Editorial / Personal Finance & Investment

Why Commercial Property is a More Lucrative Investment than Residential 

Coming from an engineering background, I initiated my investment journey in 2010 by investing a sum of $60,000. This sum was the result of savings from multiple jobs that I held during a six-year stint, spanning my school and university education.

Starting my property investment voyage, I initially bought a house and granny flat in Sutherland, Sydney. This investment provided a yearly positive cash flow of $10,000 after covering debts and other outgoings, piquing my curiosity in property investment.

As I aimed to own a portfolio of ten properties, each generating an annual income of $100,000, I faced obstacles and learned critical lessons. Together with my wife Mina, we shifted our focus towards high-yielding multi-tenant investments.

Eventually, we shifted towards the world of commercial real estate due to its compelling average net yields of 6-8%, surpassing that of residential properties significantly. This strategic shift critically influenced our investment approach, paving the way for a diverse and profitable portfolio in the commercial property sector. Today, our portfolio stands impressively valued at over $75 million, which would have not been possible if we stuck to low-yielding residential property. 

I have witnessed firsthand the immense potential that commercial properties hold for investors. Here are the reasons why commercial property investment stands out as a more lucrative opportunity compared to residential properties. 

Higher Income Potential 

Generally, commercial properties tend to have a better return on investment compared to residential properties. Commercial properties typically yield an annual return of the purchase price between 6% and 9%, whereas residential properties usually result in roughly 1-3%. These figures, presented in net terms, illustrate the substantial difference in income potential between the two types of properties. This higher return is a testament to the robust financial rewards that savvy commercial property investors can enjoy. 

Longer Lease Periods 

One of the key advantages of commercial real estate lies in the duration of its leases. Commercial leases often extend between 3 to 10 years, providing investors with a stable and predictable income stream over an extended period. This prolonged lease period significantly enhances financial security, a crucial factor for investors seeking long-term stability in their investments, a luxury rarely found in the volatile residential market where leases are often renegotiated annually. 

Direct Control over Value 

Commercial property investment offers a unique opportunity for investors to directly influence the property’s value. By expanding lease-able space or adjusting rental rates, investors can proactively enhance the value of their commercial properties. In contrast, residential property values are closely tied to comparable properties in the neighbourhood, limiting the investor’s ability to influence their asset’s appreciation. 

Triple Net Leases 

Commercial properties often utilise the triple net lease structure, a game-changer for investors. Under this arrangement, tenants bear the responsibility for property taxes, insurance, and maintenance costs, in addition to the rent. This shift in financial responsibility substantially reduces overhead costs for property owners, significantly boosting the property’s profitability. 

Less Competition 

The barrier to entry in commercial real estate is higher, as it demands a more substantial capital investment. This barrier naturally limits the competition, offering committed investors a unique advantage. Additionally, dealing with professional business entities, a common practice in commercial property transactions, simplifies negotiations when compared to the complexities of dealing with individual tenants in the residential sector. 

Multiple Revenue Streams 

Multi-unit commercial properties present investors with the opportunity to diversify their income streams. By housing multiple tenants within a single property, investors can spread their risk across various businesses, ensuring a consistent flow of revenue. This diversification not only mitigates risk but also amplifies the property’s income potential, making it a wise and strategic investment choice. 

The world of commercial property investment offers a myriad of advantages, providing secure and financially rewarding investment avenues. As investors, embracing the unique opportunities presented by the commercial real estate market can pave the way for sustained wealth creation and long-term financial success.

About Author

Scott O’Neill is Australia’s number one commercial property expert and the Founder and Managing Director of Rethink Investing, which is recognised as Australia’s largest and most experienced buyer's agency catering to commercial property investors. Rethink Investing has sourced commercial properties for over 3,500 clients, enabling them to procure more than $3.0 billion in real-estate since 2015.