Rental income and cash flow
Rental income is the money generated by the tenants living in the property, while cash flow is the money left over after you subtract all ownership and running costs.
Early on in the journey, investors tend to focus on capital growth to multiply their asset base, but as their portfolios grow, so do expenses. The cost of living, tenancy reforms and land tax can put pressure on finances, especially for low-yield properties. Cash flow is important as a financial buffer to avoid selling early under stress.
An investment property can generate a healthy amount of money but still have negative cash flow due to mortgage repayments, insurance, maintenance and other expenses. This shortfall is claimed as a loss at tax time and has made property investing attractive to many Australians. It has allowed them to reduce out-of-pocket expenses in the short term while generating wealth through capital gains in the long term.
Major reforms announced in the 2026-2027 Federal Budget, however, limit negative gearing on residential properties to new builds from July 1, 2027. Under the proposed framework, investors who purchase established residential investment properties after Budget night will generally no longer be able to offset rental losses against salary and wage income in the same way.
Instead, those losses are expected to be able to offset income from residential property or be carried forward and used in future years. This means the loss may still have value, but the immediate annual tax benefit could be reduced for affected investors.
Grandfathering arrangements mean existing property investments purchased before 12 May 2026 are expected to remain subject to the current rules, which may make it attractive for some investors to hold onto stock to take advantage of the old tax system. Find out more about the impact of the Federal Budget on the property market here.
Vacancy rates and ongoing costs
Extended periods without a tenant can put pressure on an investment, as rental income stops while ongoing costs continue. Regular expenses such as mortgage repayments, council rates, insurance and maintenance still need to be covered, which can affect cash flow.
It may be tempting to sell a vacant investment property, but it is also an opportunity to reassess your strategy and identify areas for improvement to turn around its performance. Some simple changes could make a world of difference and attract a high-quality, longer-term tenant.
There are simple, cost-effective ways to make your rental stand out from the crowd if demand is declining. This includes refreshing interior paint and adding a split-system air-conditioning unit or built-in wardrobes. These are likely to be appreciated by a renter who may even be happy to pay more for such features. Importantly, make repairing anything broken always a priority, such as leaky taps, damaged fly screens and broken garage remotes.
A poorly maintained property or cheap fixes will frustrate a tenant who is unlikely to extend their lease. Your LJ Hooker property manager can keep your property in tip-top shape by scheduling routine inspections and putting a preventative maintenance plan into action. This can prevent small problems from escalating into expensive ones.
Rental yield vs capital growth: which matters more?
Rental yields can fluctuate due to supply and demand and are not guaranteed by past performance. Typically, property prices in metropolitan areas are higher and yields are lower, with potential for longer-term growth. Investment properties in regional areas tend to be more affordable and may offer higher rental yields and better cash flow, but growth may be limited.
Most investors want to maximise capital growth by choosing an area with potential for future demand. Ideally, they will hope to buy at the bottom of the demand cycle and hold onto their asset long enough for it to appreciate. Most property markets experience ‘cycles’ in which demand and supply ebb and flow, leading to average capital growth that increases, decreases or remains flat.
So, which one is more important?
The benefits of high-yield properties include helping cover mortgage repayments and reducing financial stress. Investors looking to build wealth will benefit from capital growth, as even a moderate price increase can significantly outpace rental income over the long term. Ideally, the best investments will offer moderate yields and solid growth prospects, so look for buying opportunities in areas with ongoing infrastructure expansions, new retail precincts or major community developments.
Is your equity position strong enough to create options?
In time, many investors find they have created potential to expand their portfolio. As their original property increases in value and their loan balances decrease, their equity position strengthens, providing more choices about what to do next.
Generally, there needs to be enough ‘usable equity’ to cover a 20 per cent deposit plus upfront fees such as stamp duty and legal fees. There are several online tools that can assist in calculating usable equity. You will need a bank valuation to determine its current value.
Once you know the property’s market value, multiply it by 0.80 per cent and then subtract your remaining outstanding loan amount.
Aside from positive equity, there are some other tell-tale signs you are ready to buy another investment property.
- Your income has increased – a pay rise or improved returns from your first investment can strengthen your position.
- Your first property is performing – the investment is providing a steady income, and you feel comfortable with expanding your portfolio.
- Favourable market conditions – you are looking for areas with low vacancy rates, strong rental yields and positive growth forecasts.
Most investors in Australia – around 70 per cent - own just one property as at 2022/23, according to the Reserve Bank of Australia. The remaining 30 per cent own multiple-asset portfolios, while the share of investors owning more than one property has increased by 7 percentage points over the past two decades.
How compliance and holding costs can affect long-term returns
As a landlord, providing a well-maintained home is not only necessary to attract quality tenants but is also a legal requirement. The property must meet key safety and health standards, with regulations varying across the country. Most require the installation and testing of smoke alarms, electrical safety switches, compliance with housing standards, water efficiency and pool fencing. Strict insulation and heating standards have now also been introduced in some parts of Australia.
Ongoing maintenance and compliance requirements can put pressure on the cash flow of a poorly performing investment property, particularly one without a capital buffer. Investors often overlook the ongoing expenses of owning a property, such as strata fees, repairs, insurance and land tax.
The good news is that an experienced property manager can handle compliance matters, such as property safety, to ensure you fulfil your legal obligations as a landlord. If your compliance and holding costs are affecting your long-term results, it may be time to change management. LJ Hooker property managers will look after everything involved in maintaining and renting out your investment property, from daily tasks to finding the right tenants.
