Positive Gearing and Investment Loans Explained

A positive geared investment property earns more in rent each month than it costs in loan repayments, rates, insurance and other holding expenses.

That surplus goes straight into your account. No cross-subsidising from your wage. No waiting years for a capital gain to make the numbers work. The property pays its own way from day one and then some.

In Gippsland, positive gearing is most common with older weatherboard homes in Sale or Morwell where purchase prices sit below median and rental demand from shift workers, hospital staff and tradies keeps vacancy rates low. It also shows up on small hobby farms with long-term tenants or dual-occupancy blocks in Traralgon where two separate incomes cover a single loan.

What Makes an Investment Loan Positive Geared

Positive gearing happens when your total rental income is greater than all the property's deductible expenses in a financial year. Loan interest is usually the biggest deduction. Council rates, insurance, property management fees, repairs and depreciation all count too. If the rent still exceeds that total, the surplus is taxable income.

Consider an investor who buys a three-bedroom weatherboard in Moe at the lower end of the suburb's price range. Weekly rent is $360, or roughly $18,700 a year. The investment loan is structured as interest-only at current variable rates, costing around $11,000 annually. Add $2,000 for rates and insurance, $1,500 for property management, and $1,000 for minor repairs and the annual expense total sits near $15,500. That leaves $3,200 in positive cash flow before tax. The investor pays income tax on that $3,200 at their marginal rate, but the property still covers itself and contributes to household income.

Lenders assess positive geared loans in the same way as any investment property finance. They apply the serviceability buffer, which remains at 3.0 percentage points above the loan product rate, and they test your capacity to service the debt even if rental income drops or disappears entirely. Positive cash flow helps your application, but it does not replace the need to demonstrate adequate income from other sources.

Positive Gearing Versus Negative Gearing for Gippsland Investors

Negative gearing delivers a tax deduction because the property runs at a loss. Positive gearing delivers cash flow because the property runs at a profit. Which approach suits you depends on your income, your deposit size and what you need the investment to do.

For properties held before 12 May 2026, losses from negative gearing remain fully deductible against your wage or business income until you sell. For established properties bought after that date, losses can only offset income from other residential properties from the 2027-28 financial year onward. New builds acquired after 12 May 2026 retain full loss deductibility.

An investor earning $90,000 a year who negatively gears an established property bought in early 2026 can still claim a $5,000 annual loss against their salary, reducing taxable income and generating a refund at tax time. An investor earning $55,000 who buys the same type of property this year can only use that $5,000 loss against future property income or a capital gain. If they have no other property income, the loss is quarantined and carried forward.

Positive gearing sidesteps that issue entirely. The property generates surplus income rather than a loss, so the legislative changes around negative gearing do not apply. You pay tax on the surplus, but you also have cash in hand each month rather than topping up the mortgage from your wage.

Loan Structure for Positive Cash Flow Properties

Interest-only loans reduce your monthly repayment by deferring principal reduction, which increases the chance of positive cash flow. Principal and interest loans build equity faster but cost more each month, which often tips a marginal property into negative territory.

At current variable rates, a $300,000 interest-only loan on a Gippsland investment property costs roughly $1,850 per month in interest. The same loan on principal and interest repayments costs around $2,400 per month. That $550 difference determines whether a property with $2,200 monthly rent is positive or negative geared.

Interest-only periods typically run for one to five years, after which the loan reverts to principal and interest unless you refinance or request an extension. Lenders assess extensions on a case-by-case basis and may require updated income verification, a current valuation and evidence that the loan-to-value ratio remains within policy.

Some investors split the loan, keeping half interest-only and half principal and interest. That structure maintains some positive cash flow while reducing the total debt over time. Others prefer a variable rate for flexibility or a fixed rate to lock in repayments where cash flow is tight. The right structure depends on your income stability, your equity position and how long you plan to hold the property. A mortgage broker in Gippsland can model the monthly cost difference across loan types and help you match the structure to the numbers.

Rental Yield and Borrowing Capacity in Regional Markets

Rental yield is annual rent divided by property value, expressed as a percentage. A property rented at $360 per week with a value of $310,000 has a gross yield of 6.0 per cent. After expenses, the net yield is lower.

Higher yields make positive gearing more achievable. Gippsland towns with lower median prices and steady rental demand from local employment in health, education, transport and agriculture tend to deliver yields between 5.5 and 7.0 per cent. Metropolitan markets with higher purchase prices and softer rental growth often sit below 4.0 per cent, which makes positive gearing difficult without a large deposit or below-market interest rate.

