The standard comparison of commercial and residential property is a yield table and a shrug. Both halves of that are lazy. The yield gap is real, but the interesting differences are structural, and the 2027 tax changes just moved the goalposts on the residential side of the ledger. Here's the comparison I actually give clients.
The headline numbers, and what they hide
Residential property in the capital cities typically yields 3 to 4% gross. Commercial property typically yields 4 to 7% net. Those words are doing different jobs.
A residential yield is quoted before the landlord pays rates, insurance, management and maintenance. Strip those out and a 4% gross yield is often 2.5% in your hand. A commercial net yield is quoted after the tenant pays most outgoings, because commercial leases routinely pass rates, insurance and maintenance to the tenant. A 6% net commercial yield and a 4% gross residential yield aren't two percentage points apart; in cash terms they can be nearly double.
Residential's compensation has historically been faster capital growth and a deeper, more liquid market: there's always a buyer for a house, at some price, within weeks. Commercial assets trade slower, to a smaller pool, and their value moves with the lease as much as the land.
The real differences are structural
The lease is the asset. A commercial property with a seven-year lease to a national tenant, fixed 3% annual escalations and a strong WALE is a fundamentally different asset to the identical building sitting vacant. Residential value lives mostly in land and comparables; commercial value lives in the quality of the income. This is why I grade every commercial deal A1 to C3 on income before building, through The Deal Grade™.
Vacancy asymmetry. A residential vacancy costs you weeks. A commercial vacancy can cost months or longer, and it's the risk that scares residential investors off. It's real, it's priced (it's a large part of why the yield is higher), and it's managed at purchase: tenant covenant, lease length, location depth. Buy the lease well and vacancy risk shrinks; buy a vacant strata shop because it looked cheap and you've bought the whole risk with none of the compensation.
Lending. Residential loans stretch to 80 to 90% LVR at the sharpest rates in the market. Commercial lending typically wants 25 to 35% down at higher rates with shorter terms. The entry ticket is genuinely bigger.
Effort profile. A good commercial asset with a strong tenant on a net lease is close to mail-box income for years at a stretch. Residential tenancies turn over, and someone (you, or a manager you pay) handles it.
What the 2027 changes do to this comparison
Here's the part most comparisons haven't caught up with. From 1 July 2027, rental losses on most newly purchased established residential property stop offsetting salary and carry forward instead. Negative gearing was always a residential-side subsidy: high-yield commercial property rarely ran losses worth gearing in the first place. Many commercial assets are cash flow positive from settlement.
So the reform narrows residential's after-tax advantage without touching commercial's. An asset class whose appeal never depended on the tax refund looks relatively better every time the refund shrinks. It's part of why more residential investors are graduating to commercial now, and why the Commercial Ready Check exists: most investors assume commercial is for someone richer, and the numbers often say otherwise.
Who each class actually suits
Residential suits investors earlier in the journey: smaller deposits, easier lending, growth-driven wealth building, and a forgiving exit market. It rewards precision about location; growth inside a suburb isn't evenly spread, which is why I score the pocket, not the postcode.
Commercial suits investors with capital who want income now: typically $300,000+ to deploy, a tolerance for slower liquidity, and the discipline to buy the lease rather than the building. Retirees and pre-retirees replacing salary with rent are the natural fit, as are business owners buying their own premises (including through an SMSF).
The honest answer for many portfolios is sequence, not either/or. Build equity in residential growth assets, then convert accumulated equity into commercial income when the portfolio's job changes from growing to paying you.
Where to start
If you're weighing the move, the Ready Check takes two minutes and scores you on the same factors I check with clients: capital, income, risk posture, timeframe. And the commercial page sets out how I buy: every deal graded on income quality first, net yields of 4 to 7%, at $5,000 plus 2% on success. If your next property's job is income, it's the conversation worth having.
Frequently asked questions
Is commercial property riskier than residential?
The risks are different rather than simply bigger. Commercial concentrates risk in the lease (vacancy, tenant failure) and compensates with yield; residential concentrates risk in capital price cycles and liquidity is the safety valve. Poorly selected assets are dangerous in both classes; the selection discipline just points at different things.
How much do I need to invest in commercial property?
Practically, most quality commercial assets need $300,000+ in deployable capital once you account for a 30%-ish deposit, costs and a buffer. Entry-level commercial (small strata offices and shops) exists below that, but cheap commercial without tenant quality is where most commercial horror stories start.
Do the 2027 negative gearing changes apply to commercial property?
The announced measures target residential investment property. Commercial property's tax treatment is unchanged as drafted, and most commercial assets run cash flow positive anyway, so annual loss deductions were never the point. Final detail depends on the legislation as passed.
What is a net lease?
A lease where the tenant pays some or all outgoings (rates, insurance, maintenance) on top of rent. It's why commercial yields are quoted net and why a commercial yield and a residential gross yield aren't comparable numbers until you adjust both to cash in hand.
