Can I afford an investment property?

Buying a rental home can be a clever way to climb the property ladder. Here's how to work out if you can afford to become a landlord.

Sarah Megginson's headshot

By

Sarah Megginson

Updated

Fact checked
4.6 based on 835 reviews

Key takeaways

  • Evaluate your investment goals and property type before committing. Using existing equity may reduce your upfront cash deposit.
  • While 20% is typical, a 10% deposit with LMI could enable buying more properties. Be aware of ongoing ownership costs.
  • Clean up spending habits and budget tightly for 3 to 6 months to boost your home loan application. Most expenses are tax-deductible.
Wondering 'How much do you need for an investment property?' Or are you keen to invest in property, but you're not sure of the steps and costs involved? The first piece of good news is: it may be more affordable than you think to own the property. With a tenant paying the majority of your expenses for you, the cost of owning the property can be quite manageable.

The second bit of positive news? If you own your own home already, you may be able to use the equity as a deposit on your investment property.

But with potential rewards come potential risks. As an investment property owner, you have to have good money habits, a decent pool of savings and a clear budget, so you don't run into financial trouble along the way.

Working out whether you can afford an investment property really boils down to your priorities: Are you ready to sacrifice your UberEats and weekends out now for a stronger financial future? We're here to help you work this out.

Questions you must ask:

  • Why do I want to buy an investment property? To grow wealth? To have another income stream when you retire?
  • How will this fit into my long-term goals? Could your investment property help fund a bigger home, renovation or travel plans in 10 years' time?
  • What type of investment property do I want? One that brings high rental returns, or one that you can sell for a profit in 5 or 10 years?
  • Do I want to renovate to add value? Or do you want a "set and forget" property that is ready to rent out right away?
  • Do I want to buy/can I afford a house or an apartment? Apartments are a more affordable entry point, but may have lower price growth.
  • What will be the interest rate on my investment home loan? Compare a number of home loan options so you get the best deal.

Answering all of these questions will help you formulate your strategy and lead you closer to the answer of whether you can afford to buy an investment property that fits into your long-term plan.

How much will a bank loan you for an investment property?

Generally, it's quite straightforward to qualify for a loan worth 80% of a property's value, meaning you need to chip in a 20% deposit. But most banks will loan up to 90% (so you only need a 10% deposit), but there's a catch: you'll need to pay lender's mortgage insurance. This is a premium you pay to convince the lender that you're a good risk and you're not going to default on your home loan – and if you do, your LMI policy will kick in to protect their losses.

How much does it cost to own an investment property?

Costs to buy an investment property:

  • Deposit. You'll usually need a deposit of 10-20% of the property's value.
  • LMI. If you have less than 20%, you'll need to pay lenders mortgage insurance (LMI). Many people see LMI as a negative, but it can be a great tool for smart investors. Here's an example of how to use LMI to your advantage. Take your 20% deposit, which may be used to buy one investment valued at $600,000. By paying LMI you're able to split your money into two 10% deposits, to purchase two $600,000 investment properties. You now have a portfolio valued at $1.2 million, which tenants are helping you to pay off and which are growing in value over the long-term.
  • Loan costs. In addition to repaying the interest and principal amount you borrow, there are other costs associated with your loan. There are establishment and bank application costs, as well as valuation fees and monthly or annual fees, plus LMI, if you're offering less than 20% deposit. Your lender will provide you with a full overview of all costs during the loan application process.
  • Purchase costs. Stamp duty is the big one: the amount which varies from state to state and is based on the value of the property. You'll also pay for the legal transfer of ownership, registration fees and the cost of a solicitor or conveyancer. Building and pest inspections should be conducted before the sale of the property goes through, which generally cost around $500. Title searches may be another added cost.
  • Buyers agent's fee. An increasing number of investors are using investment advisers or buyer's agents to help them find and purchase the right property. There is a cost to using this service, but many are willing to pay it in order to reduce the risk of buying an investment property that doesn't grow in value. Keep in mind that if you use a professional to help you buy an income-producing property asset, their fee should be tax-deductible.
  • Insurance. Building insurance can protect your investment property against fire, storms, theft and a wide range of other risks, while Landlord Insurance provides cover if tenants damage your property or default on their rent. The cost of this type of cover is influenced by a range of factors, including the size of your property, the material used in its construction and where the property is located.

Picture not described

Damian Collins's headshot
Expert insight: Understanding your risk profile

"One of the most critical aspects of property investment is understanding your own risk profile and how it aligns with your investment goals. In my experience, having a clear action plan tailored to your personal circumstances is key. It's not just about buying property; it's about making informed decisions that suit your financial situation and long-term objectives. Diversifying your investments and seeking professional guidance are crucial strategies to navigate the complexities of the market and build a robust property portfolio that stands the test of time."