Lenders apply a rental income assessment that is typically 80 per cent of the market rent, which accounts for vacancy and management costs. If market rent is $360 per week, the lender will assess rental serviceability using $288 per week. That assessed figure feeds into your overall borrowing capacity alongside your wage, any other investment income and your existing debts.

An investor earning $75,000 a year with no other debts might qualify for a $450,000 loan on an owner-occupied principal and interest basis. Adding a positive geared investment property with $15,000 in assessed annual rental income could lift that capacity by $60,000 to $80,000, depending on the lender's policy and the size of the loan on the investment property itself. Positive cash flow improves your serviceability position, but it does not remove the DTI lending limit that applies from 1 February 2026. Each lender can allocate up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater.

Tax Treatment of Positive Geared Investment Income

Rental income from a positive geared property is added to your assessable income and taxed at your marginal rate. All the usual deductions still apply, including loan interest, rates, insurance, property management, repairs, and depreciation on the building and fixtures.

An investor in Warragul earning $68,000 from their day job who adds $4,000 in positive property income will pay tax on a total of $72,000. At current marginal rates, that $4,000 is taxed at 32.5 cents in the dollar plus the Medicare levy, or roughly $1,460. After tax, the investor keeps $2,540 in cash each year from the property.

Depreciation deductions can reduce or eliminate the taxable surplus without changing the actual cash flow. A quantity surveyor prepares a depreciation schedule showing the annual deduction for building wear and chattels such as carpets, blinds, hot water systems and appliances. On an older property, the building depreciation may be minimal or exhausted, but chattels can still deliver $2,000 to $4,000 per year in deductions for the first few years.

If the investor above claims $3,000 in depreciation, the taxable income from the property drops from $4,000 to $1,000, and the tax bill falls to around $365. The investor still receives the full $4,000 in cash, but pays tax on only $1,000 of it. Depreciation is a non-cash deduction, meaning it reduces your tax without reducing your bank balance.

Capital gains tax applies when you sell. For assets held longer than 12 months and sold before 1 July 2027, individuals receive a 50 per cent discount on the gain. For the portion of any gain that accrues after 1 July 2027, the cost base is indexed to inflation and a 30 per cent minimum tax rate applies to the real gain. Properties purchased as eligible new builds after 12 May 2026 retain access to both the 50 per cent discount and the indexed treatment, with the investor choosing whichever delivers the lower tax.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders require a 20 per cent deposit for investment loans to avoid Lenders Mortgage Insurance. On a $320,000 purchase, that means $64,000 plus another $15,000 to $20,000 for stamp duty, conveyancing and other settlement costs.

If you have less than 20 per cent, LMI allows you to borrow at a higher loan-to-value ratio, typically up to 90 per cent. The insurer charges a one-off premium based on the loan amount and LVR, which can range from $3,000 to $15,000 or more. Some lenders allow you to capitalise the premium into the loan. Others require it paid upfront.

Investors who own their home outright or have significant equity can often access deposit funds by refinancing their owner-occupied loan. That approach is common in Gippsland where long-term residents hold substantial equity in homes bought decades ago. The equity is released and used as the deposit on the investment property, with each loan secured against its respective property. Lenders assess both loans together when determining your overall serviceability.

When Positive Gearing Fits Your Investment Strategy

Positive gearing suits investors who need the property to contribute to household cash flow rather than generate a tax deduction. Retirees, part-time workers, single-income families and self-funded retirees often prefer positive gearing because it supplements income without adding to their tax-time complexity.

It also suits investors with limited serviceability buffer. If your income is already stretched across your home loan, car loan and living expenses, a negatively geared property that costs you $150 a week out of pocket may not be serviceable. A positive geared property that pays you $60 a week improves your position and makes future borrowing more achievable.

Capital growth in Gippsland has historically trailed Melbourne but remained positive over long holding periods. Investors targeting positive gearing typically prioritise income and hold the property for ten years or more, allowing both rent and value to increase steadily without relying on short-term price spikes.

Call one of our team or book an appointment at a time that works for you. We work with investors across Traralgon, Warragul, Moe, Morwell and the wider region, and we can walk through the numbers on any property you are looking at to confirm whether it will hold up on interest-only, principal and interest, or a split structure. We will also check your borrowing capacity and work out what deposit you need to make the purchase serviceable.

Frequently Asked Questions