Why Melbourne High-Yield Apartments Won't Create Unlimited Borrowing Capacity

A young investor once sat across from me with a spreadsheet full of Melbourne apartments priced around $400,000 and renting for $570 a week. That's a 7% gross yield, he said, and if each one adds cash flow, he could buy twenty and borrow forever. I'd managed hundreds of Melbourne apartments over two decades, and I had to tell him the spreadsheet was missing half the costs and all the lending rules.

The 7% gross yield shrinks fast

Gross yield is the annual rent divided by the purchase price. It ignores every cost. On a $420,000 apartment renting for $570 a week, gross yield is about 7.1%. Then strata fees, council rates, insurance, property management, vacancy and a maintenance allowance all come out. I've seen the total for a one-bedder run well over $11,000 a year. Net yield lands around 4-5%. That's the number you actually keep.

Strata fees alone on high-density Melbourne apartments can exceed $5,000 a year. Council rates add another $1,800. Insurance is often $800. If you use a property manager at 7% plus GST, that's another $2,300. Now allow two weeks' vacancy a year, which is optimistic for student-heavy buildings, and $1,000 for repairs. That's over $11,000 gone before you pay a cent of mortgage interest. Lifts, pools, gyms and concierge desks push strata higher still. A building with a lift often costs $1,500 more a year in strata than one without.

Lenders don't see the yield you see

Lenders don't just look at the rent. They stress-test the loan at several percentage points above today's rate and they shade the rental income, often using 80% of gross rent. If interest rates are 6%, the bank may assess you as if you're paying 9% and only receiving $23,712 a year rather than the $29,640 you actually collect. That pushes the property into negative serviceability fast.

Serviceability is the bank's measure of whether you can afford the loan after living expenses and other debts. A property that is mildly positive on your own spreadsheet often looks deeply negative to a lender, because they use a higher interest rate and a lower rent figure. In my experience, a 7% gross yield apartment rarely adds any borrowing capacity at all once those assumptions hit.

The property type limits the loan

Then there's the property type. Small studios, serviced apartments, student buildings and high-density towers are exactly the stock that attracts the 7% yields. They're also the stock that many lenders cap at 60-70% loan-to-value ratio (LVR), or decline altogether. LVR is the loan amount divided by the property value. A 60% LVR cap on a $420,000 apartment means you need a $168,000 deposit plus stamp duty. That's a lot of cash to tie up for a property that struggles to pay for itself.

I remember a client who bought three such apartments in one year. Each purchase drained his cash because the lenders capped LVR at 65% and wanted genuine savings for the deposit. After the third, his bank refused a fourth because his serviceability was negative across the portfolio. He sold one at a small loss to reduce debt. The yield didn't save him.

Each purchase makes the next one harder

Even if the property is mildly positive or neutral after tax, the bank's assessed position is almost always negative. Every negative-geared property reduces your household's assessed surplus. After two or three, your borrowing capacity is gone, not grown. You also need fresh cash for each deposit and stamp duty. Equity in an existing apartment helps only if the lender will lend against that apartment, and if it's one they treat as high-risk, they often won't.

The high yield is rarely free money. It's usually the market pricing in weak capital growth, high supply, difficult resale, or a building with issues. Lenders know this. Their restrictions are the tell. So no, buying low-priced high-yield Melbourne apartments does not create unlimited borrowing capacity. It creates a ceiling, often lower than you think.