However, if your investment property is becoming too expensive to upkeep or is not delivering significant returns, selling is an option and will allow you to divert funds more productively.
Should market conditions influence your decision?
Property markets move in cycles, and while current conditions may present some challenges, it remains underpinned by Australia’s significant housing supply constraints.
Mathew Tiller, Head of Research for LJ Hooker, said higher interest rates, stretched affordability and proposed tax reforms are influencing buyer and investor behaviour. While some markets remain resilient, others could experience greater price corrections as conditions change.
While short-term movements can feel dramatic, the long-term data provides a much clearer perspective. The cycle of rise, pause, soften and recover is not a flaw in the property market; it is simply how it works.
“The current market deserves attention, but it does not deserve panic,” Mr Tiller said.
“Some parts of Australia are cooling after a strong run. Others are still being supported by population growth, tight housing supply, limited stock and relative affordability. It does not mean the market is failing but rather adjusting, which is exactly what property markets have always done.”
“Conditions in Sydney are different to Perth. Melbourne is different to Brisbane. Even neighbouring suburbs can perform very differently depending on affordability, housing supply, employment, buyer demand and the type of stock available. It is important to understand what is driving your local market, to keep a long-term perspective, and to make decisions that suit your own circumstances.”
Signs holding your property may continue to make sense
If your investment property is performing, then holding onto it may make sense, especially if you are happy with a longer-term view. A good property is hard to replace, and selling now could mean paying more to re-enter the market in the future, once stamp duty and other transaction fees are taken into account.
Another advantage of keeping your investment comes from the potential to grow and diversify your portfolio. RBA data shows that around 80 per cent of Australians with multiple properties own them in the same state or territory, with 30 per cent in the same housing market. However, the report found that more investors are becoming geographically diversified, making them less vulnerable to economic downturns, natural disasters and state-specific regulatory changes.
If your investments are negatively geared, it is important to crunch the numbers to make sure you won’t spread your finances too thin. Additional repayments and expenses are associated with every investment property and can impact cash flow. Speak with a professional, such as your accountant or financial advisor, who can assess the costs, taxation responsibilities and determine whether this decision aligns with your future goals.
Signs selling might be worth exploring
If your investment property is no longer supporting your financial goals, then you may be ready to close the chapter and list it for sale. This may be due to weaker rental returns, rising costs, demanding maintenance or a slowdown in capital growth.
The upside is that selling will allow you to reduce debt, unlock capital for other projects or direct funds towards another investment strategy. The best time to take action is not necessarily when property prices are at their highest, but when selling makes sense for your own circumstances.
Other common reasons for investors to sell:
- Market conditions – if it looks like your property price has peaked and it is time to cash out.
- Cash flow – rising costs and higher repayments are putting a strain on your finances, or you are incurring too many losses.
- Life events – Personal reasons such as finances, divorce, retirement, starting a family or relocating overseas.
You may also be influenced by upcoming changes to Capital Gains Tax introduced as part of the 2026/20027 Federal Budget.
CGT is added to your income tax when you profit from selling an asset, such as an investment property or shares. Currently, if an investment property is held for 12-months, the owner generally receives a 50 per cent discount on capital gains tax when they sell. Under the new reforms, from 1 July 2027, the 50 per cent CGT discount will be replaced with an inflation indexation system and a new minimum 30 per cent tax on real net capital gains. To assist in understanding these changes, we’ve prepared a fact sheet.
Avoid a knee-jerk reaction by gathering local market data to gain a complete picture of current conditions. Also, speak with a professional, such as an accountant or a financial advisor, who can provide options for you.
Importantly, if you do decide to sell, make sure you have a realistic understanding of the property’s current market value, the likely selling costs and what you hope to achieve from the sale. This will ensure your expectations align with the current market, allowing you to make an informed decision about moving forward.
A sell vs hold decision framework
On average, Australians hold onto an investment property for eight to 10 years. It can take time and even an entire property cycle to maximise returns. Planning to sell or hold onto your investment property isn’t always straightforward. It is best to look at the whole picture, rather than just focus on one aspect. Look at the property’s overall performance, future potential and how it fits with your long-term goals.
Arm yourself with all the information needed to decide one way or the other, including a rental appraisal, tax position, upcoming costs and market value. Then ask yourself, is this still the right investment for me? The answer may be obvious, especially if it is draining your finances, time and energy.
If your property is performing but you’ve lost your zest for investing, it may require further thought or professional advice. Even giving yourself another 6-12 months can make the decision clearer.
Reasons to sell:
- There has been sufficient capital growth
- Potential to capitalise on demand in your area
- You are facing an ongoing negative cash flow
- Maintenance has become too expensive
- You want to change your investment strategy
Reasons to hold:
- You want to wait for future capital growth
- The investment is still relatively new
- You can comfortably cover expenses
- You are able to utilise tax advantages
- Rising equity could allow for portfolio expansion
It is always best to run your plans by your accountant or financial planner so you can move forward without regrets. You will find more tips on managing and growing your investment property here.
LJ Hooker property managers work hard to ensure that your portfolio remains in tip-top shape, generates a regular stream of income and the best possible returns. They have access to a host of reliable tradespeople. This prevents small problems from turning into major, more costly ones. Even better, they have systems set up to handle problems 24 hours a day.
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