Commercial Property vs Residential Property: Where Does Your Capital Work Harder?
When investors compare commercial and residential property, the conversation usually stops at headline yield or capital growth. The more useful question is return on the cash you actually invest: what your deposit earns once rent, costs, interest and growth are all taken into account.
The picture has shifted in 2026. Residential yields have compressed to around 4% gross, while commercial lenders are now offering up to 80% LVR on the right property. Commercial rents are holding at around 5% net. This article runs the numbers side by side on four options: a standard residential investment, a higher-yield co-living property, and commercial property at both 70% and 80% leverage.
All figures are illustrative, general in nature and for demonstration purposes only. They are not a forecast or personal advice.
Key Assumptions Used in This Comparison
- Property value: $1,000,000 in every scenario
- Interest rate: 6.2% interest-only on every loan. Commercial loans are often priced a little higher, so check current rates with your broker.
- Residential (standard): 4% gross yield, 80% LVR ($200,000 deposit), management about 6.6% (6% + GST), and owner-paid outgoings (rates, water, insurance, maintenance) of about $7,000 a year
- Residential (co-living): 8% gross yield (co-living typically ranges from about 6% to just over 10%), 80% LVR, and higher management of about 12%. Outgoings are about $14,000 because utilities, internet and common-area costs usually sit with the owner.
- Commercial: about 7% gross / 5% net. The tenant reimburses outgoings under the lease, leaving about $50,000 net rent to the owner. Management is about 6.6%, the same as residential.
- Commercial LVR shown at both 70% ($300,000 deposit) and 80% ($200,000 deposit)
- Rents and outgoings rise 2.5% a year. Figures are before tax and exclude stamp duty, depreciation and other purchase costs.
- Capital growth is modelled at 5% and 7% a year for all four scenarios, so growth is treated as equal over the long term
The Numbers: Year One
| Residential (standard) | Residential (co-living) | Commercial (70% LVR) | Commercial (80% LVR) | |
|---|---|---|---|---|
| Property value | $1,000,000 | $1,000,000 | $1,000,000 | $1,000,000 |
| LVR | 80% | 80% | 70% | 80% |
| Your deposit | $200,000 | $200,000 | $300,000 | $200,000 |
| Loan | $800,000 | $800,000 | $700,000 | $800,000 |
| Gross rental yield | 4.0% | 8.0% | ~7.0% | ~7.0% |
| Rent received by owner | $40,000 | $80,000 | $50,000 (net) | $50,000 (net) |
| Outgoings paid by owner | $7,000 | $14,000 | $0 (tenant pays) | $0 (tenant pays) |
| Management fee | $2,640 (~6.6%) | $9,600 (~12%) | $3,300 (~6.6%) | $3,300 (~6.6%) |
| Net income | $30,360 | $56,400 | $46,700 | $46,700 |
| Net yield on property | 3.0% | 5.6% | 4.7% | 4.7% |
| Loan interest (6.2%) | $49,600 | $49,600 | $43,400 | $49,600 |
| Pre-tax cash flow | −$19,240 | $6,800 | $3,300 | −$2,900 |
| Cash flow on deposit | -9.6% | 3.4% | 1.1% | -1.5% |
Standard residential property at today’s 4% yield is negatively geared by about $19,240 a year on these numbers. Co-living and commercial at 70% LVR are positively geared. Commercial at 80% LVR is close to neutral, because the extra borrowing absorbs most of the higher net rent.
The Numbers Over Ten Years
Here is the full picture over ten years: capital growth plus the cumulative cash flow, measured against the deposit you put in. Growth is held equal across all four, so the differences come purely from how much you invest and what the property pays you along the way.
| Residential (standard) | Residential (co-living) | Commercial (70% LVR) | Commercial (80% LVR) | |
|---|---|---|---|---|
| Your deposit | $200,000 | $200,000 | $300,000 | $200,000 |
| Value after 10 years @ 5% p.a. | $1,628,895 | $1,628,895 | $1,628,895 | $1,628,895 |
| Value after 10 years @ 7% p.a. | $1,967,151 | $1,967,151 | $1,967,151 | $1,967,151 |
| Cumulative 10-year cash flow | −$155,865 | $135,871 | $89,198 | $27,198 |
| Total gain @ 5% growth | $473,029 | $764,765 | $718,093 | $656,093 |
| Annualised return on deposit @ 5% | 12.9% | 17.0% | 13.0% | 15.7% |
| Total gain @ 7% growth | $811,286 | $1,103,022 | $1,056,349 | $994,349 |
| Annualised return on deposit @ 7% | 17.6% | 20.6% | 16.3% | 19.6% |
A few things stand out:
- At the same growth rate and the same 80% LVR, commercial outperforms standard residential, by about $183,063 over ten years at 5% growth. That gap is simply the cash flow residential property costs you to hold.
