Is Investing in Residential or Commercial Property Better?

Residential and commercial property both offer strong opportunities for investors, though they deliver returns in very different ways. Residential property remains a familiar and accessible option for many Australians, while commercial property is often associated with higher yields, longer leases, and greater potential for income stability.

But when deciding whether it’s better to invest in residential or commercial property, it’s important to consider a few factors that separate both property types:

1. Quality of tenant
2. Length of lease
3. Return on Investment
4. Property outgoings
5. Accessibility
6. Risk
7. Simplicity
8. Simplicity (part two)

Let’s dive into each and see which out of residential and commercial property is the investment winner.

1. Quality of tenant

A commercial property tenant has a big impact on a property value. If a tenant has desirable traits, such as being a large national brand with decades of historical performance, it is likely to have a positive outcome on the property value.

That’s because there’s less risk of such a robust tenant missing rental payments, going into liquidation or closing their doors.

Commercial property landlords can increase the value of their investment by placing a high-quality tenant in their premises, and this is a huge advantage for investing in commercial real estate.

Meanwhile, residential property tenants do not impact the property value. There is no opportunity for landlords to directly improve the property value by having a better tenant in their house.

2. Length of lease

We’ve already seen how the quality of the tenant impacts a commercial property‘s value. So, you’d be correct to assume that the longer the lease, the better the commercial property value.

This means commercial landlords can add value to their property by extending the lease agreements they have with tenants. Residential property landlords don’t have that luxury.

The length of lease in a residential property doesn’t impact the property value. Nor are residential property leases longer than typical commercial property leases.

Residential property leases usually run for one or two years, while commercial property lease terms can be up to five, seven, ten, or even 15 years. This means that if you’re buying a commercial property, you can expect far longer income security from your investment.

3. Return on Investment

It depends on the property size and location, tenant quality and length of lease, but commercial property investors can often receive much higher returns and yields (earnings generated from the investment).

Residential property generally provides modest annual yields of around 2 to 4 per cent, with investors often relying on long-term capital growth to drive returns. Commercial property, by contrast, can deliver much higher yields — often between 5 and 10 per cent — depending on factors such as location, lease structure, and tenant quality.

4. Property outgoings and expenses

Expenses and outgoings are usually much higher in commercial property than residential property. More can go wrong and replacement parts (such as air conditioners) can be far more expensive.

Like residential property, land tax, water rates and body corporate can chew further into a commercial landlord’s pocket. Unless their tenant has signed a net lease.

Net leases mean the tenants pay the outgoings for you. This is a huge advantage of commercial property over residential property, which will see the owner fork out for all outgoings and expenses.

5. Accessibility

Buying a residential property is often more achievable for individual investors, with ownership levels still high across Australia. According to the 2021 Census, around two-thirds of households own their home either outright or with a mortgage. This familiarity continues to make residential property the entry point for many investors.

Financing requirements vary, but most banks now require a deposit of around 20 per cent for residential property purchases, with some lower-deposit products available in certain circumstances. Rising property values in recent years mean the actual cash outlay is typically higher than in decades past, which has made affordability an important factor in residential investment decisions.

Commercial properties are much more difficult to purchase individually. At least for an asset of substantial value.

Big league commercial properties will cost millions of dollars. And for commercial property financing, the bank is usually only willing to accept a 40 per cent deposit on these properties.

This is why many turn to commercial property syndicates to partake in commercial property.

6. Risk

Commercial property investments can carry different types of risk compared to residential property. Tenant demand is closely linked to business conditions and the broader economy, while residential demand is underpinned by the need for housing. Investors should weigh these risk profiles carefully, especially in an environment shaped by interest-rate shifts, hybrid working trends, and changing consumer behaviour.

This is because commercial property is more susceptible to market conditions than residential property. People need homes to live, so there is always underlying demand for homes. Meanwhile, tenant demand for commercial property is driven by business activity, which in turn can be driven by the economy.

Understanding those risks is key to good investment in commercial property. Investors should be aware that every investment comes with risk and should discuss any investment opportunity with their accountant or financial adviser.

7. Simplicity

Residential property is known for being a simpler investment. There is far more available information on how to invest, and it’s typically a familiar investment to most Australians: You’ve either invested in it yourself or know someone who has.

Commercial property has a lot more factors to consider: Commercial financing, due diligence, lease and purchase negotiations, and many more.

A solid network of property professionals is also crucial for knowing how to invest in quality commercial real estate.

8. Simplicity (part two)

A popular alternative to taking on the burden of investing alone in commercial real estate, is investing alongside a commercial property syndicate.

A syndicator will handle all the dirty work for you, ensuring the best possible chance of success in commercial property investment, while aiming for the least amount of risk.

Whether you’re drawn to the accessibility and familiarity of residential property, or the higher yields and long-term income stability of commercial property, it’s important to match the investment type with your goals, risk tolerance, and time horizon. Both asset classes have a place in a diversified portfolio, and the “right” choice will look different for every investor.

And as always, speak to your accountant before going ahead with any investment.

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Updated: 26 August 2025