Residential vs commercial property investment: Comparison

Australian's obsession with real estate may have been dealt a curve ball with the 2026 tax changes to residential property investment but, for the most part, the commercial sector remained largely unaffected.

Commercial investors retain negative gearing tax benefits while self-managed super funds (SMSFs) can continue to borrow money to purchase commercial property - two avenues closed to new residential investors. 

The rule changes are expected see more 'mum-and-dad investors' consider purchasing commercial and industrial properties.

The sector is not without its opportunities but commercial and residential property investment are inherently different. Here are some important factors to consider:

Borrowing and loans

• Higher entry costs

Commercial properties generally cost more than residential properties, meaning higher get-in costs, bigger loan amounts, and higher repayments. For this reason, commercial property may not be an achievable option for some potential investors.

• Deposit

The rule-of-thumb 20% deposit requirement for residential property loans - or lower with insurance - doesn't apply to commercial lending. Potential commercial borrowers typically need to stump up a 25-35% deposit with some lenders requiring a 40% deposit.

This is because lenders regard commercial property as a higher-risk proposition.

• Interest rates

This risk assessment also pumps up commercial loan interest rates which are considerably higher than standard investor home loan rates.

Lenders generally see the housing market as stable while regarding the commercial sector as subject to more outside risk factors, such as cycles in the wider economy and business confidence than can affect potential rental income. 

In the event of a default on the loan, lenders also believe it will be easier to re-sell a residential property than a commercial property that may sit on the market for some period, compounding their losses.

• Loan terms

As well as higher interest rates, commercial loans generally need to be paid back within considerably shorter time periods - 10-15 years rather than the 30 years extended to residential investors.

Some lenders have extended commercial loan terms in more recent years but regular repayments remain considerably higher than residential loan repayments.

• Approval criteria

While residential lenders will assess an applicant's income, expenses, and credit score, commercial loan approvals are based on quite different criteria and processes.

These can be more customised, taking into account whether the property will be occupied by the buyer's own business or rented out. Approval can also be far more dependent on the type of property, whether it be an industrial warehouse, an office, or a retail premises.

Commercial property loan approval focuses more on cash flow, rental income from the property, and lease arrangements than the buyer's personal finances. 

Such considerations can also affect interest rates commercial buyers may be offered and, in some cases, loan terms. 

• SMSF borrowing

Self-managed superannuation funds are no longer permitted to take out new loans to finance the purchase of any residential property - existing or new-build. (Those with signed contracts up to 10 August 2026 can finalise loans in progress.)

SMSFs are, however, permitted to buy residential properties outright, without finance, provided they purchase them within the bounds of SMSF rules.

But the new rules surrounding SMSF borrowing do not affect commercial properties.

Unlike SMSF residential property rules, SMSFs are permitted to purchase commercial or industrial premises and rent them to their own or member-owned businesses, as long as they are paying market rent.

For an SMSF looking to invest in property and needing a loan to do so, commercial property is now the only option. However, it may not be the best investment vehicle for all SMSFs. It is highly recommended to seek professional investment advice before proceeding.

Rental Income

The long-standing rule of thumb is that commercial properties typically have higher rental yields than residential properties.

This is not only because rents are higher, but leases tend to be considerably longer than the standard six or 12 months for residential properties, meaning there are less vacant periods between tenants.

As well, tenants are responsible for far more property expenses including council rates and building insurance that can boost yields substantially.

• Rent increases

Unlike residential leases, commercial leases generally include a fixed annual rent increase of around 3-5%. Some lease agreements may tie the annual increase to CPI inflation but commercial rent increases are agreed to up front and apply automatically.

Residential property rent increases are subject to state and territory government regulations. Most jurisdictions allow one rent increase per year, regardless of whether the property is newly tenanted during that period. 

The Northern Territory allows rent to increase every six months while the ACT is the only jurisdiction that caps rental increases in line with CPI data.

Vacancy rates

Yet reaping higher rental yields with built-in increases only applies if a commercial property is rented. Commercial vacancy rates are considerably higher than low residential property vacancy rates that have been a feature of Australia's housing market in the post-pandemic period.