- Co-living delivers the strongest result in this model because it combines residential lending with commercial-style income. It also carries higher management, compliance and operating demands, so it needs to be the right property in the right location.
- Moving commercial from 70% to 80% LVR lowers the deposit by $100,000 and lifts the annualised return on that deposit, at the cost of a thinner cash-flow buffer.
- Tax changes the result. Residential losses can be negatively geared, which narrows the gap for higher-income earners. We cover this in Negative Gearing Changes 2027.
Typical Cost & Structural Differences
| Feature | Residential (standard) | Residential (co-living) | Commercial |
|---|---|---|---|
| Typical lease length | 6–12 months | Room-by-room, rolling | 3–5+ years with fixed annual reviews |
| Gross rental yield | ~4% | ~6% to just over 10% | ~7% gross / ~5% net |
| Outgoings (rates, insurance, body corporate) | Paid by owner | Paid by owner (plus utilities) | Usually paid by the tenant, as set out in the lease |
| Management fee (approx.) | ~6–7% incl. GST | ~10–15% | ~6–7% incl. GST |
| Typical maximum LVR | 80% (up to 90% with LMI) | ~70–80% (lender dependent) | Up to 80% with selected lenders |
| Vacancy | Shorter and more frequent | Spread across rooms | Less frequent, but can run longer |
| Cash flow at today’s yields | Usually negative | Usually positive | Neutral to positive |
| Capital growth (long term) | Trending to be broadly equal | Trending to be broadly equal | Trending to be broadly equal, and stronger in the short to medium term right now |
Capital Growth: Why We Now Model Them Equally
Historically, residential property delivered stronger median capital growth, driven by population growth, scarcity and owner-occupier demand. That gap has narrowed, and in the short to medium term commercial property, particularly small-format industrial, is currently looking stronger:
- In the commercial examples we have reviewed recently, values have grown by around 12% year-on-year. We deliberately model a more conservative 5–7%.
- In Melbourne, strata warehouse prices have risen about 89% and rents about 69% over four to five years, according to a recent industrial market outlook.
- Industrial land vacancy in established areas is below 2%, and realistic new supply is only three to five years away.
- Residential growth has slowed as prices have outrun yields, which now sit around 3.5–4%.
Over the long term we expect the two to trend towards similar growth, which is why every scenario above uses the same 5% and 7% assumptions. You can see the current market case and live examples on our Commercial Property page, and how infrastructure drives growth in this article.
Risk vs Reward: What Really Matters
Residential (standard)
- Lower deposit options, deep lending market and strong tenant demand
- Negatively geared at today’s yields, so you need surplus income to hold it
- Sensitive to interest-rate rises
- Can be positively geared through higher-yield strategies such as dual key or co-living
Commercial
- Higher net income, and the tenant usually pays the outgoings
- Longer leases with fixed annual increases
- Now available at up to 80% LVR with selected lenders. Rates and terms differ from residential.
- Vacancies can last longer, so a cash buffer matters
- Can suit SMSF ownership, including leasing to your own business on commercial terms
📊 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 is more complex and generally more expensive. It reflects higher liability exposure, business-related risks and the need for broader cover tailored to the tenant’s operations. In many commercial leases, the building insurance premium is recovered from the tenant as an outgoing.
| 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), often recovered from the tenant |
| 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 the one that suits your budget, cash flow and strategy. Measure your return on the money you put in, not on the value of the property.
- If you want low entry and long-term growth and can comfortably fund the shortfall, standard residential property still works, and the tax system helps.
- If you want growth and income, commercial property at 70–80% LVR now competes head-to-head with residential on growth and wins on cash flow.
- If you want the highest income from residential lending, a well-located co-living or dual key property can match or beat commercial yields.
- Many investors use more than one of these at different stages of their portfolio journey. Your budget, borrowing capacity and structure (personal name, trust or SMSF) will decide which comes first.
Not sure which strategy suits you? Speak with properT network about structuring your portfolio, or view current commercial property options.
Related reading
Commercial Property: current options, map and yields
The significant rise in demand for Dual Key property in Australia
High Yield Investment Property: Co-Living homes
Melbourne and Victorian property market set for growth
Queensland Property Market Update
