Commercial and residential property both offer compelling investment opportunities — but they work very differently. Here's how to think about which suits your situation.
- Commercial property typically yields 5-8% versus 2-4% for Sydney residential.
- Commercial tenants usually pay outgoings — residential landlords don't get that.
- Commercial lending needs bigger deposits (25-35%) and often shorter loan terms.
- SMSFs can lease commercial property to related parties — a unique advantage over residential.
When Australians think about investment property, they typically think residential. But commercial property — offices, warehouses, retail premises, industrial units — offers a different set of returns, risks, and financing requirements that suit certain investors very well.
Yield: Commercial Wins on Income
Residential yields in Sydney: typically 2-4% gross. Commercial yields: typically 5-8% gross, sometimes higher for industrial. However, commercial tenants typically pay all outgoings — council rates, water, insurance, land tax, maintenance. Net yields are therefore much closer than the gross comparison suggests.
Capital Growth: Residential's Traditional Edge
Residential property in major capital cities has delivered strong long-term capital growth. Commercial property capital growth is more variable — driven by economic conditions, tenant quality, and lease length rather than population dynamics.
Lease Structures: Commercial Advantages
Commercial leases are typically longer (3-10 years vs 12 months residential), with annual rent reviews tied to CPI or fixed percentage, outgoings paid by tenant, and make-good provisions requiring tenants to restore the property at end of lease.
Finance: Different Rules Apply
Commercial property finance has stricter lending criteria: larger deposits required (25-35%), shorter loan terms (15-20 years vs 30), higher interest rates (1-2% above residential), and fewer mainstream lenders in the market. See our commercial property loans service page for full details.
SMSF and Commercial Property: A Unique Advantage
Your SMSF can purchase your business premises and lease it back to your business at market rent — keeping rental income inside the superannuation environment (taxed at 15% in accumulation, potentially 0% in pension phase). This is one of the most powerful legal tax structures available to small business owners. See ASIC's SMSF property guidance.
Which Investment Is Right for You?
Commercial may suit you if: you're seeking higher cash-flow yield, you're a business owner wanting to buy your premises in SMSF, you have a larger deposit, or you want longer lease terms.
Residential may suit you if: you're a first-time investor, have a smaller deposit, want capital growth as the primary return, or prefer a larger tenant pool.
Ready to discuss investment property finance? Contact Sam for a free consultation.
Frequently Asked Questions
Can I buy commercial property with less than 25% deposit?
Some lenders will go to 70% LVR on commercial property, but 65% (35% deposit) is more common. Property type, tenant quality, and lease length all influence the maximum LVR available.
Is it harder to get a commercial property loan than a residential one?
Generally yes. Commercial loans are assessed on both the property's income and the borrower's financial position, with lower LVRs available. A specialist broker is important for navigating commercial lending criteria.
