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Everyone’s compass for happiness is different. Most people, however, overestimate what they need to achieve their happiness goals and this means they take on unnecessary risk. The goal of investing – especially in commercial property – should be about setting up a safe, sustainable, and scalable income that frees you up to live on your terms.
I’m not just someone who’s studied commercial property from the sidelines. I’ve helped thousands of clients achieve their property goals as a buyer’s agent, I’ve written the book Commercial Property Investing Explained Simply, and most importantly, I walk the talk.
I currently earn over $100,000 a year in passive income from a single commercial property: a shopping centre. And the best part? It doesn’t require daily attention or the stress you might associate with managing multiple residential properties.
In this guide, I’ll walk you through the key fundamentals of commercial property investing, explain why it can outperform residential property in many cases, and help you understand how to get started the smart way.
Why invest in commercial property?
Commercial property investing offers a range of benefits that attract savvy investors looking for long-term, consistent returns. Chief among these is cash flow. Unlike residential property, where your net returns can quickly be eaten up by council rates, maintenance, and body corporate fees, commercial property typically produces a much stronger net yield because tenants pay most, if not all, of the outgoings.
Leases are longer, income is often indexed to inflation, and properties are assessed based on income, not emotion. Commercial property also offers better scalability. One well-chosen asset can provide the kind of return that might take several residential properties to achieve.
But before diving in, it’s important to understand how commercial property compares to the more familiar residential market.
Residential versus commercial property: A quick breakdown
Familiarity versus financials
Most people feel more comfortable with residential property because they live in one. It’s tangible, familiar, and widely covered in the media. That emotional comfort is part of the reason why the majority of investors start there. In fact, around 70 per cent of residential property in Australia is owner-occupied, often bought based on lifestyle or personal taste.
Commercial property, on the other hand, is typically bought strictly based on numbers – rental return, tenant quality, and location demand. This analytical approach means it’s less emotional but also more objective and potentially more profitable.
Capital growth versus cash flow
With residential property, capital growth is usually the main goal. You’re hoping the property appreciates over time so you can sell at a profit. But it’s not guaranteed. And with gross yields of 3–6 per cent and outgoings eating into that, the net return can be closer to 1–3 per cent.
Commercial property offers an entirely different value proposition. Yields typically sit between 5 and 8 per cent net and the rent is often tied to inflation, meaning your income increases over time. That makes it possible to generate real wealth from cash flow alone – even if the property never appreciates in value.
Deposits and leverage
Yes, you’ll generally need a bigger deposit to buy a commercial property. Loan-to-value ratios (LVRs) for commercial are typically 60–80 per cent, compared to 80–95 per cent for residential. But the upside is that the higher initial outlay is often recovered through stronger cash flow in just a few years.
And while you may use less leverage with commercial property, this often leads to a stronger and safer portfolio. In fact, some commercial properties are available for as little as $50,000 – think car parks or regional offices – so the barrier to entry may not be as high as you think.
Due diligence is key
Due diligence for residential property tends to be relatively straightforward: check for flood zones, inspect the building, and research the suburb.
For commercial, it’s more complex, but it also gives you more control. You’ll need to assess the tenant, the lease, the foot traffic, zoning, fitout, and more. But this deeper analysis lets you truly understand your investment and mitigate risk.
Property management: set and (mostly) forget
Residential tenants can be high-maintenance. Leases are typically six to 12 months, bonds are only one month, and tenants often treat the property as a temporary home.
Commercial tenants, by contrast, sign leases from one to 30 years, post bonds or bank guarantees of up to six months, and often spend significant money on the internal fitout. They have a business to protect and their premises are central to that business. They want stability. That’s a win-win for investors.
And because commercial tenants are usually responsible for all outgoings – rates, maintenance, insurance, even security, you’re not getting stung every time a tap leaks or the carpet needs replacing. This hands-off approach is a huge appeal for those wanting freedom from the day-to-day burdens of property ownership.
Risk and vacancy: Manageable with the right strategy
Yes, commercial properties can sit vacant for longer if a tenant leaves. That’s a real risk, but it can be mitigated. Choosing a property in a high-demand area, with a versatile layout and fair rental pricing, will make it far easier to re-lease.
In contrast, residential properties tend to have shorter vacancies (a few weeks) but more frequent tenant turnover. Residential tenants also have stronger legal protections, making evictions slower and harder. Commercial leases are more flexible for landlords, with clearer terms and enforcement options.
Depreciation and tax benefits
Another often overlooked benefit of commercial property is depreciation. You can claim tax deductions on the building and its fixtures, which are usually more valuable than those in a house or apartment. That means greater offsets against your income and more money in your pocket.
Final thoughts: Is commercial property right for you?
Commercial property isn’t for everyone, but it’s likely right for more people than you think.
It offers higher income, less day-to-day management, better tenant security, and strong long-term growth when done correctly. You’ll need to do your homework (or work with someone who can do it for you), but the rewards can be life-changing. I’ve seen it happen time and time again – for myself and for the thousands of clients I’ve helped over the years.
If your goal is financial freedom, fewer headaches, and a safer path to passive income, commercial property might just be the key.
And if you’re still not sure where to begin, my book Commercial Property Investing Explained Simply goes even deeper. Or feel free to reach out through Palise Property. I’d love to help you take the first step.
Because no matter where your compass for happiness points, commercial property can help you get there, with a little less stress and a lot more security.
Steve Palise is a residential and commercial property buyer’s agent, founder of Palise Property, and author.