commercial-property-vs-residential-property | Investment Property Professionals Australia wide

Commercial Property vs Residential Property: Where Does Your Capital Work Harder?

When investors compare commercial property and residential property, the discussion often focuses on headline yields or capital growth. However, the most important metric for many investors is return on invested capital — how hard your actual cash is working.

This article compares commercial and residential property using realistic leverage, yields, and typical costs to help investors understand the difference. All numbers shared are for demonstration purposes only and general in nature.

Key Assumptions Used in This Comparison

To keep things simple and transparent, we assume:

Property value: $1,000,000
Commercial property loan-to-value ratio (LVR): 70%
→ 30% deposit ($300,000)
Residential investment LVR: 90%
→ 10% deposit ($100,000)
Commercial property yield: 7.0%
Residential property yield: 4.5%
Figures shown are before tax and before loan interest
Median long-term growth rates are discussed qualitatively, not forecast

Rental Yield Comparison

Commercial Property

Annual rental income estimate:
7% of $1,000,000 = $70,000
Investor capital invested:
$300,000 (70% LVR)
Return on equity (before debt costs): 23.3%

Residential Property

Annual rental income:
4.5% of $1,000,000 = $45,000
Investor capital invested:
$100,000 (90% LVR)
Return on equity (before debt costs): 45%

This highlights a key concept:
Higher leverage amplifies returns — but also exposure to higher borrowings.

Typical Cost & Structural Differences

Commercial and residential properties behave very differently as investments:

Commercial leases are usually longer (3–10 years)
Tenants often pay outgoings in commercial property
Residential property usually has more consistent demand, but lower yields
Management fees and vacancy risk differ significantly

Commercial vs Residential Property Comparison

Feature	Commercial Property	Residential Property
Property value	$1,000,000	$1,000,000
Typical LVR	70%	90%
Investor deposit	$300,000 (30%)	$100,000 (10%)
Gross rental yield	7.0%	4.5%
Annual rental income	$70,000	$45,000
Return on invested capital (pre-debt)	23.3%	45.0%
Typical lease length	3–10 years	6–12 months
Vacancy risk	Higher, but less frequent	Lower, but more frequent
Management fees (approx.)	5–7%	7–10%
Outgoings paid by tenant	Often yes	No
Long-term capital growth	Moderate	Historically higher

Capital Growth Considerations

Historically:

Residential property has delivered stronger median capital growth, driven by population growth, scarcity, and owner-occupier demand.
Commercial property tends to grow more slowly but compensates with higher income and stronger cash flow but keep in mind higher LVR at 70%, demonstrating lower ROI on the power of Leverage.

Many investors therefore:

Use residential property for growth
Use commercial property for income and yield stability

Risk vs Reward: What Really Matters

While residential property shows a higher return on equity in this simplified example, it comes with:

Sensitivity to interest rate changes
Cash Flow Negative on lower yield and higher interest rates
Can be Positively Geared on the back of higher rental yields (dual key, Co-Living etc)
Higher ROI on your money invested (10% deposit)

Commercial property, by contrast:

Requires more capital upfront
Offers stronger income coverage but lower at a required 30% LVR
Tenants pay outgoings

📊 Residential vs Commercial Insurance Comparison

Insurance costs are another key difference between residential and commercial property. Residential landlord insurance is typically lower-cost and designed to cover standard tenant risks, loss of rent and basic liability. Commercial property insurance, by contrast, is more complex and generally more expensive, reflecting higher liability exposure, business-related risks and the need for broader, tailored coverage depending on the tenant’s operations.

Aspect	Residential Landlord Insurance	Commercial Property Insurance
Typical annual cost (Australia)	~$300–$2,000+ (units); $1,500–$4,000+ (houses)	From hundreds to many thousands+ (highly variable by size/use)
Risk profile	Residential tenants; lower day-to-day operational risk	Business tenants; varied operational and liability exposures
Coverage focus	Property damage, loss of rent, tenant injury liability	Property damage, business interruption, liability, tenant business impacts
Liability limits	Lower, tied to residential rental activity	Often higher, reflects commercial risks
Policy complexity	Simpler base offerings	Broader, tailored policies depending on industry/usage

Final Thoughts

There is no universally “better” investment — only what suits your budget, and strategy. Although based on the power of Leverage, your financials should be calculated on how much you have invested and not on the value of the property. Your investment into the asset determines how inefficient or efficient your ROI may be over the life of the investment.

Based on the illustrative numbers used above, and for demonstration purposes only, if we compare the financials of the two investment types over a 7–10 year horizon, an investment-grade residential property would typically deliver a higher return on invested capital. This reflects the combination of higher leverage, consistent capital growth, and efficient use of investor funds.

If your goal is maximum leverage and capital growth, residential property often wins.
If your goal is income, yield, and stability, commercial property becomes compelling. Unless you elect to invest in a suited Co-Living property or a Dual Key / Duplex property which come with higher residential yields and can be similar to commercial property yield.
Sophisticated investors often use both, at different stages of their portfolio journey.
Your budget will also determine which Investment Vehicle better suits your Investment Strategy.