This has ensured most residential investors have experienced minimal difficulty in finding new tenants, keeping rental income flowing. 

Time between commercial tenants can be significantly longer, meaning commercial landlords will need to service any loans and shoulder property expenses themselves between leases.

Tenants

Commercial properties are leased to businesses that can be more stable and prefer considerably longer leases than residential tenants.

But businesses are also more affected by economic cycles, meaning they run the risk of going out of business, along with other potential tenants. Business fortunes can also change quickly owing to market competition, new technologies, and structural trends.

Put simply, with residential property, people will always need somewhere to live while businesses can come and go.

Tax

• Negative gearing

Some investors may look to commercial property now that negative gearing tax benefits have been wound back for new investors in existing residential properties. (They can still apply to new-build homes.)

Prior to the change in negative gearing rules, nearly half of residential property investors in Australia claimed rental losses but the rate is far lower for commercial property holders.  

While commercial properties can be negatively geared, they often generate more income than it costs to own them. This is because of their higher rental yields and borrowing rules that generally don't allow leveraged commercial properties to operate with large losses.

It is not generally advised to purchase a commercial property for negative gearing purposes but a tax professional is the best person to consult for individual tax advice. 

• Capital gains tax

All asset classes, including residential and commercial property, are subject to new capital gains tax rules from 1 July 2027.

From that date, the 50% capital gains tax discount will no longer apply, replaced by a cost-based indexation method with a 30% minimum tax rate applied.

Appreciation

Both residential and commercial properties have the potential to gain in value over time.

Generally, residential property has seen higher growth rates than the commercial sector. This has been exaggerated in recent years by rapid growth in home values in the post-pandemic period.

Over the longer term, Australia's home prices have averaged an annual growth rate of around 6.5% over the past 30 years. But it's hard to compare apples with oranges.

Commercial properties tend to appreciate more slowly but their values can also be more stable in market downturns.

There is also significant variation based on property types. In recent years, industrial properties have far outstripped office and retail in terms of price growth, based on growing demand from ecommerce and logistics businesses.

As a rule of thumb, residential properties may deliver greater appreciation but they may also come with more out-of-pocket expenses to hold them. Commercial properties tend to cover their own holding costs and deliver a better rental yield but may not provide as much capital growth over time.

It is always advisable to consult a financial professional to determine what may be the best investment strategy for your needs and individual circumstances.

Risk

Any investment comes with a degree of risk. Here's a summary of the major risks to consider investing in both property types:

Residential property

• Lower rental yields: Yields tend to be around 2-4% compared to the commercial sector's 5-8%. This makes positive cash flow more difficult to achieve initially
• Higher tenant turnover: Standard 12-month leases can mean extra re-tenanting costs, wear and tear on the property from tenants moving in and out, and the risk of vacancy periods eroding rental income
• More landlord expenses: Unlike commercial property leases, landlords cover general rates, building insurance, and maintenance costs
• Less control: Residential tenancy laws dictate the frequency of rent increases and generally protect tenant rights

Commercial property

• Extended vacancy periods: While commercial leases are longer, vacancy rates are also considerably higher. This can mean it may take months, even years, to find or replace a tenant
• Sensitive to economic cycles: Commercial property demand is highly dependent on the economic climate and business confidence. It can also be affected by major structural shifts (such as work from home or new technologies reshaping business needs)
• Stricter financing access: Lenders generally require higher deposits, shorter loan terms, and charge higher interest rates which may rule some potential investors out
• May not see as much capital growth: This is dependent on property type, but commercial property generally appreciates more slowly but steadier than residential property over time

Steve Palise

Founder, Palise Property (commercial & residential buyers agency)

What the expert says:

"The biggest misconception I see from clients who've invested in residential properties and are switching to commercial investments is believing the blanket statements.

"Here are a few:

'Commercial has higher vacancy rates.'

'Commercial properties do not grow in value.'

'You need a bigger budget to get into commercial.'

"While these statements can be true for certain properties, they base these assumptions on very small sample sizes - like seeing one retail shop near them that has sat vacant for years.

"Not the mechanic that they have been taking their car to for 20 years and not once thought about the premises being vacant.

"Commercial properties are not one size fits all."