How to know if you can afford an investment property in Melbourne

Discover how to assess your financial readiness for Melbourne investment property. We look at borrowing capacity, costs, yields and market strategies for 2025 investors.

Are you ready to join the thousands of Australians building wealth through Melbourne property investment? The city’s property market has entered an exciting new phase in 2025, with four consecutive months of growth signalling a strong turnaround after the challenges of 2024. Recent interest rate cuts have improved your borrowing capacity and restored buyer confidence, creating fresh opportunities for investors who understand how to assess their financial readiness.

With median house prices sitting around $920,000-$940,000 and rental vacancy rates below 1%, the fundamentals are aligning in your favour. However, successful property investment requires much more than simply having enough for a deposit. You need to understand your true borrowing capacity, calculate all associated costs, and plan for the unexpected.

Whether you’re taking your first steps into property investment or you’re an experienced investor looking to expand your portfolio, the principles remain the same: thorough planning, realistic budgeting, and professional guidance create the foundation for sustainable success.

Understanding your borrowing capacity

Your borrowing capacity forms the cornerstone of any investment property purchase. Unlike owner-occupier loans, investment property lending involves different criteria that directly impact how much you can borrow and on what terms.

What lenders assess for investment loans

When you apply for an investment property loan, lenders conduct a comprehensive review of your financial position. They examine your income sources, including salary, business income, and existing rental income, but they scrutinise your expenses more closely than with owner-occupier loans. Your existing debts, credit history, and overall financial behaviour all influence their decision.

Here’s what you need to know: lenders treat projected rental income conservatively. Rather than accepting your full rental income projections, most lenders only factor in 70-80% of estimated rental income when calculating your borrowing capacity. This approach accounts for potential vacancy periods, property management fees, and other expenses that reduce your net rental income.

Lenders also apply different interest rate buffers when assessing investment loans. They typically test your ability to service the loan at rates 2-3% higher than current rates, ensuring you can meet repayments if interest rates rise significantly. This stress testing becomes particularly important for investment loans where rental income forms part of your serviceability calculation.

Loan-to-Value Ratios and deposit requirements

Most Australian lenders will finance up to 80% of an investment property’s value, meaning you need at least a 20% deposit. This standard approach helps lenders manage risk while allowing you to leverage your capital effectively. For a property valued at $800,000, you’ll need $160,000 for the deposit alone, before accounting for additional purchase costs.

Some lenders offer loans with deposits as low as 10% deposit-requirements, but this comes with significant additional costs. When your loan-to-value ratio exceeds 80%, you’ll pay Lender’s Mortgage Insurance (LMI), which can add tens of thousands to your upfront costs. The LMI premium varies based on your deposit size and loan amount, but it protects the lender rather than you.

An increasingly popular alternative involves using equity from your existing home rather than cash deposits. If you have sufficient equity in your principal residence, you might access these funds without paying LMI, provided your total borrowings across all properties don’t exceed 80% of the combined property values.

Working with mortgage brokers

Engaging a qualified mortgage broker early provides several advantages. Brokers assess your complete financial picture and provide realistic estimates of your borrowing capacity across different lenders. They understand which lenders offer competitive rates for investment properties and can structure loans to optimise your tax position.

Pre-approval through a broker gives you confidence when inspecting properties and making offers. In competitive markets, sellers and agents prefer dealing with buyers who have confirmed finance, potentially giving you an advantage in negotiations.

The choice between interest-only and principal-and-interest repayments requires careful thought. Interest-only loans can improve short-term cash flow, making it easier to maintain positive or neutral gearing. However, they typically come with slightly higher interest rates and require refinancing after the interest-only period expires.

Calculating the true cost of Melbourne investment property

Understanding the complete cost structure prevents nasty financial surprises and helps you budget appropriately. Beyond the purchase price and deposit, numerous upfront and ongoing expenses can significantly impact your initial capital requirements and ongoing cash flow.

Upfront acquisition costs

Stamp duty represents one of your largest upfront costs when purchasing investment property. This state government tax varies considerably depending on property value and location, potentially adding tens of thousands to your acquisition costs. Unlike some first-home buyer concessions available for owner-occupiers, investment property purchases typically face full stamp duty rates.

