Why sophisticated resi property investors should consider diversifying into commercial 

For most property investors, residential real estate is the natural starting point. It’s familiar, relatively liquid, and the barriers to entry are lower than in commercial markets. You understand how houses and apartments are valued, can visualise the tenant experience, and there are many financing options available. 

Over time, many investors develop substantial portfolios, using their knowledge of local markets to maximise returns. 

The residential property wall 

Despite their popularity, residential portfolios have limits. Cash flow for residential investment properties is often poor, and many investors run out of cash or borrowing capacity sooner than expected. 

This happens because of how lenders sensitise residential income. While gross rental yields for residential properties sit at around 3-5%, according to Cotality, lenders typically discount this gross rent to 75-80% when calculating your ability to service a loan. Then, once you factor in ongoing costs like rates, insurance, and maintenance, the net yield applied for servicing drops even lower, often failing to cover the actual costs of holding the asset. 

Lenders also apply interest rate buffers (around 3%), further reducing borrowing capacity. 

Even with a high income, your ability to borrow can be restricted by the very residential assets meant to build wealth. When a residential portfolio plateaus, commercial property can be the next step to increase cash flow and support further growth. 

The benefits of commercial property investment 

Commercial real estate offers several advantages for experienced residential investors. 

Higher net yields 

Commercial properties typically deliver net yields between 5-8%, according to CBRE, compared to residential’s compressed returns.  

The income advantage compounds when you consider that commercial tenants typically cover outgoings – insurance, rates and maintenance – that would otherwise erode your returns in residential property. 

Given the higher net yield, commercial property investment tends to deliver stronger cash flow than residential property investment.  

Longer lease terms 

While residential tenancies are typically six to twelve months, commercial leases often run for three, five or even ten years. This provides income stability and reduces the time and cost associated with tenant turnover. 

Diversification 

Your investment performance is no longer tied exclusively to the residential market cycle, and you gain exposure to different economic drivers, such as business activity, employment trends and consumer spending. 

The disadvantages of commercial property investment 

Like any asset class, commercial property has its own considerations. 

Higher entry and holding costs 

Commercial investments typically require larger deposits, and upfront costs such as due diligence, legal work and building reports can be higher. Owners may also need to fund incentives or contributions to tenant fit-outs in some cases. 

Tenant quality 

A commercial property’s value is closely tied to the strength of its tenant and lease. A strong tenant on a long lease can add to the asset’s value, while a weak tenant or short lease can make a property less attractive to lenders and buyers. 

Market sensitivity 

Commercial assets can be more sensitive to economic cycles and business conditions. Demand for certain property types may shift with changes in consumer behaviour, employment trends or industry performance. 

Financing commercial property investment 

It’s important to understand that commercial property finance operates differently. 

Lenders typically offer lower loan-to-value ratios (LVRs), often around 65-70% compared to residential’s 80% or more. This means you’ll need a larger deposit or equity contribution. However, lenders focus heavily on the asset’s income-generating potential rather than your personal serviceability position. For investors with strong equity but tight borrowing capacity under residential lending rules, this can be a genuine opportunity to unlock growth. 

Non-bank lenders and specialist finance brokers can also provide more flexibility when structuring commercial loans, including interest-only options, portfolio-based assessments and financing that can consider multiple ownership entities together. 

Where to start with commercial property investment 

Many residential investors begin with smaller commercial assets: industrial units in growth corridors, single or small multi-tenant retail shops with stable leases, or mixed-use developments that combine residential and commercial elements. 

These properties are more affordable, easier to understand and still deliver the core benefits of commercial ownership. However, due diligence is critical. Lease quality, tenant strength, location dynamics and vacancy risk all require careful analysis. 

How to transition from residential to commercial property investment 

Transitioning into commercial property involves more than buying an asset. Investors need to structure portfolios for sustainable growth, reduce risk and maximise financing. Commercial finance can offer more flexibility than residential, but specialist knowledge is key. 

Finance Advisory Co can help. With deep experience in both residential and commercial property finance, we work with investors to assess lending options, structure loans for maximum efficiency and provide risk management framework support. By tailoring finance solutions to your portfolio and investment goals, we can help make the move into commercial property streamlined and more strategic. 

If you’re ready to explore commercial property and want specialist guidance on financing options, speak to a specialist investor finance broker at Finance Advisory Co. Contact us by calling 0426 236 007 or emailing ben@finad.com.au. 

Finance Advisory Co Pty Ltd (ABN 37 660  030 419) is a Credit Representative (CR No. 541104 of Connective Credit Services Pty Ltd (Australian Credit Licence 389328 ) 

This article is intended to provide general information only and does not take into account your objectives, financial situation or needs. While every effort has been made to ensure the accuracy of the information, it does not constitute legal, tax or financial advice and should not be relied upon as such. You should consider whether the information is appropriate to your circumstances and seek independent professional advice before making any financial decisions. All lending is subject to lender terms and conditions, fees, charges and eligibility criteria.