Is Negative Gearing Still Worth It? The Real Maths of Investment Properties

"Property always goes up." "The tax benefits are amazing." "It's the Australian dream."

You've heard it all. But when you actually run the numbers on an investment property, the reality is more complicated than the spruikers suggest.

Let's do the maths.

What Is Negative Gearing?

Negative gearing means your rental property costs more to own than it earns in rent. The loss is then deducted from your taxable income.

Simple example:

Rental income: $500/week ($26,000/year)
Mortgage interest: $28,000/year
Other costs: $8,000/year
Loss: $10,000/year

If you earn $120,000, that $10,000 loss drops your taxable income to $110,000. At the 37% marginal rate, you save $3,700 in tax.

But you're still $6,300 out of pocket. Negative gearing doesn't make money—it reduces how much you lose.

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The Full Cost Breakdown

Most people underestimate what an investment property actually costs.

Purchase costs (one-time):

Stamp duty: 4-5.5% of purchase price
Legal fees: $1,500-3,000
Building/pest inspection: $500-800
Loan establishment: $500-1,000
Landlord insurance setup: $300

On a $600,000 property: ~$30,000-35,000 upfront costs

Ongoing costs (annual):

Council rates: $1,500-3,000
Water rates: $800-1,200
Strata fees (if applicable): $3,000-6,000
Landlord insurance: $1,200-2,000
Property management: 7-10% of rent
Maintenance allowance: 1% of property value
Vacancy allowance: 2-4 weeks/year

On a $600,000 property: ~$15,000-25,000/year before the mortgage

A Real-World Example

The property:

Purchase price: $650,000
20% deposit: $130,000
Loan amount: $520,000
Interest rate: 6.5%
Weekly rent: $550

Annual income:

Rent (50 weeks, allowing for vacancy): $27,500

Annual expenses:

Mortgage interest: $33,800
Council rates: $2,200
Water rates: $1,000
Landlord insurance: $1,500
Property management (8%): $2,200
Maintenance: $3,000
Depreciation (non-cash): $8,000
Total deductible expenses: $51,700

Annual loss: $24,200

Tax benefit at 37% marginal rate: $8,954

Actual cash out of pocket:

Loss: $24,200
Minus depreciation (non-cash): $8,000
Add principal repayment: ~$8,000
Net cash outflow: ~$24,200/year

After tax benefit: ~$15,246/year out of pocket

That's $1,270/month you're paying to own this property.

When Does It Become Worth It?

Scenario 1: Property grows 5%/year

Year 1 value: $650,000
Year 5 value: $829,000
Capital gain: $179,000
CGT (50% discount, 37% rate): ~$33,000
Net gain after tax: $146,000

Your costs over 5 years:

Cash outflow: $76,230 (assuming stable)
Purchase costs: $32,000
Selling costs (2.5%): $20,725
Total costs: $128,955

Net profit after 5 years: $17,045

That $130,000 deposit earned you $17,045 over 5 years. Annual return: ~2.5%

A high-interest savings account might have done better.

Scenario 2: Property grows 7%/year

Year 5 value: $912,000
Capital gain: $262,000
Net gain after CGT: $213,000
Total costs: $128,955
Net profit: $84,045

Annual return on deposit: ~11%

Now we're talking. But 7% growth isn't guaranteed.

The Numbers Nobody Mentions

Interest rate risk:

Every 1% rate increase = ~$5,200/year extra cost
Your "manageable" loss can become crushing

Vacancy reality:

Budget says 2 weeks. Reality often 4-6 weeks
One bad tenant can cost $10,000+ in damage/lost rent

Maintenance surprises:

Hot water system: $2,000
Air conditioning: $3,000-5,000
Roof repairs: $5,000-15,000
These don't care about your budget

Opportunity cost:

That $130,000 deposit in an index fund averaging 8%/year
After 5 years: ~$191,000
No tenants, no repairs, no stress

The Break-Even Calculation

When does the property become positively geared (paying for itself)?

Current situation:

Rent: $550/week
Expenses: $1,000/week (all-in)

For positive cash flow, rent needs to cover expenses:

Required rent: ~$1,000/week
Current rent: $550/week
Gap: $450/week

To close the gap:

Rent increases of 5%/year take 13 years to reach $1,000
Or property value increases until you refinance
Or interest rates drop significantly

Most properties take 10-15 years to become cash flow positive.

The Deposit Dilemma

Here's the uncomfortable truth about "building wealth through property":

To buy a $650,000 investment property, you need:

20% deposit: $130,000
Stamp duty: $25,000
Other costs: $5,000
Cash required: $160,000

If you don't have that cash:

LMI for <20% deposit: $15,000-25,000 (non-deductible)
Higher interest rates
Even worse cash flow

The barrier to entry is enormous.

Who Should Consider Investment Property?

It might make sense if:

You're in the top tax bracket (45%+)
You have $200,000+ sitting in savings
You can absorb $20,000/year losses for 10+ years
You believe in 7%+ long-term capital growth
You want diversification from shares
You're comfortable with illiquid assets

It probably doesn't make sense if:

You haven't maxed super contributions
You'd be stressed by the monthly outflow
You need the deposit for your own home
You can't handle vacancy or repair surprises
You're chasing "passive income" (it's not)

The Super Alternative

Before buying an investment property, consider:

$160,000 into super instead:

Tax deduction on contribution (up to cap)
15% tax on earnings (vs 37% outside)
Compound growth in low-fee index funds
No tenants, no repairs, no stress

At 8% average return, $160,000 in super becomes ~$460,000 in 15 years (in today's dollars, after tax).

Can your investment property beat that with certainty?

The Honest Conclusion

Investment property can build wealth. But:

It requires significant capital
It's not passive income
The tax benefits don't make a bad deal good
Capital growth is the only way it works
Opportunity cost matters

Run the numbers. All of them. With realistic assumptions.

If it still makes sense, go for it. If it doesn't, there's no shame in index funds.

Use the rental property calculator above to run your own numbers. Be conservative on growth, generous on costs. If it still works, you might have found a good investment.