which strengthens your position for future borrowing and reduces risk if property values stagnate.

For investors focused on building wealth through property, the decision often comes down to what you do with the surplus income. If you're using the positive cash flow from an interest-only loan to fund additional deposits, pay down non-deductible debt, or invest elsewhere, the strategy can be sound. If the surplus simply covers lifestyle expenses, you may be better served by principal and interest repayments that force equity accumulation over time.

East Doncaster investors with established portfolios often use a split strategy: interest-only on properties they plan to hold long-term for capital growth, and principal and interest on properties they may sell within a decade. This allows them to manage cash flow in the short term while steadily reducing debt on assets they intend to retain. The approach requires access to multiple investment loan products with different features, which is where working with a broker who can compare options across lenders becomes relevant.

Tax Treatment and Claimable Expenses on Positive Cash Flow Properties

Even though a positively geared property generates taxable income, you're still entitled to claim all legitimate expenses against that income. Loan interest, property management fees, council rates, insurance, repairs, and depreciation are all claimable, just as they are with a negatively geared property. The difference is that your total income exceeds your total expenses, so you pay tax on the surplus rather than receiving a deduction.

Depreciation remains one of the most overlooked claimable expenses for property investors. A quantity surveyor's report identifies the depreciation you can claim on the building structure and fixtures, which can amount to several thousand dollars per year depending on the property's age and condition. This non-cash deduction reduces your taxable income without affecting cash flow, which makes it particularly valuable for positively geared investors who are already paying tax on surplus income.

Stamp duty is not an ongoing claimable expense, but it forms part of your cost base for CGT purposes when you eventually sell. Keeping detailed records of all acquisition and holding costs, including any capital improvements, ensures you can accurately calculate your capital gain and apply the appropriate indexation method under the new tax rules from 2027 onwards.

When Lenders Mortgage Insurance Applies to Investment Purchases

Lenders Mortgage Insurance is typically charged when your loan to value ratio exceeds 80%. For investment properties, some lenders apply LMI at even lower thresholds, particularly if you're purchasing a unit or townhouse rather than a standalone house. The premium is calculated based on the loan amount and LVR, and it can add tens of thousands of dollars to your upfront costs.

If you're targeting a positively geared outcome, minimising or avoiding LMI by contributing a larger deposit improves your cash flow in two ways. First, your loan amount is lower, which reduces repayments. Second, you're not capitalising the LMI premium into the loan, which would further increase the amount borrowed and the weekly repayment. A $600,000 purchase with a 20% deposit avoids LMI entirely, whereas the same purchase with a 10% deposit could add $15,000 to $20,000 in LMI depending on the lender, pushing your loan to $555,000 or more and increasing repayments accordingly.

Some investors use equity from their existing home to fund the deposit on an investment property, which allows them to borrow at 80% LVR or below without needing cash savings. This can be structured through a refinance that releases equity and establishes a new loan split for investment purposes. The interest on the portion used for investment is deductible, while the interest on your owner-occupied debt is not, so keeping the loans separated from the outset is important for tax purposes.

How to Assess Whether a Property Will Be Positively Geared

Start with realistic rental income based on comparable properties currently leased in the area. Don't rely on the selling agent's estimate or your own optimistic projection. Use rental listings on Domain or REA to find similar properties in the same suburb, then adjust for differences in condition, location, and features.

Next, calculate your holding costs. Loan repayments will be your largest expense, but don't forget council rates, water rates, insurance, property management fees, and an allowance for maintenance and repairs. If the property is in a complex with body corporate fees, include those as well. For an established property in East Doncaster, annual holding costs excluding the loan often range from $8,000 to $12,000 depending on the property type and whether it's strata-titled.

Finally, add your expected loan repayment based on current investor interest rates and the deposit you plan to contribute. If the total weekly cost is less than the realistic weekly rental income, the property is positively geared. If it's close, consider whether you can structure the loan as interest-only or contribute a larger deposit to shift the balance. Running these numbers before making an offer prevents disappointment later when serviceability or cash flow doesn't align with your expectations.

Call one of our team or book an appointment at a time that works for you to discuss how different loan structures and deposit strategies can position your next investment for positive cash flow from settlement.

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