Residential vs Commercial Property Investment: Which is Better in Australia?
Buying an investment property can be highly rewarding, but you may wonder which path to take: residential or commercial? Both property types offer excellent wealth-generating prospects, but there are significant differences to consider when making your choice.
Let’s delve into the key considerations when deciding whether to invest in a residential or commercial property.
1. The cost
Most property investors start building an investment portfolio with residential properties because they are cheaper than commercial properties.
Commercial properties require more capital than residential properties and higher deposits. Lenders typically require a 20-40% deposit compared to 5-20% for residential properties.
The cost of buying a commercial property may be out of reach initially, but you could add it to your portfolio later on. The best property investment strategies include diversification. An investment property strategist can help you formulate the right strategy to achieve your goal of owning a commercial property.
2. Acquiring finance
Applying for a commercial property loan tends to be more onerous than applying for a residential one. Lenders typically want proof of the property’s viability. This may include profit and loss statements, tax returns, a business plan and lease agreements. If you can’t prove viability, you may not succeed at securing finance.
Residential property, on the other hand, is assessed on the asset’s value and your ability to service a loan. Capital growth and rental income are typically more stable with residential properties, reducing risk for lenders.
3. Return on investment
Capital growth on residential properties tends to be stronger than on commercial properties over the long term.
However, commercial properties attract higher rent than residential properties. After deducting property expenses, you’re likely to generate a bigger profit. To maximise profits, you could enter into a net lease in which your tenants cover a portion of the building’s outgoings, such as maintenance costs, insurance and property taxes. You can’t do that with residential properties.
Commercial leases are also longer, typically three to five years, but they can extend to 10 years, whereas residential leases are between six and 12 months. That means you’ll likely receive a stable income with a commercial property for many years.
One advantage of residential property is that vacancy rates are lower, making it easier to find tenants. As such, you may experience fewer disruptions in monthly income. On the other hand, finding a business that suits your commercial space can take a long time, potentially leaving you without income for many months.
As of January 2025, the national residential vacancy rate was 1.0%. In comparison, the office vacancy rate was 13.7% in CBD locations and 17.2% in non-CBD locations.
Of course, markets differ from one location to another. Consult a commercial property buyer’s agent for insights into the local commercial market.
Residential vacancy rate
Commercial vacancy rate
Source: Property Council of Australia
4. Tax considerations
Before buying an investment property, make sure you understand your tax obligations. A property investment agency can recommend a good accountant who can explain the tax implications of each property type.
For both residential and commercial investment properties, you must declare your full rental income.
You can generally deduct mortgage interest, expenses related to managing the property, and depreciation on certain assets for both types of properties.
For negatively geared residential properties, you can offset losses against your taxable income and potentially reduce your tax liability.
Commercial properties may attract a GST liability under specific circumstances. You may also be eligible for GST credits on purchases associated with renting out your property, such as the GST charged by your property management company.
Both types of properties may also be subject to capital gains tax when sold.
5. Property management
Managing a property – whether residential or commercial – can be time-consuming. Many investors work with a property management company to oversee the day-to-day operations. This includes:
- Marketing the property
- Finding and screening tenants
- Facilitating lease renewals
- Collecting rent
- Conducting property inspections
- Arranging for maintenance and repairs to take place
Residential property management aims to create a comfortable living environment, whereas commercial property management focuses on maximising operational efficiency for businesses.
Commercial spaces vary widely from industrial and warehousing to offices and retail, each with its own operational dynamics. Choose a property management company that specialises in commercial property and understands its operational and regulatory demands.
Residential vs. commercial property investment: which is right for you?
There’s no right or wrong answer. It depends on your investment goals, available capital and tolerance for risk.
Residential properties are usually cheaper and tend to appreciate faster. They also typically weather economic fluctuations much better than commercial properties. Finding tenants for residential properties is also easier.
Commercial properties generate higher rent and have longer leases, which can put you in a strong cash flow position. However, finding suitable tenants is harder and can result in income gaps over extended periods.
Talk to an investment property buyer’s agent who can help you develop the best property investment strategies, which could be a combination of both property types.
BFP Property Group is a buyer’s agency located in Sydney. We help investors buy and manage investment properties across Australia. To get started on your property investment journey, book a call with one of our experienced buyer’s agents.
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