If You’re Stressing About Yield, It’s Probably Too Late, The Rental Yield Myth in Borrowing Capacity

If a higher yield feels like the missing piece to unlock your next purchase, that pressure is often the signal you have left it too late. Not because yield is bad. Because the boost is usually small, and the trade-offs are expensive.

This episode lands a blunt line: cash flow is not king in the scaling phase. Capital growth is king.

What Happened

The team unpacked a common belief: higher rental yield increases borrowing capacity, therefore it should be prioritised.

They ran quick numbers on a $750,000 purchase to show how little yield movement actually changes borrowing power once lender rent shading and serviceability settings are applied.

They then explored the hidden cost of yield chasing: fewer markets, longer search time, missed growth, and a narrower strategy.

A second theme emerged, SMSF lending has shifted, with new 90% LVR options appearing without the old risk fee that previously made high leverage unattractive.

Key Findings

1. A yield lift rarely moves borrowing capacity the way people expect

A half percent yield increase looks meaningful on paper. In lending math, it often is not.

Example used in the episode:

• $750,000 property at 4% yield = $30,000 rent per year
• $750,000 property at 4.5% yield = $33,750 rent per year
• Difference = $3,750 per year, around $72 per week before tax
• Banks shade rent, commonly using about 80% to 90% of rent
• That shaded increase is then multiplied through debt-to-income or servicing rules
• The result discussed was roughly a $20,000 lift in borrowing capacity

That is helpful, but it is not a portfolio-changing lever.

2. The real cost is opportunity loss, not the rent gap

Once yield becomes a hard filter, the buy box shrinks.

In the episode, the team noted a practical effect:

• At one yield target, you may have about 10 viable markets
• Increase the yield requirement slightly and you can lose about half of them
• Fewer options means longer search time
• Longer search time can mean buying after the growth move has started

They gave the blunt comparison: losing $50 a week after tax is minor if waiting costs you tens of thousands in capital growth.

3. Yield compression is normal as assets get more expensive

As prices rise, rental growth often lags price growth. That compresses yields.

The team pointed to premium Sydney as the extreme example where yields can be very low. It is not a market flaw. It is a normal outcome of price growth outpacing rents.

4. Fixed costs do not scale neatly with property price

Investors often compare two cheaper, higher-yield properties to one more expensive, lower-yield asset.

The problem is the duplication of holding costs:

• Two sets of council and water charges
• Two insurance policies
• Two maintenance schedules
• Two vacancy risks
• Two sets of property management fees

So the headline yield difference can be weaker than it looks after real-world costs.

5. Negative cash flow is more normal now

The episode framed a mindset reset: many good growth markets today start negatively geared, even with a 20% deposit.

The key is viewing early cash flow pressure as temporary, with rents rising, rates changing, and debt reducing over time.

Action Steps

1. Stop using yield as your first filter
   Set a minimum that keeps cash flow survivable, then rank deals by fundamentals and growth drivers.
2. Run the borrowing power math properly
   Model rent shading at 80% to 90%. Then test the impact of a 0.5% yield uplift. If the borrowing lift is modest, do not let it dictate your market choice.
3. Time-box your search
   If chasing yield adds months, the cost can be bigger than the rent gain. Set a clear acquisition window and stick to it.
4. Treat capital growth as the early-stage engine
   In the scaling phase, growth expands equity, equity expands options. Cash flow matters, but it is usually not the main accelerator.
5. If SMSF property is in play, revisit lending options
   The episode flagged new 90% LVR SMSF loans with no risk fee. That can materially change leverage and diversification inside the fund. This is a lending and structuring conversation that needs specialist guidance, but it is worth reviewing if SMSF is already part of your plan.

Final CTA

If you want a strategy that prioritises the levers that actually move your portfolio, markets, asset selection, lending policy, and a clear path through the early negative cash flow years, book a discovery call with InvestorKit.