The Sydney suburbs where property investors can claim the most on tax

Property investors would be thousands of dollars in the red each month in many sought-after Sydney suburbs as mortgage repayment costs outstrip rental income.

Landlords looking for a unit where the rent covered their mortgage would find slim pickings, as only one Sydney suburb would offer positive cash flow on a median apartment.

Experts say investors need deep pockets to stay in the market and many are offsetting losses by claiming tax deductions for negatively geared properties, but capital growth remains the primary consideration when buying an investment.

New investors in Darling Point units would face the largest shortfall, as monthly mortgage repayments on a median-priced unit would outstrip rents by $6893, new analysis of CoreLogic data shows. The median unit value is almost $2,437,000.

A string of other pricey neighbourhoods topped the list for negative cash flow, including Milsons Point, where investors would be short $6192, Millers Points (-$6109), Cremorne Point (-$5854) and Kirribilli (-$5271).

Mascot was the only suburb where rents outstripped mortgage repayments, by $25 per month, but investors could still end up in the red when accounting for other costs like council rates.

New investors who purchased in a string of inner suburbs would be left more than $5000 short every month, as mortgage repayments outstrip rental income. Credit: iStock

A property is negatively geared when the cost of mortgage interest and expenses linked to owning a rental is more than the income it generates each year. Landlords can claim this cost as a tax deduction against their wage income to pay less tax.

CoreLogic’s head of residential research Eliza Owen said it was becoming more difficult to purchase a positively geared investment property in Sydney.

“Sydney is very much a negative-gearing investment strategy market, or you’re taking a non-traditional model of cash flow like Airbnb, or you’re purchasing something that isn’t at the median-value level,” Owen said. “If you are getting positive cash flow in Sydney, it’s not off the median values or the traditional 20 per cent deposit home loan.”

The analysis is based on median home values and rents in February and assumes investors purchased with a 20 per cent deposit and a variable mortgage rate of 6.52 per cent.

Investors who purchased with a larger deposit or were further along with repayments would face less of a shortfall.

Owen said the rising interest rate environment had only exacerbated the level of negative gearing.

“Cash flow returns have been eaten into by increased interest rates over the past two years,” she said. “Despite rampant rental increases in Sydney, it is still not enough to put rental properties in a positive cash flow position.”

AMP chief economist Dr Shane Oliver said it was harder for investors to negatively gear two years ago, given record low interest rates, but the market had changed markedly since.

“The equation has changed dramatically since interest rates have risen and it’s really gone back to what it was in the past,” Oliver said.

Investors are hanging out for interest rates to fall, possibly later this year, for some relief from the rent-mortgage gap.

“If the RBA drags the chain and doesn’t do it until 2025, we could see more distressed sales from investors,” he said.

Oliver said property investing could become riskier in the future, given the federal government’s plan to build more homes and possibly cut immigration levels, which could push house prices lower.

Those relying on high capital gains when selling their investment property may not get them.

“The rise in enthusiasm for property investment comes from lower interest rates and higher prices – now people may look to keep their money in the bank instead.”

Negative gearing tax concessions were tipped to cost the public purse $6 billion by last financial year if the average variable rate hit 6 per cent, which it has now passed.

Equilibria Finance’s managing director and mortgage broker Anthony Landahl said while capital growth was critical to investment strategies, negative gearing was a common discussion among clients as the cost of funding and holding rental properties surged.

“For most of our clients, negative gearing is absolutely a consideration. Cash flow has been a much bigger concern in the last 12 to 18 months because of the rising rate environment,” Landahl said.

“The cost of holding and funding a property is outrunning the rent,” he said.

Loan Market Ryde’s James Keillor said it was increasingly difficult to have a positively geared investment property at the current median price.

“It would be almost impossible to see a property positively geared with today’s interest rates,” Keillor said.

He stressed that negative gearing should always be a secondary consideration when choosing to buy an investment property.

“It should be a good property to purchase regardless of tax benefits, and the tax benefits make it an additional incentive.”