Legal and conveyancing fees cover the complex process of transferring property ownership. Professional conveyancers typically charge between $500-$1,500 depending on property type, location, and transaction complexity. While this might seem minor compared to other costs, using experienced professionals helps you avoid costly legal problems later.

Building and pest inspections provide protection against structural issues or pest infestations that could cost thousands to rectify. These inspections typically cost $300-$1,000 but can save you from purchasing a property with expensive hidden problems. For older properties especially, comprehensive inspections help you understand what repairs or renovations might be needed.

When your deposit is less than 20%, Lender’s Mortgage Insurance becomes a significant additional cost. LMI premiums are calculated based on your loan amount and loan-to-value ratio, potentially adding thousands or tens of thousands to your upfront costs. The good news is that LMI can often be added to your loan amount rather than paid upfront.

Real-world cost example

Let’s break down a typical investment property purchase. For a property valued at $750,000 with a 20% deposit, you’d need $150,000 upfront, plus approximately $30,000-$35,000 in stamp duty, $1,200 for conveyancing, $800 for building and pest inspections, and various smaller fees. Your total upfront investment could easily reach $185,000-$190,000 before you even settle.

If you only had a 10% deposit ($75,000), you’d add LMI costs of perhaps $15,000-$20,000 to your calculation. While the lower deposit reduces your immediate cash requirements, the LMI premium increases your total borrowing and ongoing interest costs.

Ongoing ownership expenses

Once you own the property, ongoing expenses begin immediately. Property management fees typically range from 6-8% of your rental income, depending on services provided and local market conditions. These fees cover advertising for tenants, conducting inspections, collecting rent, and handling maintenance issues.

Landlord insurance differs from standard home insurance by covering risks specific to rental properties, including protection against tenant damage, rental default, and loss of rent during repairs. This typically costs more than standard home insurance but provides protection for investment properties.

Council rates, water charges, and strata fees (for apartments) represent unavoidable ongoing costs. Even during vacancy periods, you remain responsible for these expenses. For strata properties, you might face special levies for building repairs that can’t be predicted in advance.

Maintenance and repairs require careful budgeting as they’re both unpredictable and necessary. Creating a maintenance buffer of at least 1-2% of the property value annually helps cover routine repairs, while a separate fund for major items like roof repairs prevents financial stress when larger expenses arise.

Melbourne’s rental market dynamics and yield expectations

Now that you understand the costs involved, let’s examine the income side of your investment equation. Melbourne’s rental market provides the income stream that makes your investment viable, so understanding current conditions and realistic yield expectations is fundamental to your success.

Current rental yield landscape

Melbourne’s average gross rental yields currently sit around 2.95% for houses and 4.38% for units, meaning any yield above 5% is generally good in the current market. These yields reflect the relationship between rental income and property values, with higher yields typically found in areas where rental demand exceeds purchase demand.

Rental yields vary significantly across different Melbourne suburbs and property types. Outer suburban areas often provide higher yields due to lower property prices, while inner-city areas might offer lower yields but stronger capital growth potential. Units typically yield more than houses in the same area due to their lower purchase prices and strong rental demand.

Here’s encouraging news for investors: Melbourne’s rental vacancy rate has dropped below 1%, creating a highly competitive environment for tenants and strong conditions for landlords. This tight rental market has driven asking rents up by more than 25% year-on-year in some suburbs, improving yields for existing investors.

Rental income projections

When projecting rental income, research recent rental listings for similar properties in your target area. Look at properties with comparable features, condition, and location rather than relying on broad suburb averages. Real estate websites provide valuable data, but speaking with local property managers gives you insights into current market conditions and tenant preferences.

Be aware that seasonal factors can influence rental demand and achievable rents. University areas might experience stronger demand during semester periods, while family-oriented suburbs might see more stable year-round demand. Understanding these patterns helps you budget for potential vacancy periods.

You should budget for at least 2-4 weeks of vacancy annually to account for tenant changeovers, property improvements, or unexpected circumstances. Having three months of expenses readily available provides security during longer vacancy periods.

