Softer prices do not guarantee investment cash flow

In her 28 July speech, RBA Governor Michele Bullock said the housing market had eased by more than the RBA anticipated in May, while the full effects of this year’s cash-rate increases were still to be felt. That is useful market context, but it is not a forecast for every suburb or evidence that a particular investment property is financially safe.

A lower purchase price may improve the entry maths. The practical decision is whether rent, after vacancy and ownership costs, can support the finance—or whether your household income can comfortably fund the gap through rate rises, repairs and periods without a tenant.

Start with the cash-flow question

Moneysmart warns that rental income may not cover mortgage repayments and other expenses, and that an owner may need to meet the costs when the property is empty. Compare expected income with every outgoing before treating an advertised yield as a return.

Worked annual cash-flow example

Assume an $800,000 purchase and rent of $650 a week. The full 52-week rent is $33,800. Allow two vacant weeks and the collected rent becomes about $32,500 a year.

Subtract $8,000 for council and water rates, insurance, management and repairs. That leaves about $24,500 before finance costs.

A $600,000 interest-only loan at 6.50% costs about $39,000 a year in interest, leaving an estimated $14,500 annual shortfall before tax. A further 0.25 percentage-point rise adds another $1,500 a year.

This illustration excludes stamp duty, conveyancing, land tax, body corporate fees, major repairs, tax outcomes, buying and selling costs and any capital growth. It is not a lender quote or a recommendation to use interest-only finance.

Gross yield is not net cash flow

• Gross rental yield — annual rent divided by the purchase price before costs. In this example, $33,800 ÷ $800,000 is about 4.23%.

• Vacancy allowance — a deliberate reduction in expected rent for weeks without a tenant. Two weeks reduces the example rent to $32,500.

• Net cash flow — rent remaining after vacancy, holding costs and finance costs. It can be negative even when the gross yield looks reasonable.

Stress-test four moving parts

• Rent evidence — use recent comparable leases, not only the selling agent’s estimate.

• Vacancy and repairs — allow for time without rent and both routine and larger maintenance.

• Finance costs — test a higher rate and the repayment after any interest-only period ends.

• Household buffer — check whether the gap can be funded without using emergency savings.

Interest-only is a timing choice

Moneysmart explains that an interest-only loan does not reduce the principal during the interest-only period. When it changes to principal-and-interest repayments, the repayment normally rises because the original amount must be repaid over the remaining term. Test that future repayment before buying.

Before making an offer

Ask for evidence supporting the rent estimate and obtain realistic annual cost estimates.

Run the cash flow with vacancy, a repair allowance, a higher interest rate and the post-interest-only repayment.

Keep an emergency reserve separate from the money allocated to cover an expected investment shortfall.

Bottom line

A softer price can improve the purchase equation, but it does not remove cash-flow risk. Test what is left after rent, vacancy, costs and finance—and decide whether the shortfall remains comfortable without relying on future price growth.

Sources

Reserve Bank of Australia — Monetary Policy in an Era of Shocks, 28 July 2026

Moneysmart — Buying an investment property

Moneysmart — Interest-only home loans

General information only. This is not financial advice. Loan options and eligibility depend on your personal income, liabilities, assets and lender assessment criteria.