Common Mistakes with Investment Loan Rental Yield

Rental Yield Alone Won't Tell You If a Property Pays Its Way

Rental yield is the annual rent divided by the property price, expressed as a percentage. A property advertised with a 5 per cent yield sounds like it covers itself, but that figure ignores every other cost you carry as an investor. Consider a property purchased at current median rates in a regional centre where the advertised yield sits at 5.2 per cent. After accounting for body corporate fees, council rates, property management, insurance, vacancy periods and maintenance, the actual cash position might be negative $8,000 per year before you factor in the mortgage repayment. At current variable rates, an interest-only loan on 80 per cent of the purchase price would add another $25,000 to $30,000 in annual interest. The property yields 5.2 per cent on paper but costs you $33,000 to $38,000 out of pocket each year.

In our experience, officers working rotating rosters often focus on yield because it feels like a single number that answers the question of whether the property will support itself. It won't. Yield tells you one thing: how much rent you collect relative to what you paid. It does not tell you whether the property generates positive cash flow, whether you can claim the losses against your salary, or whether the property will deliver a return once you sell.

Negative Gearing Has Changed for Established Properties Purchased After May Last Year

If you purchased an established investment property after 7:30pm AEST on 12 May 2026, losses from that property can only be offset against income from other residential properties, not against your salary. Losses you cannot use in the current year carry forward and can be used against residential property income in future years, including capital gains when you sell. Properties you bought before that date, or properties you contracted to buy before that date even if they settled later, continue under the old rules where losses offset all income including wages.

For a sergeant earning $110,000 per year who purchased an established investment property in September last year with an annual loss of $15,000, that loss no longer reduces taxable salary income. The $15,000 carries forward and will reduce tax payable on future residential property income or on the capital gain when the property is sold. Officers considering their first investment property now need to decide whether they are buying for tax relief today or for capital growth over the long term. Yield matters more under the new rules because a property that generates a small profit or breaks even avoids creating a loss you cannot immediately use. The changes do not apply to new builds. If you purchase a property that meets the definition of an eligible new build, losses from that property continue to offset all income including salary under the old negative gearing rules.

You can read more about structuring investment loans in line with the new tax treatment on our investment loans for police officers page.

The Deposit You Need Depends on Whether You Want to Avoid LMI or Access Equity

Most lenders require LMI on residential investment loans above 80 per cent LVR. At 85 per cent LVR on a property valued at $600,000, the LMI premium might be $12,000 to $18,000 depending on the lender and your borrowing profile. Some lenders offer LMI waivers for law enforcement officers up to 90 or 95 per cent LVR on owner-occupied loans, but those waivers generally do not extend to investment loans. If you have equity in an existing property, you may be able to borrow against that equity to fund the deposit on the investment property without needing to pay LMI on the new loan, provided your total borrowing across both properties stays within serviceability limits.

An officer who owns a home valued at $750,000 with a remaining mortgage of $400,000 has $350,000 in equity. Using 80 per cent of that equity gives access to $280,000, which after repaying the existing $400,000 loan leaves $280,000 available for the deposit and costs on an investment property. Borrowing this way means you are increasing the debt secured against your home, and if the investment property does not perform or if you cannot meet repayments on both loans, your home is at risk. Lenders assess serviceability on the combined debt, and the buffer requirement means you need to demonstrate capacity to service both loans at a rate 3 percentage points above the actual rate.

Officers working shift rosters sometimes assume overtime and allowances will support the additional servicing requirement, but lenders typically apply a discount to non-guaranteed income. If your overtime is consistent and well-documented over at least 12 months, most lenders will include 80 per cent of that income in the assessment. One-off payments or irregular allowances are usually excluded. You can find more detail on how shift allowances are treated in serviceability calculations on our home loans for police officers page.

Vacancy Rates and Tenant Demand Matter More Than the Yield Percentage

A suburb with a 6 per cent yield and a 10 per cent vacancy rate will cost you more than a suburb with a 4.5 per cent yield and a 2 per cent vacancy rate. Yield figures are almost always calculated on the assumption the property is tenanted year-round. If the property sits vacant for six weeks while you find a tenant, that is 11.5 per cent of the year with no income and all the holding costs still payable. In areas with high vacancy rates or where tenant demand is seasonal, the advertised yield can be misleading.

Before committing to a property, check the vacancy rate for that suburb and property type using data from a property management platform or local agency. Look at median time on market for rentals and whether rents in the area have been rising, falling or stable over the past two years. A property in a suburb with strong infrastructure, employment diversity and low vacancy will typically deliver more reliable income than a higher-yield property in a location dependent on a single industry or where rental demand fluctuates.

Interest-Only Loans Increase Yield but Delay Wealth Building

An interest-only loan on an investment property reduces your monthly repayment and increases cash flow, which can make the difference between a property that costs you $5,000 per year out of pocket and one that costs you $15,000. At current variable rates on a $500,000 loan, an interest-only repayment sits around $2,100 per month compared to $3,200 per month on principal and interest. The $1,100 per month difference is $13,200 per year, which for many investors is the difference between holding the property comfortably and struggling to meet repayments during vacancy periods or rate rises.

Interest-only loans do not reduce the amount you owe. After five years on interest-only, you still owe $500,000, and when the interest-only period ends, the loan reverts to principal and interest with repayments calculated over the remaining loan term. That means higher repayments once the interest-only period expires. Officers in their 30s or early 40s often use interest-only loans to manage cash flow while building equity through capital growth, then refinance or switch to principal and interest once their income increases or they pay down other debt. Officers closer to retirement need to consider whether they will be able to meet the higher principal and interest repayments once the interest-only period ends, or whether they plan to sell the property before that point.

You can compare loan structures and repayment options on our interest only loans for police officers page.

Capital Growth and Rental Income Are Two Different Strategies

Properties that deliver high rental yields are often in regional areas, outer suburbs or locations with lower capital growth prospects. Properties in established suburbs closer to capital city centres typically have lower yields but stronger long-term capital growth. You need to decide which outcome you are investing for. If you need the property to generate income now or to minimise the amount you are paying out of pocket each year, yield is the priority. If you are investing for wealth accumulation over 10 to 15 years and you can afford to carry the property at a loss in the short term, capital growth is the priority.

An officer purchasing a two-bedroom unit in a regional town with a 6 per cent yield might generate $24,000 in annual rent on a $400,000 property. After all holding costs and interest, the property might still cost $10,000 per year out of pocket, but that is manageable on a law enforcement salary. If the property appreciates at 3 per cent per year, it will be worth $537,000 in 10 years, delivering a gain of $137,000. An officer purchasing a three-bedroom house in an established suburb 15 kilometres from a capital city CBD at a 3.5 per cent yield might pay $650,000 and collect $22,750 per year in rent. That property might cost $20,000 per year out of pocket after all holding costs and interest, but if it appreciates at 5 per cent per year, it will be worth $1,058,000 in 10 years, delivering a gain of $408,000. Both strategies work. The mistake is assuming high yield and high growth will occur in the same property.

DTI Limits Now Cap How Much You Can Borrow for Investment Property

From 1 February this year, lenders can only write 20 per cent of new investment loans to borrowers with total debt of six times their income or more. If your total household income is $120,000 per year, any lending that takes your combined home and investment debt above $720,000 falls into that 20 per cent cap. Once a lender has used its quarterly allocation of high-DTI loans, further applications from borrowers above the six-times threshold will be declined until the next quarter, regardless of your deposit size or serviceability.

This does not mean you cannot borrow above six times your income, but it does mean approval is no longer certain even if you meet all other criteria. If you are planning to borrow close to or above that threshold, apply early in the calendar quarter when lenders have more capacity within the cap, and be prepared to approach multiple lenders if your first choice has already reached its limit. The cap applies to new lending only. Existing loans are not affected, and refinancing an existing investment loan does not count toward the cap provided the loan amount does not increase.

Officers looking to expand their portfolio or leverage equity from an existing property should factor the DTI cap into their borrowing strategy. You can read more about structuring multiple investment loans on our expanding your property portfolio page.

Fixed Rates Lock In Certainty but Remove Offset and Flexibility

A fixed rate on an investment loan gives you certainty over your repayments and your deductible interest expense for the fixed period, but most fixed rate products do not offer offset accounts and limit additional repayments to $10,000 or $20,000 per year. If you need to break the fixed rate early because you sell the property or refinance, you may be charged break costs that run into thousands of dollars depending on the remaining fixed term and how much rates have moved since you locked in.

Variable rate investment loans typically allow unlimited additional repayments, full offset functionality, and no break costs if you repay the loan early. For officers with irregular income or who want the ability to park surplus funds in an offset account to reduce interest without losing access to that cash, a variable rate is usually the better option. For officers who want to fix their deductible interest expense and do not expect to repay the loan early, a fixed rate can work, but read the terms carefully and confirm what happens if your circumstances change.

Call one of our team or book an appointment at a time that works for you. We work around shift rosters and can meet after hours or on your days off. We access investment loan options from banks and lenders across Australia and will structure the loan to suit your income, your serviceability and your long-term property strategy.

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