Tax implications and benefits

Investment property ownership brings significant tax implications that affect your overall returns. If your property expenses exceed your rental income, you may be able to claim negative gearing benefits, reducing your overall tax liability. However, this means you’re subsidising your investment through your regular income.

Depreciation schedules prepared by quantity surveyors can provide substantial tax deductions for the building structure and fixtures. These non-cash deductions can significantly improve your after-tax returns, particularly for newer properties.

Most property-related expenses are tax-deductible, including loan interest, property management fees, insurance, maintenance, and repairs. However, capital improvements that add value may need to be depreciated over time rather than claimed immediately.

Creating your investment budget and financial strategy

With a clear understanding of costs and income potential, you can now create a comprehensive budget and strategy. Successful property investment requires planning that goes beyond simple deposit calculations.

Financial readiness checklist

Before committing to an investment property, ensure you have an emergency fund separate from your deposit. This fund should cover at least six months of personal expenses plus three months of property expenses without rental income. Having this buffer prevents you from being forced to sell during unfavourable market conditions.

Your debt-to-income ratio across all borrowings should remain manageable even after adding the investment property loan. Most financial advisors recommend keeping total debt service below 30-40% of your gross income to maintain financial flexibility.

Stress testing your budget against potential interest rate rises helps ensure long-term sustainability. Calculate your cash flow position if interest rates rise by 2-3% above current levels, giving you confidence that your investment remains viable in less favourable conditions.

Cash flow planning

Realistic cash flow projections require conservative estimates of rental income and comprehensive expense budgeting. Use the lower end of rental estimates and the higher end of expense estimates to ensure your projections remain achievable. This conservative approach prevents cash flow problems when reality differs from optimistic projections.

Building renovation and upgrade budgets early helps improve rental returns and property values. Even cosmetic improvements like fresh paint, new carpets, or modern fixtures can justify higher rents while making your property more attractive to quality tenants. Budget at least 2-3% of the property value annually for improvements and major maintenance items.

Your exit strategy planning affects initial investment decisions and ongoing management. If you’re planning to hold the property long-term for capital growth, you might accept lower initial yields in favour of areas with strong growth potential. If you need positive cash flow quickly, higher-yielding areas might better suit your strategy.

Risk management strategies

Portfolio diversification helps manage investment risk as you build multiple properties. Geographic diversification across different suburbs or property types can reduce your exposure to localised market downturns or demographic changes.

Comprehensive insurance coverage protects your investment against various risks. Beyond standard landlord insurance, think about income protection insurance that covers loan repayments if you become unable to work.

Property investment typically rewards patient, long-term investors who can ride out market cycles and benefit from both rental income and capital growth over time. Planning to hold properties for at least 7-10 years allows you to maximise these benefits while minimising transaction costs.

Choosing the right Melbourne investment strategy

Different investment strategies require varying capital commitments, skills, and risk tolerances. Understanding these approaches helps you choose the strategy that best aligns with your financial position and goals.

Buy-and-hold strategy

The buy-and-hold approach suits investors seeking steady rental income and long-term capital growth without active property management demands. This strategy works well for busy professionals who want property exposure without significant time commitment.

Capital requirements for buy-and-hold investing include your deposit, purchase costs, and sufficient reserves for maintenance and vacancy periods. Since you’re not planning major renovations, your initial capital requirements are typically lower than value-add strategies, but you need adequate ongoing cash flow.

Successful buy-and-hold investing requires selecting properties in areas with strong long-term growth fundamentals. Look for suburbs with infrastructure development, population growth, employment opportunities, and lifestyle amenities that attract both tenants and future buyers.

Renovation and value-add opportunities

Value-add strategies involve purchasing properties below market value and improving them through renovations or enhancements. This approach can provide faster returns than buy-and-hold but requires additional capital, skills, and time commitment.

Renovation strategies require substantial additional capital beyond the purchase price and deposit. Budget carefully for permit costs, contractor fees, materials, and holding costs during renovation when the property might not generate rental income. Unexpected issues can quickly blow out budgets, so maintain generous contingency funds.

