Debating between residential vs commercial property investing? While commercial offers higher yields, residential is more accessible with lower deposits and stable demand. We break down the key differences, including financing, risks, lease terms, and growth potential. Whether you're a new or experienced investor, this guide will help you decide which investment suits your strategy.
You’ve probably heard the question—why not just buy a commercial property? With higher rental returns, tenants covering most expenses, and strong long-term growth, it sounds appealing. But is commercial the better choice over residential?
In this blog, we’ll explore the key differences between residential and commercial property, their pros and cons, and why residential investment might still be the better option—for now.
Both types of real estate have their advantages and disadvantages. At the end of the day—it’s about what fits your investment strategy and financial goals. Many investors start with residential properties because they’re more affordable and easier to finance. Commercial property can be a good option, but it needs to align with your long-term plan.
One of the biggest differences between residential and commercial property is the deposit required to get started.
If you’re saving up for your first or next property, this difference is significant. It takes much longer to save for a commercial deposit than a residential one. Purchasing residential and commercial properties varies significantly.
Residential Property: Entry-level units start at $250,000, and brick homes range from $350,000-$400,000.
Commercial Property: Quality commercial investments typically start at $500,000, with many strong options around $800,000-$900,000.
That’s why most investors begin with residential and later expand into commercial when they have more capital.
For example, with a $450,000 residential property and a 10% deposit, you'd need around $70,000-$75,000 upfront, including fees. In contrast, a $800,000 commercial property requires a 20% deposit of $160,000, not including other costs—making it much less accessible, especially for growing investors.
One of the biggest selling points of commercial property is the lease structure.
Commercial Tenants: Leases typically last three or more years, with some extending to 10 years or longer. This stability means fewer tenant changes.
Residential Tenants: While leases are shorter, many tenants treat rental properties as long-term homes, staying for several years.
If you buy the right residential property in the right market, you may have tenants who stay longer than you own the property. Some investors even have tenants who were there before they bought the property.
Vacancy risks exist in both markets. In both residential and commercial, the wrong location can lead to difficulty finding tenants.
Commercial spaces can remain vacant for 6 to 12 months while landlords search for tenants. Residential properties are less likely to face this issue—provided they are in the right locations. With the ongoing rental crisis, demand for housing remains strong, making residential property a more stable investment. Commercial spaces, like offices, can sit empty during economic downturns or crises, such as the pandemic.
Residential properties are also easier to assess in terms of value, with clear comparable sales. Commercial properties, however, are valued based on rental income, which can fluctuate. If a tenant is paying below market rent, the property may be undervalued, but rental income increases can significantly boost the value. Rent increases are possible in both sectors, whether through market demand in residential or built-in escalations in commercial leases.
When financing investment properties, lenders assess borrowing capacity differently for each type of real estate.
Residential property: You can usually borrow 90-95% of the property’s value, making it easier to finance with a smaller deposit. Even if vacant, lenders will use a rental appraisal to assess income and borrowing capacity.
Commercial property: Lenders scrutinise income more closely due to higher risks, requiring a 30-35% deposit instead of the typical 20%.
When it comes to managing expenses, residential property owners are responsible for paying council rates, water rates, and other costs. In contrast, with commercial property, tenants typically cover these outgoings, allowing landlords to enjoy a higher net rental yield. While commercial properties often offer better yields, it's important to also factor in the potential for capital growth. Ultimately, the decision between residential and commercial real estate should take into account both the immediate financial returns and long-term growth potential.
If you have significant capital, you might be tempted to buy a high-value commercial property. However, purchasing multiple affordable residential properties can offer more flexibility and lower risk by diversifying income streams.
Even with the capital to invest in commercial, many investors still prefer residential, particularly affordable homes in strong markets. Properties bought just two years ago for $250,000-$260,000 are now worth much more, and today's $400,000-$450,000 homes could reach $600,000 or more in a couple of years.
While commercial properties may suit some investors, residential property remains a top choice for long-term stability, consistent demand, and capital growth.
If you need help finding high-quality property investments, book a FREE discovery call with our Search Property team. Feel free to watch the full breakdown in our YouTube video here.
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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