The Pros and Cons of Positive Gearing in Property

Positive gearing means your rental income covers your loan repayments and property costs, leaving you with cash in hand each fortnight.

That income might be modest, but it's real money you can spend, save, or reinvest. It's the opposite of negative gearing, where you subsidise a rental shortfall from your own pocket in exchange for a tax deduction. With positive gearing, you claim fewer deductions because you're making a profit, but you're also not bleeding cash every month.

The appeal has sharpened since negative gearing rules changed. From 1 July 2027, rental losses on properties bought after 12 May 2026 can no longer be offset against your salary or other non-property income unless the property is an eligible new build. If you're looking at an established dwelling and you don't want losses quarantined, positive gearing becomes the only strategy that doesn't lock you into a waiting game.

What Positive Gearing Demands Upfront

Positive gearing requires either a large deposit, a property with above-average yield, or both.

Consider a buyer who finds a two-bedroom unit in a regional Victorian town at $320,000. The unit rents for $380 a week, or roughly $19,760 a year. Body corporate fees run $1,800 annually, rates and insurance another $2,500, and agent fees take 7.7 per cent of the rent. With an 80 per cent investment loan at current variable rates, principal and interest repayments sit around $22,000 a year. After expenses, the property washes its face. If the buyer increases the deposit to 30 per cent, repayments drop to about $15,400 a year, and the property delivers a small positive return of roughly $200 a month before tax.

That example works because the yield is high and the purchase price is low relative to rent. In metro Melbourne, the same scenario is much harder to engineer unless you're buying a studio in an oversupplied pocket or putting down 40 per cent or more.

The Tax Treatment You Actually Get

You still claim every deductible expense: loan interest, agent fees, rates, insurance, depreciation, body corporate, and maintenance.

The difference is that your rental income exceeds those expenses, so you report a profit. That profit is added to your taxable income and taxed at your marginal rate. If you're on the 32.5 per cent bracket and you make $2,400 a year from the property after all deductions, you'll pay roughly $780 in tax on that income, leaving you with about $1,620 in your pocket.

Under the old negative gearing model, you might have made a $5,000 loss, claimed it against your salary, and saved $1,625 in tax, but you'd still be $3,375 out of pocket each year. Positive gearing reverses that: you're ahead by $1,620 instead of behind by $3,375. Over ten years, that's a $50,000 swing before you account for capital growth.

How It Changes Your Borrowing Capacity

Lenders assess rental income at 80 per cent of the market rate to account for vacancy and arrears.

If your property rents for $380 a week, the lender will assess it at $304 a week, or about $15,800 a year. They then subtract all loan repayments and ongoing property expenses, and if the result is positive, it can add to your borrowing capacity for future purchases. If it's negative, it reduces what you can borrow next time.

A positively geared property, even by a small margin, keeps your serviceability intact. That matters if you're planning a second purchase within a few years or if you want to refinance your owner-occupied home later without selling the investment. A negatively geared property, by contrast, erodes your borrowing power with every dollar of loss the lender has to account for.

Interest Only vs Principal and Interest

Most positively geared investors choose principal and interest repayments because the property already covers the cost.

Interest only loans reduce your monthly repayment and can push a break-even property into positive territory, but they also mean you're not building equity through loan reduction. If your goal is to hold the property for passive income over the long term, paying down the loan accelerates the point at which the property becomes genuinely cash-flow positive, even if rates rise or the property sits vacant for a period.

Interest only still has a place if you're planning to sell within five to seven years, or if you're using the cash flow from one property to fund the deposit on another. But it's a leverage play, not an income play.

Where Positive Gearing Works in Practice

Regional Victoria offers the clearest path because yields are higher and purchase prices lower.

In towns like Bairnsdale, Warrnambool, Ballarat, and Bendigo, you can still find two-bedroom units and older three-bedroom houses at prices that allow a 25 to 30 per cent deposit to deliver positive cash flow. Vacancy rates in these areas tend to be lower than metro Melbourne, and tenant demand is steady, particularly where there's a university, hospital, or government employer anchoring the local economy.

Metro investors chasing positive gearing usually need to look at newer apartments with depreciation schedules that offset part of the rental profit, or they need to buy in fringe suburbs where capital growth may be slower but yields sit above 4.5 per cent. The trade-off is always the same: higher yield today, uncertain growth tomorrow.

The Portfolio Growth Question

Positive gearing slows portfolio expansion because you're using more equity and cash upfront.

If you buy one property with a 30 per cent deposit instead of three properties with 10 per cent deposits each, you've chosen income over growth. That's fine if your goal is financial freedom from rental income in fifteen years, but it's a slower path if you're trying to build wealth through capital appreciation and leverage.

In our experience, buyers who prioritise positive gearing are usually older, closer to retirement, or already holding negatively geared properties and looking to balance the portfolio. First-time investors in their thirties often prefer to stretch borrowing capacity and accept a small monthly loss in exchange for the chance to own multiple properties while they're still working.

Fixed Rate or Variable Rate for Positive Cash Flow

Variable rates give you flexibility to make extra repayments and pay the loan down faster.

Fixed rates lock in your repayment amount, which can be useful for budgeting if the margin between income and expenses is tight. But if you fix and rates fall, you're stuck paying more than you need to, and the property might slip back to break-even. If you're confident in the cash flow buffer, variable is usually the better choice for positively geared loans.

Some investors split the loan, fixing half and leaving half variable. It hedges both ways, but it also adds complexity, and most lenders charge a higher rate on split loans than they would on a single variable facility.

When Positive Gearing Doesn't Make Sense

If you're buying in a high-growth metro area with a low yield, forcing positive gearing means either a deposit so large you'd be better off buying two properties, or accepting a property in a location with weak growth prospects.

Positive gearing also doesn't suit buyers who plan to upgrade their owner-occupied home within two years. The cash flow benefit is small, and the upfront equity you've tied up in the investment would have been more useful as a deposit on your next home. In that scenario, a smaller deposit on the investment and a short-term negative position makes more sense, assuming you can still service both loans.

Refinancing a Positive Investment Loan

If your property is already positively geared, refinancing can increase the margin by securing a lower rate or switching to a lender with better investor discounts.

A 0.25 per cent rate reduction on a $250,000 loan saves about $625 a year, which might not sound like much, but over ten years it's $6,250 you didn't have to earn. If you're holding multiple properties, refinancing all of them together can deliver enough improvement in cash flow to fund another deposit or simply give you breathing room if one property has a longer-than-expected vacancy.

Most lenders reassess rental income and property expenses at refinance, so if your rent has increased or your body corporate fees have dropped, make sure those figures are updated in the application.

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