Beginner's Guide to Positive Geared Investment Loans

A positive geared investment property is one where rental income exceeds all holding costs, including loan repayments, rates, insurance, and management fees.

The appeal is obvious. Instead of subsidising the property from your salary each month, the rent pays the loan and puts cash in your pocket. That surplus can accelerate the next deposit, cover rate rises without stress, or simply reduce the pressure on your household budget. For buyers in Coffs Harbour, where rental vacancy sits below 1 per cent and strong tenant demand continues, positive gearing is not just viable but increasingly deliberate.

From 1 July 2027, investors purchasing established dwellings will no longer be able to offset rental losses against wage income under new negative gearing rules. Losses will be quarantined and can only offset future rental income or capital gains. That change puts positive cash flow at the centre of every lending conversation we have now. Loans need to be structured to deliver surplus income or at worst remain cash flow neutral, rather than relying on tax refunds to cover shortfalls.

How Positive Gearing Works in Practice

Positive gearing occurs when total rental income exceeds all property expenses. The calculation is rental income minus loan repayments, minus rates, minus insurance, minus management, minus body corporate if applicable, minus repairs allowance. If the result is positive, the property is positively geared.

Consider a dual-income couple purchasing a two-bedroom unit in Coffs Harbour. The property generates $550 per week in rent, or approximately $28,600 per year. Loan repayments at current variable rates with a 70 per cent loan-to-value ratio sit around $22,000 per year. Council rates are $2,400, strata levies $3,600, insurance $1,200, and management at 7.7 per cent of rent is $2,200. Total expenses are $31,400. The property runs at a loss of $2,800 annually, or around $54 per week.

To flip that position, the couple increases their deposit to 40 per cent, bringing the loan amount down and reducing annual repayments to $13,200. Expenses now total $22,600. Rental income of $28,600 delivers a $6,000 annual surplus, or $115 per week. The property is positively geared.

The difference is the deposit. More equity reduces the loan, which reduces repayments, which turns negative cash flow into positive. That structure also avoids Lenders Mortgage Insurance, which would otherwise apply to any borrowing above 80 per cent LVR and add thousands to the upfront cost.

Why Positive Gearing Matters More Now

The upcoming quarantining of rental losses removes the tax subsidy that historically made negative gearing tolerable for wage earners. Under the current rules, a $2,800 annual loss on an investment property might deliver a $1,200 tax refund at a marginal rate of 32.5 per cent, reducing the real cost to $1,600. From 1 July 2027, that refund disappears for properties purchased after 12 May 2026. The full $2,800 comes out of after-tax income with no offset.

That shift changes the math on what is sustainable. Positive gearing removes reliance on tax treatment entirely. The property stands on its own cash flow, regardless of legislative settings or marginal tax rates. It also reduces exposure to rate rises. A positively geared property with $115 per week surplus can absorb a 1 per cent rate increase without requiring any additional contribution from the investor. A negatively geared property already costing $54 per week becomes more expensive with every move in rates.

For borrowers subject to the new debt-to-income cap introduced in February, positive cash flow also improves borrowing capacity. Lenders assess rental income at 80 per cent of market rent and include it in serviceability calculations. A property that covers its own costs and generates surplus income strengthens the application for the next purchase.

Investment Loan Features That Support Positive Gearing

The loan structure determines whether positive gearing is achievable. Interest-only repayments reduce the monthly cost compared to principal and interest, which can be the difference between surplus and shortfall in the early years. On a $300,000 loan at current variable rates, interest-only repayments might sit around $1,400 per month compared to $1,900 on principal and interest. That $500 monthly saving is $6,000 per year, often enough to move the property into positive territory.

Variable rates also allow access to offset accounts, which reduce the interest charged without affecting the loan balance. Parking your emergency fund or next deposit in an offset linked to the investment loan lowers the effective rate and increases surplus cash flow. Fixed rates do not typically offer offset, which can make positive gearing harder to achieve or maintain if you hold surplus cash elsewhere.

Loan-to-value ratio is the other structural lever. The lower the LVR, the smaller the repayment. Borrowing at 60 per cent LVR instead of 80 per cent can reduce annual repayments by $8,000 or more, depending on the property value. That reduction often exceeds total holding costs and shifts the entire equation.

Some lenders also offer rate discounts for investor loans above certain thresholds or for clients with multiple facilities. A 0.20 per cent reduction in the interest rate on a $300,000 loan saves around $600 per year, which directly improves cash flow. Those discounts are negotiated at application and refinance, not automatically applied.

