Everything You Need to Know About Investment Property Selection

Picking the wrong investment property costs you twice - once in what you pay upfront and again in what you can't borrow next time.

If you're buying an investment property as a builder, you need to understand how property selection affects your borrowing power, your tax position, and whether the numbers actually work. The changes to negative gearing and capital gains rules from July 2027 have made new builds far more valuable than established properties for investors, but only if you pick the right type of new build and structure your investment loan properly from the start.

Why New Builds Get Different Tax Treatment Now

Properties purchased after 12 May 2026 can only be negatively geared if they qualify as eligible new residential dwellings. That means dwellings built on previously vacant land, or properties where the number of dwellings on the site increases. A knock-down rebuild that replaces one house with one house does not qualify. Neither does a renovation, no matter how extensive.

Consider a builder looking at two properties in the same suburb - an established unit for $480,000 and a new townhouse for $520,000. Both produce $450 weekly rent. The established property generates a $12,000 annual loss after interest, rates, insurance and management. Under the new rules, that loss can only be offset against future rental income or capital gains on residential property. It cannot reduce your taxable building income. The new townhouse with the same loss can still be offset against your wages, exactly as negative gearing has always worked. That difference is worth roughly $4,500 a year in tax to someone on a marginal rate of 37 cents plus Medicare levy.

The capital gains position is equally weighted toward new builds. When you sell, gains accrued after July 2027 on the established property will be taxed using cost base indexation with a minimum 30 per cent rate on real gains. The new build gives you a choice - take the indexed cost base with the 30 per cent minimum, or take the old 50 per cent discount. You pick whichever gives the lower tax.

What Counts as a New Build for Lenders and the ATO

Lenders and the ATO use different definitions, and you need to satisfy both. For the tax rules, a new build is a dwelling constructed on land that was vacant immediately before construction, or a development that increases the number of dwellings on the site. The property must not have been occupied for more than 12 months before you buy it. If a developer builds a townhouse, rents it out for 18 months, then sells it to you, it is not an eligible new build for tax purposes even though it is practically new.

Lenders care about whether the property is established or under construction because it affects the loan to value ratio they will accept and whether Lenders Mortgage Insurance applies. A completed new townhouse in a small development is treated the same as an established property for lending purposes. A house and land package where you are buying off the plan is treated as construction finance until practical completion, which means progress payments and a higher deposit requirement in most cases.

Deposit Size and How It Affects What You Can Buy

The deposit you can put down determines the type of property you can afford and whether you pay LMI. Most lenders will lend up to 90 per cent of the property value for investment purposes if you have genuine savings or equity. Some will go to 95 per cent, but only for specific borrower types or property types, and LMI at that level is expensive enough to question whether the purchase makes sense.

If you are using equity from your home, the combined loan to value ratio across both properties matters. Lenders will typically allow you to borrow up to 80 per cent of your home's value without LMI, or up to 90 per cent with LMI, and then lend you up to 90 per cent of the investment property value. Borrowing at high LVR on both properties simultaneously can push you into a position where serviceability becomes the binding constraint, not the deposit.

The debt-to-income cap introduced in February 2026 allows lenders to write only 20 per cent of new investor loans at a DTI of six times income or more. If your total borrowing across all properties exceeds six times your gross income, you may find some lenders will not approve the loan even if you can service it under their usual buffer. That makes deposit size critical - a larger deposit reduces the loan amount and keeps you under the DTI threshold.

Rental Income and Vacancy Assumptions Lenders Use

Lenders will only credit a portion of the expected rental income when calculating serviceability. Most use 80 per cent of the market rent, which accounts for vacancy, management fees, and periods between tenants. Some reduce it further for certain property types. If the property is in an area with high vacancy rates or a market dominated by short-term rentals, the lender may apply an even larger discount or decline the loan altogether.

You need a rental appraisal from a licensed property manager before you apply. The appraisal should reflect current market rent for a tenanted property on a standard lease, not holiday rental income or optimistic projections. Lenders will compare the appraisal to their own valuation and to comparable listings. If the numbers do not align, they will use the lower figure.

Serviceability is calculated using the loan's interest rate plus a three percentage point buffer. On a $450,000 loan at a variable rate of 6.3 per cent, the lender will assess serviceability at 9.3 per cent. If you are considering an interest only investment loan, the assessment rate is applied to the interest-only payment, but some lenders also test whether you can afford to repay principal and interest at revert.

Strata Title, Body Corporate and What Lenders Will Not Touch

Lenders will not lend on properties with certain characteristics, regardless of price or location. Units in buildings with major defects, unresolved cladding issues, or active legal disputes between owners and builders are generally declined. Properties in complexes with a commercial-to-residential ratio above a certain threshold, or in buildings where a single entity owns more than a specified percentage of the lots, are also difficult to finance.

Serviced apartments, student accommodation, and properties with restrictive covenants that limit who can occupy the property or how it can be used are often excluded. If the property can only be rented through a specific management arrangement or rental pool, most lenders will not accept it as security.

Body corporate fees are included in the serviceability assessment. A unit with $8,000 annual body corporate fees requires roughly $35,000 to $40,000 more in income to service than an equivalent house with no strata levies, all else being equal. High body corporate fees also reduce the net rental yield, which affects whether the property makes sense as an investment in the first place.

Location and How It Affects Borrowing and Resale

Lenders apply postcode-level restrictions based on oversupply risk, vacancy rates, and prior valuation experience. Some postcodes in regional areas, interstate mining towns, or areas with high concentrations of new apartment developments are subject to lower maximum LVRs or are excluded altogether. If you are looking at a property in a location the lender considers higher risk, you may need a 30 per cent or 40 per cent deposit regardless of your financial position.

You also need to think about resale. Investment property is not your forever home - you need to be able to sell it when your circumstances or strategy change. Properties in tightly held suburbs with strong owner-occupier demand hold value better than those in areas dominated by investors. Units in large complexes or streets with multiple similar developments compete with each other when owners sell, which can push prices down.

Proximity to infrastructure, schools, and employment centres matters, but so does the specific street and position within the suburb. A property backing onto a main road or adjacent to commercial premises will rent and sell for less than one in a quiet residential street, even if they are in the same suburb and the same distance from the train station.

Claimable Expenses and How They Change What You Keep

Interest on the investment loan, property management fees, council and water rates, landlord insurance, repairs and maintenance, and depreciation on the building and fixtures are all claimable expenses. Stamp duty and borrowing costs such as loan establishment fees and LMI are not immediately deductible but are added to the cost base for capital gains purposes.

New builds offer higher depreciation deductions than established properties. A new townhouse might generate $8,000 to $12,000 in depreciation deductions in the first few years, compared to $2,000 to $4,000 for an established property of similar value. Depreciation does not require any cash outlay, which improves your after-tax cash flow even if the property is neutrally geared or slightly negative.

If you are purchasing an investment property using an equity release loan secured against your home, only the interest on the portion of the loan used to purchase the investment is deductible. Interest on any part of the loan used for private purposes, including topping up your offset or paying down non-deductible debt, is not claimable. Keeping the loan purposes separate from the start avoids arguments with the ATO later.

Investment property selection is not about finding the cheapest property or the highest rent. It is about finding a property that you can borrow against, that qualifies for the tax treatment you need, that will rent consistently, and that you can sell without taking a loss when your strategy changes. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions