Residential vs Commercial Property Investing in Australia, How to Pick the Right Deal and Avoid the Borrowing Capacity Trap

A common mistake is treating commercial like residential. Investors ask, “What borrowing capacity do I have left?” then buy a small, risky commercial deal that looks cheap but carries vacancy, tenant default risk, and poor downside protection. The better move is to buy the right commercial, not just any commercial.

What Happened

The conversation unpacked a real pattern seen in experienced residential investors. They spent 10 to 20 years building equity, then tried to bolt on commercial using whatever borrowing capacity remained. One example included a circa 100k specialised commercial asset that sat vacant for 12 months because the tenant pool at that price point was thin and higher risk.

The smarter pivot was selling down the residential portfolio, consolidating capital, and stepping into higher-quality commercial assets in the 5 to 8 million range where tenant quality, lease structure, and deal packaging are typically stronger.

Key Findings

• Commercial quality is not judged like residential quality.
• In commercial, you are not buying a postcode. You are buying cash flow, WALE, and tenant behaviour.
• Lower-priced commercial assets can be higher risk because they often rely on small “mum and dad” tenants with higher default rates.
• The 5 to 8 million segment can unlock stronger tenants, longer leases, better due diligence processes, and cleaner deal structures.
• Positive cash flow can start immediately in commercial once the deposit is placed, especially when yields are 6% plus and leases are long.

Lessons for Investors

1. Stop using borrowing capacity as the strategy

Borrowing capacity is a constraint, not a filter for quality. Choosing a deal because the bank will fund it often leads to compromised tenant strength, poor locations for commercial demand, or specialised assets with limited re-leaseability.

2. Think in cash flow, WALE, and tenant stickiness

WALE is the weighted average lease expiry. It is a practical way to estimate how long your income is contracted before lease risk rises. Tenant stickiness also matters. Tenants with heavy fit-outs, equipment, compliance requirements, or logistics needs are less likely to move.

3. Not all retail is the same

Clothing and easily delivered online retail can be fragile. Large format, experience-based, and convenience-led tenants can be more resilient, especially in suburban locations with strong parking, signage exposure, and repeat demand.

4. Commercial has multiple levers for cash flow

Yield is one lever. Lease terms are another. Depreciation can also materially improve after-tax outcomes, particularly in newer builds, and unlike residential, commercial depreciation rules can be more flexible depending on asset structure and investor circumstances.

Real Deal Breakdowns

These examples show how deal quality is built, not assumed.

Deal 1, Industrial with showroom mix, 5.1 million

• Indicative purchase: 5.1m
• Net yield: above 6%
• Outcome discussed: circa 96k passive income per annum assuming 6% interest
• Strength drivers: tight industrial precinct near an airport, zero vacancy feel, high clearance, significant parking, fresh 5-year lease, long-standing business history
• Why it works: industrial utility plus showroom function supports sales and operations, and airport precinct logistics improves tenant demand

Deal 2, Medical asset, 6.7 million, long WALE

• Indicative purchase: 6.7m
• Net yield: circa 6.97%
• WALE: circa 7 years
• Tenant mix: multiple surgeons plus pathology, complementary services, long-standing occupancy
• Why it works: defensive tenant category, diversified income across operators, proximity to a major health precinct supports ongoing demand

Deal 3, Multi-tenanted large format retail in WA, 5.7 million

• Indicative purchase: 5.7m
• Net yield: circa 6.52%
• WALE: circa 6.5 years
• Anchors mentioned: BCF, Anytime Fitness, Domino’s
• Why it works: multiple tenants spread risk, experiential and convenience-led categories, strong parking count, high exposure positioning on a major roundabout

Deal 4, Newer industrial in NSW, 5.2 million, 10-year lease

• Indicative purchase: 5.2m
• Net yield: circa 5.67%
• Lease: fresh 10 years
• Increases: 3% fixed annual increases
• Outgoings: tenant covers 100% including land tax, as stated
• Build: 2022
• Tenant type: essential supply category providing hygiene, PPE, chemicals
• Why it works: long lease creates set-and-forget income certainty, modern build supports depreciation and tenant appeal, essential-service demand adds resilience

Action Steps

1. Write down the real goal: wealth on paper, or retirement income.
2. Review your residential portfolio and identify assets that have likely finished their next growth cycle.
3. Model a consolidation plan to release 800k to 3m in usable equity or cash.
4. Filter commercial deals by WALE, tenant behaviour, re-leaseability, and outgoings structure, not postcode hype.
5. Target deal quality first, then negotiate price, lease terms, and risk allocation.

Final CTA

If you want to transition from growth to income and avoid buying the wrong commercial deal, book a free discovery call. We will map your portfolio, run the numbers, and show you what commercial options fit your goals.