Commercial Property Investment in Australia: Is It Time to Look Beyond Residential in 2025?

With residential yields under pressure and interest rates higher, more Australians and SMSFs are turning to commercial property for stronger, more predictable income. Compare residential vs commercial returns, understand key risks, and learn how to choose the right commercial asset and finance strategy for your situation.

Key Takeaways

• Worsening housing affordability and modest net rental yields are pushing many investors and SMSFs to compare commercial property against traditional residential investments.
• Commercial assets often offer higher net yields (commonly 5–7%+ net) than metro residential property (around 3–4.5% gross), especially when leases are long and tenants pay outgoings.
• Commercial investing usually requires more equity and stronger financials, with lower maximum LVRs (around 65–75%) and higher interest rates than standard home loans.
• A clear strategy and ‘buy box’—covering budget, location, target yield and lease quality, helps you stay disciplined and compare commercial opportunities on data, not emotion.

Why More Australians Are Considering Commercial Property Investment

Residential property has long been the default choice for Australian investors and SMSFs. But as housing affordability worsens and rental returns come under pressure, many are rethinking their strategy and exploring commercial property for stronger, more predictable income.

Key pressures in the residential market:

• High purchase prices: Entry costs for quality metro residential properties have surged, limiting options for everyday investors and SMSFs.
• Lower net yields: After factoring in costs like strata, maintenance, property management and land tax, many residential investments end up delivering relatively modest net income.

Example scenario:
An SMSF with $700,000 to invest is weighing up a small residential unit versus a small warehouse. The unit offers strong demand but produces a low net yield after outgoings. The commercial, on a long lease to a stable tenant, shows a higher net income and clearer cash flow projections. This is a typical scenario driving more trustees to at least compare commercial options alongside residential. If you are in this position, our detailed guide on how commercial property finance works in Australia can help you understand structures, risks and lending options.

In today’s higher interest rate environment, gross yields on many metro residential properties still sit around 3–4.5%, while a broad range of commercial assets can offer 5–7%+ net (depending on location, tenant quality and lease terms). This income gap is a major reason more investors and business owners are asking about commercial property finance.

*Ranges are indicative only and vary by market, tenant quality and property specifics.

For business owners, buying their own premises can be even more compelling. Instead of paying rent to a landlord, they effectively “pay rent to themselves” via their loan repayments. Over time, this can:

• Turn a running business expense into a wealth‑building asset
• Provide greater control over their location and fit‑out
• Potentially offer tax and SMSF structuring opportunities (with appropriate advice)

If you’re weighing up residential vs commercial, or considering buying your own business premises, a tailored lending strategy can help you compare the risks, repayments and long‑term wealth impact side by side.

Key Differences Between Commercial and Residential Investing in Australia

1. Lease Terms: Commercial vs Residential Property Investment
When comparing commercial and residential investing in Australia, lease structures are one of the biggest differences.

For commercial property, longer leases (often 3–5 years or more) can provide more predictable income, especially when paired with fixed annual increases or CPI‑linked rent reviews. In contrast, residential leases are shorter, giving you flexibility but also more frequent tenant turnover and less certainty around future rent.

This difference flows through to how lenders and valuers assess risk, and how confidently you can plan your cash flow over the medium term.

2. Cash Flow, Vacancy Risk and Economic Sensitivity
Commercial property can deliver strong net returns, but the risks are very different to residential.

Key contrasts:

• Vacancy risk: Commercial properties can sit empty for longer between tenants.
• Outgoings: Commercial tenants often pay most outgoings (rates, insurance, maintenance), boosting net cash flow when tenanted.
• Economic cycles: Commercial rents and occupancy levels tend to be more sensitive to business conditions.

Example: An office suite might be leased for 5 years with the tenant paying outgoings, generating excellent net income. But if that tenant leaves in a softer market, the property could be vacant for 6–12 months, compared to a typical 2–6 weeks for a well‑located residential unit.

3. Lending Criteria and Equity Requirements
For commercial property, banks usually:

• Cap LVRs around 65–75% unless combined with a business loan in which case it can be higher(vs up to 80–95% for residential). 
• Charge higher interest rates than standard home loans.
• Require stronger income servicing and often more detailed financials.

That means you’ll generally need more equity and a stronger borrowing position to step into commercial investing. To understand how LVR can affect both your borrowing power and the price you pay for money, it helps to review our breakdown of loan‑to‑value ratio (LVR) and its impact on interest rates before committing to a strategy.

If you’re weighing up commercial vs residential, a mortgage broker who understands both can help you model cash flow, risk and borrowing capacity before you commit.

Choosing the Right Type of Commercial Property as a Beginner Investor

Starting out in commercial property investment: what are your options?

As a first‑time commercial investor in Australia, you’ll typically be choosing between retail, industrial/warehousing, office, and specialised assets (such as childcare or medical centres). Each asset type comes with its own risk profile, capital expenditure (capex) requirements and leasing dynamics.

To get your bearings, it helps to compare the core features side‑by‑side:

This comparison can help you quickly see which type might fit your budget, time commitment, and risk appetite.

