Climbing the Property Ladder – What it Takes in Real Dollars.

Climbing the Property Ladder – What it Takes in Real Dollars

Quick Look

Focus: How a negatively geared investment can help build long-term property wealth

Key Takeaways:

Starting with a high-debt property requires cash sacrifice in the early years
Tax benefits soften the blow, but growth and time are the real rewards
Leveraging equity into additional property can build more wealth over the longer term
Reading Time: ≈ 8 minutes

Introduction

Buying your first investment property can feel like a stretch — especially when it costs $750,000 and you’re needing $150,000 cash to meet the typical 20% deposit required by lenders. But with careful planning, many Australians use this as a stepping stone to build long-term wealth.

In this article, we walk through a realistic path up the property ladder, using real numbers over 20 years. We show how “gearing” plays a continuing role and is aided by significant tax benefits. Gearing is the term used to describe using a smaller sum to borrow a much larger sum to own a much larger asset. This has a multiplier effect such that the growth on a larger asset is more than that on a smaller asset. Hence the term “geared up”.

Furthermore, the repayments on the geared-up borrowings and the property ownership costs such as rates, insurance and repairs, usually add up to cost more than rental income that results in a negative return. Hence the term negative gearing.

Context & Problem

Many investors underestimate how much negative gearing actually costs in real money. The tax offset helps, but the cash shortfall can be significant. Understanding this is crucial before making your first move.

For our first example, we start with a $750,000 investment, 20% cash deposit with an 80% loan, and 30-year P&I at 6.5% interest. In NSW, Govt purchase duty is close to $28,000. Outgoings and rent are typical, and depreciation is factored in.

Depreciation is an accounting concept that allows a tax deduction to be claimed against taxable income for the “fictional” cost of replacement of the bricks and mortar building costs and the fixtures and fittings. It usually only applies to new properties or ones less than approximately 10 – 20 years old. Although this is a tax deduction it doesn’t cost anything because it is part of the purchase price of the property.

From there, we look at what happens when the property grows at 6% p.a. and is used to fund a second investment.

Strategy & How To

Year 1 Negative Gearing Breakdown

Property Value: $750,000
Loan: $600,000 P&I at 6.5% (30 years)
Rental Income: $30,000

| Net Cash Loss (after tax) | -$12,228 |

This is roughly $235/week out of pocket in the early years. The interest portion of the P&I repayment is roughly 90% in Year 1.

Building Equity Over Time

Assume 6% p.a. capital growth. After 9 years:

Property 1 value: $750,000 → $1,250,000

Remaining loan: ≈ $548,000 (P&I)

Equity available: $1,250,000 – $548,000 = $702,000

Purchasing Property 2

Purchase price: $1,250,000

Purchase costs: $62,000 (approx. 5%)

Total loan: $1,312,000 (105%) interest-only @ 6.8%

Rent increased 3% p.a. $30,000 → $39,000

Costs increased 3% p.a. $ 9,300 → $12,100

Interest-only repayment: $1,312,000 × 6.8% = $89,216/year

Second Property Year 10 Cash Flow

Rental Income: $39,000

Loan Interest: $89,216

Costs: $12,100

Cash Loss (before tax): -$62,316

Add depreciation estimate (inflation adjusted): $16,000

Taxable Loss: ≈ -$78,316

Tax Refund @ 32%: ≈ $25,061

Net Cash Loss: ≈ -$37,255/year (~$716/week)

Case Study

Year 20 Snapshot Property 1: Value @assumed 6% p.a. growth: $750,000 → $2,400,000 Remaining loan: ≈ $240,000 Property 2: Value @ assumed 6% p.a. (from $1.25m): ≈ $2,400,000 Interest-only loan: $1,312,000 Total Property Value: ≈ $4.8 million Total Loans: $240,000 + $1,312,000 = $1.55 million Equity: ≈ $3.25 million Target of $3 million equity is achieved slightly ahead of schedule due to compounding growth. Warning: these outcomes are based on the assumptions shown a which may not eventuate. This exercise may even result in an overall loss as the future cannot be predicted.

Common Questions & Misconceptions

Isn’t this too risky with high debt?

Yes, it can be — especially if interest rates rise or if you can’t cover negative cash flow. That’s why understanding the real cash cost upfront is crucial.

What if property growth is lower than 6%?

Then it will take longer to reach your equity goals. Growth is never guaranteed.

Can I afford a second property if I’m still negatively geared?

It depends on your income, borrowing capacity, and how much equity you’ve built. Banks will factor in rental income, but not the full tax benefit.

Do I need to go interest-only for the second loan?

Many investors do this to reduce cash flow pressure, especially when the first property is still being paid down.

Conclusion

Buying one investment property doesn’t make you wealthy — but managing it well and using its growth to buy another can. The journey requires patience, cash discipline, and realistic expectations about returns and risks.

After 20 years, it’s possible to hold $4.8 million in property with over $3 million in equity. But the early years will test your budget and resolve. The key is planning with real numbers, not wishful thinking.

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Disclosure: General information only. Consider your objectives, financial situation and needs, and seek professional advice before acting.

How We Keep It Trustworthy

Every article includes a Review & Fact Check section below — so you know exactly where our facts come from, what’s uncertain, and whether there’s any bias.

Review & Fact Check

1. Fact References

Loan repayments and amortisation estimates verified via Moneysmart calculators and typical bank terms
Rental income increases based on 3% CPI assumption (MoneySmart average)
Property growth of 6% is hypothetical but aligns with historical long-run averages (CoreLogic data)
Tax assumptions based on ATO marginal rate of 32% (2024–25)

2. Unverified or Inconclusive Items

Future growth and rent escalation rates not guaranteed
Depreciation estimates are for illustration — actual values depend on the property and tax schedule

3. Time Sensitivity

Loan rates and tax rules current as at June 2025
Assumptions may not reflect future interest rate or lending policy changes

4. Bias Assessment

Article is neutral, educational and non-promotional
Encourages readers to seek advice before acting