What Not to Do When Chasing Positive Gearing Returns

A positive geared investment property generates rental income that exceeds all holding costs, including loan repayments, rates, insurance and maintenance.

That surplus sounds attractive, particularly when tax changes scheduled for mid-2027 will quarantine rental losses for most investors buying established dwellings. But chasing yield alone often leads buyers toward properties that deliver cashflow today and capital loss tomorrow. The goal is to find a property where rental income covers costs and the asset itself holds or gains value over time.

Why Positive Gearing Matters More After July 2027

From 1 July 2027, net rental losses from residential investment properties acquired after 12 May 2026 cannot be offset against salary or wages. Those losses can only be used against other rental income or carried forward to offset future residential rental income or capital gains. Properties purchased before that date, or those already under contract when the announcement was made, remain eligible for traditional negative gearing.

For investors buying established dwellings in Cessnock after mid-2026, this means a negatively geared property no longer delivers the immediate tax benefit it once did. The loss is still claimable, but only against future property income. A positively geared property avoids that delay entirely because there is no loss to quarantine.

Consider a buyer who purchases an older brick-and-tile unit near Cessnock town centre. The property rents for $380 per week. After principal and interest repayments, council rates, strata levies, insurance and a vacancy allowance, the property costs $425 per week to hold. Under the new rules, that $45 weekly shortfall cannot reduce taxable income from employment. It sits in a rental loss pool until the investor sells the property or generates a surplus from this or another residential rental.

Loan Structure Changes the Cashflow Outcome

The same property can be positively or negatively geared depending on how the loan is structured. Moving from principal and interest to interest-only repayments, increasing the deposit, or securing a lower interest rate can all shift a property into positive territory.

An interest-only loan reduces monthly repayments because you are not paying down the principal balance. On a $400,000 loan at a variable investor rate, switching from principal and interest to interest-only can reduce repayments by several hundred dollars each month. That reduction may be enough to turn a marginal property into one that generates surplus income.

The downside is that interest-only periods are capped, usually between one and five years depending on the lender. When the interest-only period ends, repayments revert to principal and interest and often increase because the remaining loan term is shorter. If you plan to hold the property long term, factor in what happens when repayments rise.

A larger deposit also improves cashflow by reducing the loan amount and lowering Lenders Mortgage Insurance costs if you can avoid crossing the 80 per cent loan to value ratio threshold. Deposits above 20 per cent are not always feasible for buyers trying to enter the market, but if you have access to equity from an existing property or additional savings, the impact on weekly cashflow can be significant.

Properties That Deliver Yield Without Long-Term Value

High rental yields in regional areas often reflect lower capital growth expectations or higher tenant turnover. A property that rents for $450 per week and sells for $350,000 offers a gross yield above 6 per cent, but if comparable properties in the same street have not increased in value over the past five years, the cashflow advantage may be offset by stagnant equity.

Cessnock's rental market includes a mix of older housing stock near the town centre, newer estates on the northern fringe, and rural properties on larger blocks. Rental yields vary, but properties with the highest yields are often those with deferred maintenance, proximity to industrial zones, or limited appeal to owner-occupiers. Those characteristics can make it difficult to exit the investment when you need to sell.

In our experience, investors who focus only on the weekly surplus often overlook the broader holding costs. Body corporate fees on older strata units can increase without warning. Vacancy rates in smaller regional towns tend to be higher than metro areas, and a single three-month vacancy can eliminate a year of positive cashflow. Allow for at least two to three weeks of vacancy per year when calculating whether a property is genuinely positively geared.

How Lenders Assess Rental Income on Investment Loan Applications

Lenders do not use the advertised rent when calculating serviceability. Most apply a rental income shading of 20 per cent to account for vacancy, maintenance and collection risk. If a property rents for $400 per week, the lender will typically assess serviceability using $320 per week.

That shading can affect how much you can borrow, particularly if you already hold other investment properties or have a high debt-to-income ratio. Under APRA's DTI cap introduced in February 2026, lenders may fund up to 20 per cent of new investor loans at a DTI of 6 times or greater, but most borrowers will need to stay below that threshold. If rental income is shaded and your salary is modest, the borrowing capacity may fall short of what you need to acquire a positively geared property in a location with genuine growth potential.

Variable rate investment loans currently attract a higher interest rate than owner-occupied loans, typically between 0.3 and 0.6 percentage points depending on the lender and loan features. A lower rate improves cashflow, so it is worth comparing investment loan options from multiple lenders rather than accepting the first offer. Some lenders also offer rate discounts for larger loan amounts or borrowers with multiple properties financed through the same institution.

