Avoid These 7 Mistakes When Buying Your First Investment

Most first-time investors applying for an investment loan assume the process will be similar to their owner-occupier home loan.

It's not. Lenders assess investor borrowing differently, price it differently, and structure it differently. The deposit rules change, the serviceability calculation changes, and the loan features you actually need are often not the ones you think you need.

Mistake 1: Not Understanding How Lenders Calculate Your Borrowing Capacity Differently

Lenders reduce your rental income by 20 to 30 per cent before they add it to your assessment, even if the property has never been vacant. That haircut accounts for periods where the property might sit empty, maintenance costs, and the general reality that rental income is less reliable than salary. If you're looking at an apartment in Marrickville with $650 weekly rent, the lender will only count $455 to $520 of that when they calculate what you can afford to borrow. Your personal income still needs to cover your living expenses, your current debts, and the gap between the loan repayment and the adjusted rental income. The borrowing capacity calculation for an investment property is tighter than it is for your own home, and that catches a lot of people off guard when they get a formal assessment.

Mistake 2: Assuming You Can Use the Same Deposit You Saved for an Owner-Occupier Purchase

You need a larger deposit for investment property finance than you do for an owner-occupier loan. Most lenders want at least 10 per cent genuine savings for an investment loan, and many will ask for 20 per cent if you want to avoid Lenders Mortgage Insurance. Genuine savings means money you've held in your account for at least three months. A lump sum that appeared last month from the sale of a car or a gift from family won't always count. On top of the deposit, you'll need to cover stamp duty, which in New South Wales is calculated without any first home buyer concessions because this is an investment, not your residence. For a unit in Dulwich Hill at the suburb's current median, stamp duty alone can add another significant cost before you even settle. Budget for the full amount before you start looking at properties, not after you've found one you want to buy.

Mistake 3: Picking the Wrong Loan Structure for Your Tax Position

Interest only repayments are common on investment loans because they keep your monthly repayment lower and maximise your tax deductions in the early years. The interest you pay on an investment loan is a claimable expense against your rental income, but the principal portion of a principal and interest repayment is not. If you're negatively geared, meaning your rental income is less than your holding costs, you can offset that loss against your salary under current tax rules for properties you buy now. That reduces your taxable income. Consider a buyer who picks up a two-bedroom apartment in Stanmore and rents it out for $700 a week. The loan repayment on interest only might be $750 a week at current variable rates, and once you add strata fees, council rates, and insurance, the property is costing more than it's bringing in. That loss can reduce the tax you pay on your day job. But if you're on a lower marginal tax rate or your property is positively geared from the start, principal and interest might make more sense because you're paying down the loan faster. The structure you pick should match your income, your tax position, and how long you plan to hold the property. If you're not sure, talk to an accountant before you lock in the loan structure, because changing it later usually means refinancing.

Mistake 4: Not Factoring in the Actual Holding Costs Beyond the Loan Repayment

The loan repayment is only part of what it costs to hold an investment property. Strata fees in the Inner West can range from $800 to $1,500 per quarter depending on the building and what's included. Council rates add another $400 to $500 per quarter. Landlord insurance costs around $500 to $800 a year depending on the cover. If you use a property manager, they'll typically charge 5 to 7 per cent of the weekly rent plus GST, and they'll also clip the ticket on finding a tenant and coordinating maintenance. Water usage is usually the tenant's responsibility, but the water service charge is yours. Add it all up and you're looking at an extra $8,000 to $12,000 a year on top of your loan repayment. Rental income covers some of that, but not all of it in most cases. If you're stretched just to cover the repayment, you won't have room for the rest, and that's when people get stuck.

Mistake 5: Choosing a Property Based on Where You'd Want to Live Instead of What Tenants Actually Want

Inner West buyers often gravitate toward character apartments or older buildings with high ceilings and period features because that's what they'd choose for themselves. Tenants prioritise different things. Proximity to a train station matters more than ornate cornices. A secure car space is worth more than a Juliet balcony. Internal laundry and a dishwasher will rent a property faster than exposed brick. Newtown and Marrickville attract young professionals and students who want to be close to King Street, Enmore Road, and the train line. Petersham and Stanmore pull families and couples who want a bit more space and quiet but still want to be within 20 minutes of the city. If you're buying in a block that's a 15-minute walk to the station and has no visitor parking, expect a higher vacancy rate and lower rent than a comparable apartment two streets from the platform with a secure garage. The rental market doesn't care about your taste. It cares about convenience, condition, and whether the place works for someone who didn't choose the location because they love the pub on the corner.

Mistake 6: Not Running the Numbers on What Happens If Rates Rise or the Property Sits Vacant

Lenders already stress test your loan at 3 percentage points above the actual rate, but you should run your own numbers too. If variable interest rates go up another 1 per cent, can you still cover the gap between rent and repayments without eating into your emergency fund every month? If the property sits vacant for six weeks between tenants, which is not unusual in a slower market, can you cover the full holding costs out of your salary for that period? A vacancy rate of one month per year is a reasonable assumption for planning purposes. That means you'll need to cover one month of loan repayments, strata, rates, and insurance without any rental income coming in. If that would require you to tap a credit card or skip other financial commitments, you're too exposed. Build a buffer before you settle, not after the tenant moves out and you're scrambling to find a replacement.

Mistake 7: Applying for the Loan Before You Understand What Features You'll Actually Use

Not all investment loan options are the same. An offset account on an interest only loan doesn't reduce your repayment because the repayment is interest only, but it does reduce the interest you're charged, which means you're paying down the balance faster without losing the tax deduction on the full loan amount. That's useful if you want flexibility to park cash somewhere and still have access to it. A redraw facility on a principal and interest investment loan lets you pull out extra repayments you've made, but using redraw can complicate your tax position because you're effectively re-borrowing money that's already been used to pay down non-deductible principal. Some lenders also limit how much you can redraw or charge a fee each time you access it. Fixed rate loans can make sense if you want certainty and you're confident rates will climb, but you'll pay a higher rate upfront and you'll lose flexibility if your circumstances change. Variable rate loans give you more room to make extra repayments, switch to principal and interest, or refinance without break costs. The features you pick should match how you plan to manage the loan, not just what sounds useful in theory.

Buying your first investment property in the Inner West is a solid move if you structure it properly and go in with realistic numbers. Get your deposit sorted, understand how the rental income will actually be assessed, and make sure the property will appeal to tenants, not just to you. If you're ready to look at investment loan products that fit your situation, call one of our team or book an appointment at a time that works for you.

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