Why many experts favour industrial and essential‑services assets

In the current Australian market, many commercial property specialists consider well‑located industrial and essential‑services assets (e.g. medical suites, pharmacies, neighbourhood shopping strips with supermarkets) more defensive than secondary retail or CBD office towers. These assets are often supported by:

• Demand linked to everyday needs (storage, logistics, healthcare, groceries)
• Longer lease terms with annual rent increases
• Tenants who are less discretionary‑spend dependent

For entry‑level investors, this often translates to more predictable cash flow and potentially fewer surprises.

A practical rule of thumb is to match the asset type to your personal risk appetite and experience level:

• If you want simplicity and stability, a modest industrial unit with a solid, established tenant is often easier to manage.
• If you’re comfortable with higher risk and more complex due diligence, a specialised asset like childcare or medical can offer strong returns—but usually with higher stakes if the tenant leaves.

If you’re unsure where you sit on that spectrum, it can help to speak with a mortgage broker who understands the commercial lending landscape and can model different scenarios for you.

A Practical Roadmap: From Commercial Property Strategy to Settlement

Before you start scrolling through listings, you need a clear commercial property investment strategy. This is where you decide why you’re buying and what you’re prepared to hold through the ups and downs.

Use this quick framework to define your investment brief:

1. Clarify your objective
   • Owner‑occupied business premises
   • Pure investment property
   • Long‑term wealth via SMSF (Self‑Managed Super Fund)
2. Lock in your time frame & risk tolerance
   • Short term (3–5 years) vs long term (10+ years)
   • Comfort with vacancies and variable cash flow
3. Build your ‘buy box’ – the non‑negotiables that keep you disciplined:
   • Target price range
   • Suburb or region
   • Minimum acceptable yield
   • Lease quality (tenant strength, term remaining, options)

Example: A Brisbane medical practice wants to buy its rooms. Their buy box: up to $1.4m, within 10km of the CBD, minimum 5‑year lease (to themselves), and flexibility for future expansion. This clarity stops them wasting time on unsuitable industrial sheds or fringe offices.

Once your strategy is clear, you can move from ideas to shortlisting real properties using data rather than guesswork.

Key checks before you fall in love with a property:

• Market and local data – recent sales, vacancy rates, typical yields, and incentives in that pocket.
• Tenant demand test – how quickly similar spaces lease, who the active tenant types are, and what they’re paying.
• Lease and yield analysis – length of lease, rent reviews, outgoings, and whether the quoted yield is net or gross.

From here, sit down with your broker to match the property and lease profile with the right loan structure – whether that’s a standard commercial loan, lease‑doc facility, or SMSF LRBA. Getting a strong loan pre‑approval up front is critical; our article on the top five things to keep in mind when applying for loan pre‑approval can help you prepare your application and supporting documents.

Build in buffers for 6–12 months of repayments, plus likely fit‑out costs and contingencies, before you sign anything.

If you’d like help pressure‑testing your strategy and loan options before you commit, speak with our brokerage team for a tailored borrowing roadmap that aligns your property, finance and long‑term wealth goals.

Managing Risk in Commercial Property Investment: Avoiding Pitfalls with the Right Broker

When you’re investing in commercial property, smart risk management can be the difference between a steady long‑term return and a costly mistake. Rather than chasing flashy headline yields, successful Australian investors focus on sustainable income, solid tenants and flexible assets.

A few foundations make a big difference:

• Conservative gearing: Avoid maxing out your borrowing capacity so you have breathing room if rates rise or income dips.
• Realistic vacancy and incentives: Budget for lease‑up periods, rent‑free incentives and fit‑out contributions – they’re standard in many commercial markets.
• Professional legal and building advice: A good solicitor and building inspector can flag issues with leases, titles, zoning or structure before you’re locked in.

Here’s how these steps help you dodge some of the most common traps:

• Buying overly specialised assets that are hard to re‑let.
• Over‑relying on a single tenant or short lease.
• Being seduced by above‑market yields that mask underlying risk.

The second approach is usually far more resilient over a full property cycle.

A commercial‑savvy mortgage broker helps you build this resilience by:

• Matching loan structures with your risk tolerance and cash flow, not just maximum borrowing.
• Working alongside your solicitor, accountant and property advisor so finance, tax and legal strategies all align.
• Reviewing your loans as leases roll over, rents change and interest rates move, so you can refinance or restructure early rather than react under pressure.

For further reading on structuring commercial deals and comparing them with home ownership strategies, explore our in‑depth guide to paying your home loan off quicker and how that can complement a commercial portfolio. If you are working on strengthening your application ahead of a purchase, you may also find our step‑by‑step guide on how to improve your credit score in Australia particularly useful.

If you’re considering a commercial purchase or looking to de‑risk an existing portfolio, speak with a broker who understands the Australian commercial market and can run the numbers with you, including best‑ and worst‑case scenarios, before you commit. Done well, commercial property can complement your residential holdings, support your business, and help you build more resilient, diversified income over time.

Disclaimer:

All information on this website is general in nature and not intended as financial, investment, legal, or tax advice. It may not suit your personal circumstances. You should seek independent professional advice before acting on any content. We accept no liability for actions taken based on this information.