Damian Collins's headshot
Property investment expert

Costs to own and manage an investment property

  • Property management fees. You can manage your investment property yourself if you have the time and knowledge, but this can be time consuming and risky. Investing should be enjoyable, so most people choose to employ a professional property manager to look after their investment home. Property managers perform duties such as sourcing and screening tenants, holding open houses, and organising any repair or maintenance tasks that need to be completed. As a general guide, expect to pay around 7-10% of your rent in property management fees.
  • Repairs and maintenance. Taps will leak, fittings and fixtures will need to be replaced, and some features of the house or apartment will simply break down due to general wear and tear. You should be prepared to meet the cost of any repairs and maintenance that need to be carried out at the property. Plumbers, electricians, builders, and a range of other trades may need to be called upon to keep your property in tip-top shape. Repair and maintenance expenses are generally lower on newer properties as they are less likely to have parts break down.
  • Strata fees. If you buy a townhouse or unit, you'll likely pay ongoing body corporate fees. These fees cover the cost of building insurance and expenses associated with maintaining common areas, and they vary depending on the size and type of the building, where it's located and its features. Don't forget to examine the strata fees you'll need to pay before you make the decision to buy a property.
  • Council rates. Check with the local council to find out the average quarterly rates in the area for a property of the same size as yours. Factor this amount into your budget to help you calculate the potential return on your investment.
  • Other costs.
    • Accountant's fees to help you calculate rental income and expenses when filing your tax return.
    • Pest control expenses.
    • Advertising costs incurred when a tenant moves out and you need to find a new one.
    • Renovation costs if your property is due for an upgrade to increase its "liveability" and make it more attractive to prospective tenants.
    • Travel and accommodation expenses if you need to travel to inspect your property or oversee maintenance.
    • Land tax payable to the government on your investment property.
    • The cost of connecting all the utilities and services to your property for tenants.
    • Agents' fees, legal fees, advertising costs and other expenses to ensure the property is in top condition.

I owned a rental apartment and one day I got a call from the property manager of the unit below – they had a leak in their bathroom and it was traced back to my apartment. It turns out the waterproofing in my property was damaged or had never been installed properly, so I had to rip out the bathroom and reinstall the waterproofing - it was basically a full bathroom renovation. It cost me over $11,000 and none of it was covered by landlords insurance. I've had many other unexpected scenarios as a landlord, but this was probably the most expensive one!

Chris

Chris
Property investor

Tax deductions on property expenses

So far we've outlined a number of expenses, which may have you worried that investing in property is far out of your reach.

What we have outlined here is a comprehensive list of property expenses – think of it as the worst-case scenario. Some of these expenses may not be a problem for you; for instance, if you own an apartment and pay strata fees, you might also benefit from cheaper landlord and building insurance.

The great thing about investing in property is that most of these costs are tax-deductible, which means they reduce your taxable income. You may also be able to benefit from depreciation, which is a tax deduction that reduces the amount of tax you pay even further.

As a very simple calculation, let's assume that your interest-only investment mortgage is $3,000 per month. Other costs, such as property management fees, strata fees and insurance, add another $500 per month.

You receive rent of $3,000 per month, and a depreciation deduction of $7,000 per year, or just under $600 per month.

  • Mortgage interest repayment $3,000 + monthly expenses $500 = $3,500 cost per month.
  • Rental income of $3,000 per month, means your ownership expenses total $500 per month or $6,000 per year.
  • Depreciation of $7,000 per year is deducted against your income tax when you do your tax return. You claim this, plus your out of pocket costs of $6,000, giving you a total deduction of $13,000.
  • Depending on the tax rate you pay, you receive a tax refund of 18-47% at the end of the financial year, including Medicare levy. This amounts to a tax refund of between $2,340 and $6,110.
  • The total cost of owning your investment property is your out of pocket costs ($6,000 per year) less your tax benefits (between $2.340-$6.110k)

This is a very simplistic calculation, and doesn't account for additional expenses and repairs that can and do crop up during the year. But it gives you a good understanding of how property investing works.

Finder survey: How many Australians have purchased an investment property as their retirement plan?

Response
Purchased an investment property9.06%
Source: Finder survey by Pure Profile of 1016 Australians, December 2023

How to get a loan for an investment property

Banks mainly want to confirm that you can afford the loan and that you are responsible with money. This is where high credit cards and personal loans, or spending habits around excessive shopping and gambling, can negatively impact your home loan application.

Anything you can do to reduce your spending can help improve the chances of your home loan application being approved. Here are a few suggestions to get you started:

  • Review your recent spending. Start tracking this via an app, such as the Finder app, if you aren't already. Identify areas where you are spending too much and see if there are any obvious ways you can cut down.
  • Clean up your statements. It's highly recommended that you aim to trim your spending for 3 to 6 months before applying for a home loan, so you can get your financial statements in the best possible shape.
  • Make a budget. Once you've reviewed your spending you can start to set a realistic monthly budget. Having a budget written down should hopefully make it easier to follow through and actually spend less.
  • Streamline expenses. Look at those small, ongoing monthly costs such as streaming service subscriptions and memberships. You might be better off rotating between services rather than, say, paying for four TV and/or music subscription services each month.
Compare your options

Get a mortgage broker to help you compare

Research investment loans yourself

Calculating your serviceability

Often the banks will use the word serviceability when talking about loan amounts. Use the calculator below to see how much you could potentially borrow.

Frequently Asked Questions

Sarah Megginson's headshot
Money expert + media spokesperson
Add to Preferred Sources

Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards. See full bio

Sarah's expertise
Sarah has written 225 Finder guides across topics including:
  • Home loans
  • Personal finance
  • Budgeting and money-saving tips
  • Managing the cost of living
More resources on Finder

Get rewarded $$ for switching with Finder Rewards

Find a better deal, save on your bills and get a free gift card. Sign up to be the first to hear about new Finder Rewards.

More guides on Finder

Go to site
Quickly see top rates and loans that suit you