Understanding council regulations, building permits, and compliance requirements is necessary for renovation success. Some improvements require planning permits that can add time and costs to your project. Research these requirements thoroughly before purchasing, as some properties might have limitations affecting your renovation plans.

New vs established property decisions

New properties offer advantages like modern fixtures, lower maintenance requirements, and maximum depreciation benefits for tax purposes. Developer warranties provide protection against defects, while newer properties often comply with current building standards.

Established properties typically offer better rental yields and proven rental history, but may require more maintenance and updates. The surrounding infrastructure is usually well-developed, but you won’t benefit from the same depreciation deductions available with new properties.

Off-the-plan purchases require careful consideration of settlement risks and market changes between contract signing and completion. While these purchases can offer below-market prices, you’re exposed to market movements and potential developer delays that could affect your financing arrangements.

Taking the next steps

Once you’ve determined your affordability and chosen your investment strategy, assembling the right professional team and conducting thorough market research sets the foundation for success.

Professional team assembly

Selecting the right mortgage broker involves evaluating their experience with investment loans, access to multiple lenders, and understanding of different investment strategies. A good broker should explain various loan structures, help you understand tax implications, and provide ongoing support as your portfolio grows.

Property managers play a crucial role through tenant selection, maintenance coordination, and rental income optimisation. Choose managers with strong local knowledge, good tenant screening processes, and proactive maintenance approaches. Their fees are tax-deductible and often justify themselves through better tenant quality and reduced vacancy periods.

Building relationships with accountants who understand property investment helps optimise your tax position and ensure compliance with Australian Taxation Office requirements. Quantity surveyors provide depreciation schedules that can significantly improve your after-tax returns, while building inspectors protect you from purchasing properties with expensive hidden problems.

Market research and suburb selection

Infrastructure pipeline assessment helps identify areas likely to experience growth in property values and rental demand. Major transport projects, shopping centre developments, and employment hubs can significantly impact local property markets over time.

Growth corridor identification requires understanding population trends, employment patterns, and development plans that drive long-term demand. Areas with strong population growth, diverse employment opportunities, and lifestyle amenities typically outperform over time.

Your due diligence process should include researching recent sales data, rental histories, local development applications, and any factors that might affect future property values. This research helps you make informed decisions and negotiate effectively when you find suitable properties.

Getting pre-approved and ready to buy

Loan pre-approval provides confidence when inspecting properties and making offers. Having finance confirmed allows you to act quickly in competitive situations and demonstrates your serious intent to sellers and agents.

Understanding the difference between auction and private sale processes helps you prepare appropriate strategies for different buying situations. Auctions require unconditional purchases, while private sales typically allow building and pest inspection conditions that provide additional protection.

Making competitive offers in Melbourne’s current market requires understanding recent sales data, property condition, and local market dynamics. Your real estate agent and mortgage broker can provide guidance on structuring offers that balance competitiveness with financial prudence.

Melbourne’s property investment market offers substantial opportunities for well-prepared investors who understand their financial capacity and market dynamics. Success requires thorough planning, realistic budgeting, and professional guidance to navigate the complexities effectively.

The key to determining investment property affordability lies in comprehensive financial assessment that goes beyond simple deposit calculations. Understanding your borrowing capacity, calculating all associated costs, and planning for various scenarios creates the foundation for sustainable investment success.

With Melbourne’s rental markets showing strong fundamentals and interest rates beginning to decline, current conditions present opportunities for investors who take a measured, well-informed approach. The combination of improving borrowing conditions and tight rental markets creates a favourable environment for property investment.

However, successful investing requires patience, adequate capital reserves, and ongoing professional advice to navigate changing market conditions and optimise your returns. Taking time to build your knowledge, assemble your professional team, and thoroughly research your target markets pays dividends through better investment decisions and stronger long-term returns.

Working with experienced mortgage brokers, property managers, and other investment professionals helps you avoid common pitfalls while maximising the benefits of property investment. Their expertise, combined with your thorough preparation and realistic planning, creates the best foundation for building wealth through Melbourne property investment.

Further questions

This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.