Quick Look
Focus: How a negatively geared investment can help build long-term property wealth
Key Takeaways:
Buying your first investment property can feel like a stretch — especially when it costs $750,000 and you’re needing $150,000 cash to meet the typical 20% deposit required by lenders. But with careful planning, many Australians use this as a stepping stone to build long-term wealth.
In this article, we walk through a realistic path up the property ladder, using real numbers over 20 years. We show how “gearing” plays a continuing role and is aided by significant tax benefits. Gearing is the term used to describe using a smaller sum to borrow a much larger sum to own a much larger asset. This has a multiplier effect such that the growth on a larger asset is more than that on a smaller asset. Hence the term “geared up”.
Furthermore, the repayments on the geared-up borrowings and the property ownership costs such as rates, insurance and repairs, usually add up to cost more than rental income that results in a negative return. Hence the term negative gearing.
Many investors underestimate how much negative gearing actually costs in real money. The tax offset helps, but the cash shortfall can be significant. Understanding this is crucial before making your first move.
For our first example, we start with a $750,000 investment, 20% cash deposit with an 80% loan, and 30-year P&I at 6.5% interest. In NSW, Govt purchase duty is close to $28,000. Outgoings and rent are typical, and depreciation is factored in.
Depreciation is an accounting concept that allows a non-cash tax deduction to be claimed against taxable income for the decline in value under tax law. It usually only applies to new properties or ones less than approximately 10 – 20 years old. Although this is a tax deduction it doesn’t cost anything because it is part of the purchase price of the property.
From there, we look at what happens when the property grows at 6% p.a. and is used to fund a second investment.
Year 1 Negative Gearing Breakdown
Property Value: $750,000
Loan: $600,000 P&I at 6.5% (30 years)
Rental Income: $30,000
Net Cash Loss (after tax) | -$12,228
This is roughly $235/week out of pocket in the early years. The interest portion of the P&I repayment is roughly 85% in Year 1.
Building Equity Over Time
Assume 6% p.a. capital growth. After 9 years:
Property 1 value: $750,000 →≈ $1,267,000
Remaining loan: ≈ $520,676 (P&I)
Equity available: $1,267,000 – $520,676 = $746,124
Purchasing Property 2
Purchase price: $1,250,000
Purchase costs: $62,000 (approx. 5%)
Total loan: $1,312,000 (105%) interest-only @ 6.8%
Rent increased 3% p.a. $30,000 → $39,000
Costs increased 3% p.a. $ 9,300 → $12,100
Interest-only repayment: $1,312,000 × 6.8% = $89,216/year
Second Property Year 10 Cash Flow
Rental Income: $39,000
Loan Interest: $89,216
Costs: $12,100
Cash Loss (before tax): -$62,316
Add depreciation estimate (inflation adjusted): $16,000
Taxable Loss: ≈ -$78,316
Tax Refund @ 32%: ≈ $25,061
Net Cash Loss: ≈ -$37,255/year (~$716/week)
Year 20 Snapshot
Property 1: Value @assumed 6% p.a. growth: $750,000 → $2,400,000 Remaining loan: ≈ $334,000
Property 2: Value @ assumed 6% p.a. (from $1.25m): ≈ $2,240,000
Interest-only loan: $1,312,000
Total Property Value: ≈ $4.64 million
Total Loans: $334,000 + $1,312,000 = $1.65 million
Equity: ≈ $3.0 million
Target of $3 million equity is achieved slightly ahead of schedule due to compounding growth. Warning: these outcomes are based on the assumptions shown a which may not eventuate. This exercise may even result in an overall loss as the future cannot be predicted.
Yes, it can be — especially if interest rates rise or if you can’t cover negative cash flow. That’s why understanding the real cash cost upfront is crucial.
Then it will take longer to reach your equity goals. Growth is never guaranteed.
It depends on your income, borrowing capacity, and how much equity you’ve built. Banks will factor in rental income, but not the full tax benefit.
Many investors do this to reduce cash flow pressure, especially when the first property is still being paid down.
Buying one investment property doesn’t make you wealthy — but managing it well and using its growth to buy another can. The journey requires patience, cash discipline, and realistic expectations about returns and risks.
After 20 years, it’s possible to hold $4.8 million in property with over $3 million in equity. But the early years will test your budget and resolve. The key is planning with real numbers, not wishful thinking.
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