What Positive Gearing Costs You in Capital Growth Potential

Positive gearing typically requires either a higher deposit or a lower purchase price relative to rent. In Coffs Harbour, that often means choosing a unit over a house, or targeting precincts where yields are higher but capital growth has historically been slower. A unit returning 5.5 per cent gross yield might be positively geared with a 60 per cent LVR, but comparable houses returning 3.8 per cent yield will remain negatively geared at the same deposit level.

The trade-off is deliberate. Positive cash flow prioritises income over growth, which suits investors who need the property to pay for itself now rather than relying on appreciation over a decade. That approach also reduces risk. A property that generates surplus income each month does not force a sale if rates rise, vacancies occur, or personal income drops.

Yields in Coffs Harbour are slightly above the national average for regional centres, driven by strong rental demand from a mix of permanent residents, healthcare workers, and lifestyle renters. Units near the CBD, Park Beach, and the southern end of town around Jetty and Coffs Harbour Marina generate stronger rental returns relative to purchase price, which makes positive gearing more accessible without requiring a 50 per cent deposit.

How the New Build Exemption Changes the Calculation

Eligible new residential dwellings purchased after 12 May 2026 retain access to negative gearing and the 50 per cent CGT discount under the new rules. A new build is defined as a dwelling constructed on previously vacant land or a development that increases the number of dwellings on a site. Knock-down rebuilds that do not increase dwelling numbers are not eligible.

For investors in Coffs Harbour, that exemption makes new apartments and townhouse developments in areas like Korora, Sapphire Beach, and North Boambee Valley more attractive from a tax perspective. A new build that runs at a small loss can still offset that loss against wage income indefinitely, while an established dwelling purchased at the same time cannot.

The exemption does not eliminate the need for positive gearing, but it does give new build investors more flexibility. You can structure the loan with a higher LVR and accept a modest shortfall, knowing the tax treatment remains favourable. Established dwellings require a more conservative approach because any loss is quarantined and provides no immediate tax benefit.

New builds also attract depreciation deductions on the building and fixtures, which improve after-tax returns even if the property is positively geared. An investor earning $28,600 in rent and claiming $8,000 in depreciation only pays tax on $20,600 of income, while still receiving the full cash flow. That combination of positive cash flow and non-cash deductions is the most tax-effective position available.

Structuring the Loan Application for Positive Cash Flow

Lenders assess investment loan applications on serviceability, not on whether the property is positively or negatively geared. Rental income is included at 80 per cent of market rent, and the loan is tested at the product rate plus a 3 per cent buffer. If the property is positively geared after applying those haircuts, it improves your overall debt servicing position and may increase the amount you can borrow for future purchases.

Deposit size, loan structure, and property selection all feed into the application. A 40 per cent deposit on a high-yield unit will service better than a 10 per cent deposit on a low-yield house, even if the purchase price is identical. Lenders do not require positive gearing, but they do require that you can service the loan under stressed conditions, and positive cash flow makes that test much less difficult to pass.

If you are purchasing an investment property while still holding an owner-occupied loan, the combined serviceability is assessed together. A positively geared investment reduces the net liability and can allow you to retain your current home while building a portfolio, rather than needing to sell or significantly pay down the owner-occupied debt first.

Interest-only terms are typically approved for five years on investment loans, after which the loan reverts to principal and interest unless you apply to extend. Structuring for positive gearing on an interest-only basis means the property should still be sustainable when it reverts, or you will need to refinance at that point to maintain cash flow.

The Role of Rental Income and Vacancy Assumptions

Lenders use a rental assessment based on a valuation or a tenant ledger if the property is already leased. That figure is then reduced to 80 per cent for serviceability purposes. A property renting at $550 per week is credited as $440 per week in the application. If your own cash flow model assumes 100 per cent of rent with no vacancy, you are overstating the income and underestimating the shortfall.

Coffs Harbour's low vacancy rate reduces the real risk of extended periods without a tenant, but vacancy assumptions still matter for cash flow planning. Allowing for two weeks vacancy per year and a management fee of 7 to 8 per cent of rent provides a more realistic picture of net income. Positive gearing calculated on gross rent can quickly become negative gearing once real costs are applied.

Management, repairs, and body corporate are often underestimated. A unit with $3,600 annual strata levies and a $1,500 per year repair allowance has $5,100 in costs that do not appear on the loan statement but directly reduce cash flow. Including those figures upfront prevents unpleasant surprises six months after settlement.

If the property is positively geared by $3,000 per year but you have not included a repair allowance, the first air conditioner replacement or plumbing issue will wipe out that surplus. A conservative model that still delivers positive cash flow is far more valuable than an optimistic model that falls apart under real-world conditions.

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