Fixed Rate or Variable Rate for Positive Gearing Strategy

A fixed rate locks in repayments for a set period, which makes budgeting simpler and protects cashflow if variable rates rise. The downside is that fixed rates for investors are often higher than variable rates at the time of writing, and breaking a fixed rate early can trigger significant break costs.

A variable rate gives you flexibility to make extra repayments or refinance without penalty, but repayments will increase if the Reserve Bank lifts the cash rate. For a positively geared property where the margin between income and expenses is narrow, even a small rate rise can push the property into negative territory.

Some investors split the loan between fixed and variable, which provides partial certainty while retaining flexibility. For example, fixing 50 per cent of the loan for three years and leaving the remainder on a variable rate allows you to benefit if rates fall while limiting exposure if they rise. This approach works well when you expect rates to move but are unsure of the direction.

Eligible New Builds Retain Full Negative Gearing and CGT Discount

Properties classified as eligible new builds under the recent tax changes retain access to traditional negative gearing and the option to use the 50 per cent capital gains tax discount on disposal. An eligible new build is a dwelling constructed on previously vacant land or a development that increases the total number of dwellings on a site.

Knock-down rebuilds that do not increase dwelling numbers are not eligible, nor are substantial renovations. If a new build is occupied for more than 12 months before being sold to a subsequent investor, that subsequent investor loses access to negative gearing.

For buyers in Cessnock, this creates a decision point. New land releases on the northern edge of the town occasionally offer house-and-land packages that qualify as eligible new builds. These properties may not be positively geared immediately due to higher purchase prices and construction costs, but they allow the investor to offset rental losses against salary and wages even after July 2027. Whether that tax treatment is worth the higher upfront cost depends on your income, holding period and growth expectations for the area.

What Happens When You Refinance a Positive Geared Property

Refinancing an existing investment loan can improve cashflow if you secure a lower interest rate or switch to interest-only repayments. However, refinancing also resets the loan term, which increases the total interest paid over the life of the loan if you extend the term back to 30 years.

Some investors refinance to release equity for a second purchase. If the first property has increased in value and you have paid down some of the principal, you may be able to borrow against that equity without selling. The additional borrowing increases the loan balance and monthly repayments, which can turn a positively geared property into a negatively geared one. Under the new tax rules, that loss may not be immediately deductible if the property was acquired after 12 May 2026, so the cashflow impact needs to be modelled carefully.

If you are considering a loan health check to assess whether refinancing makes sense, bring recent rental statements, loan statements and a current valuation or appraisal. Lenders will reassess your serviceability as if you were applying for a new loan, including applying the 3 percentage point buffer and shading rental income by 20 per cent.

Claimable Expenses That Improve After-Tax Cashflow

Even if a property is positively geared on a pre-tax basis, claimable expenses reduce the taxable rental income and improve the after-tax outcome. Interest on the loan, council and water rates, strata levies, landlord insurance, property management fees, repairs and maintenance, and depreciation on plant and equipment are all deductible.

Depreciation is particularly valuable because it is a non-cash deduction. You claim the decline in value of the building and fixtures without spending anything in the current year. A quantity surveyor can prepare a depreciation schedule that sets out the claimable amounts for each financial year. The cost of the schedule itself is also deductible.

For properties acquired after 12 May 2026, these deductions still apply, but they reduce rental income rather than offsetable salary income. A property that generates $500 per week in rent and incurs $450 per week in deductible expenses shows a taxable rental income of $50 per week. If the property is positively geared before depreciation, adding depreciation may result in a small rental loss, but that loss can only be used against other rental income or carried forward.

Local Market Conditions in Cessnock and Surrounds

Cessnock sits in the Hunter Valley wine region, roughly 50 kilometres west of Newcastle. The local economy relies on viticulture, tourism, coal mining and agriculture. Rental demand comes from a mix of service workers, mine employees and families who prefer the area's semi-rural character over larger centres.

Rental yields in Cessnock are generally higher than Newcastle or Sydney, but capital growth has been uneven. Proximity to the town centre, school catchment zones and transport links all influence rental demand. Properties near Hunter TAFE or Cessnock High School tend to attract consistent tenant interest, while those on the rural fringe may experience longer vacancy periods.

If you are targeting positive gearing in this market, focus on properties that appeal to long-term tenants rather than those relying on short-term workers. A well-maintained three-bedroom house within walking distance of schools and shops will hold tenants longer than a two-bedroom unit on the edge of town with no off-street parking.

Call one of our team or book an appointment at a time that works for you. We can help you compare loan structures, model cashflow scenarios and identify lenders with investor-friendly serviceability policies that align with your property strategy.

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