A Beginner’s Guide to
Commercial Investing
Why choose commercial property?
In short, commercial property offers the highest cash-flow you will find in Australian real-estate. In this post COVID climate in Australia – where interest rates are at an all-time low and high-quality commercial property is scarce – this tightening of the market has resulted in yield compression for commercial property (which is effectively capital growth), with returns currently far outweighing what residential property can deliver. Higher yields, the option to negotiate long leases (some commercial properties boast three, five and upwards of ten year leases) and the opportunity to build annual rental increases into the contract make commercial property an incredibly appealing investment for many.
But the most significant reason why you should choose commercial property must be the tenants. Apart from them being responsible for all outgoings, a well known branded tenant, for example, Coles, Australian Post, BWS, IGA or Suncorp, have their reputations to uphold and will guarantee security and therefore strong returns. The option is clear, when at the other end of the spectrum lie residential tenants who can be far more unpredictable, leading to many unforeseen costs for a landlord. Commercial tenants are of course not perfect, but when you purchase a high-quality commercial asset, it’s likely those tenants will far exceed anything you would have known in the residential world. Your reward will be a secure, long-term investment which produces a high-cash-flow and after you’ve paid your loan in full (some commercial can be paid off in as little as ten years' time), a passive income straight into your pocket.
What Type of Property Is Best for a First-Time Investor?
The ideal property for a first-time investor depends on your financial goals, risk tolerance, and current circumstances. For many, residential properties offer a straightforward entry point with consistent rental demand and lower upfront costs compared to commercial options. These can provide a balance of cash flow and long-term capital growth.
However, if you're seeking higher returns and have the financial capacity, commercial properties, such as retail spaces or industrial sites, may offer stronger yields and secure long-term leases.
Ultimately, the best choice is one that aligns with your personal financial situation and investment strategy. At Rethink Investing, we work with first-time investors to assess their goals and guide them toward the right property to start their investment journey. Discover your financing options through our Rethink Financing team.
How Do You Generate Income from Commercial Property?
Generating income from commercial property typically involves two primary streams: rental income and capital growth.
Rental Income
Commercial properties are leased to businesses, providing consistent rental payments. These leases are often longer than residential leases, with terms ranging from 3 to 10 years or more. Additionally, tenants usually cover many outgoings, such as maintenance, insurance, and property management fees, which can enhance net rental returns. High-quality tenants with secure lease agreements further strengthen income stability.
Capital Growth
Over time, commercial property values can increase based on factors like market demand, location development, or improvements to the property. Strategic upgrades or rezoning can also boost the property’s market value, offering an opportunity for significant gains when selling or refinancing.
Before purchasing commercial property, it’s important to project your rental yield to ensure your investment is profitable in the long-term. With this investment property calculator, you can get a full breakdown of your growth potential in just a few easy steps.
The basics of commercial property investing
What is commercial property?
Commercial property is real estate used specifically by investors for purposes intended to generate a profit. In Australia, it usually takes the form of building, within the four asset types (office space, retail, industrial or specialty), however, there are many other subcategories like medical, hotels, short term accommodation, etc.
View the recent high yielding, investment grade commercial assets that we’ve purchased on behalf of our valued clients.
View our Commercial Properties
The Four Main Types of Commercial Property
Commercial property can be divided into four distinct asset classes. Office space, retail, industrial and specialty. Each asset type has its own set of risks and rewards, and follow their own trends. It’s important to understand the fundamentals of each and their relationship to the current market to make sure you are purchasing a winning commercial asset. Let’s take a closer look at them individually.
Office Space
Commercial office space could be anything from a multi-level office tower in a central business district to a small office in a suburban area. When investing in office space it’s important to factor in;
- Employment growth, business confidence and, post COVID, workplace flexibility changes as the key drivers in the office space market. A high-quality office asset will be:
- Located close to food and retail amenities
- Close to transport networks or have ample parking available for employees
- Set in pleasing surroundings and boast plenty of natural light
- A well-maintained building(saving the costs of repairs since tenants pay for these themselves)
- Close to other similar businesses
Retail
Retail space could be anything from an entire shopping centre, for instance a Westfields, all the way down to a 50m2 hairdresser shop front. Key drivers in the retail markets are, consumer confidence, interest rates, time of the year (Xmas boom period), tenancy mix of the area and income growth. Investor demand is influenced by low interest rates, a strong housing market and general health of the economy. A high-quality retail asset will be:
- Highly visible from a main road with access to ample parking if a strip shop or in full view if inside a mall.
- Close to quality anchor tenants (also known as key operators), and if situated in a mall, one with low vacancy rates
- Positioned in affluent areas as wealthy people have more disposable income.
- Located in an area with a growing population
- Boasting well-established tenants who are likely to renew their leases (with long-lease and strong covenants in place)
- Offering zoning options, multi-tenant uses, or the potential for future development of the property
Industrial
Industrial space could be anything from a small 100m2 industrial site, with a flexible interior space (a mix of office and warehouse space). To a major logistics hub which could be over 100,000m2. Warehouses or factories are used to produce or store goods, or they can also be used as distribution or logistics centres. Prime considerations are strong road networks (freeways and motorways), which provide access to metropolitan areas and proximity to ports and cargo docks. Key drivers of industrial commercial property are;
- A strong economy, great access to important infrastructure and the interest rate environment. A high-quality industrial asset will:
- Be in close proximity to food retailers and other desirable amenities within population centres
- Boast a well-maintained, secure building with office space, kitchen, toilets and air-conditioning
- Feature an external loading dock with heavy-vehicle accessibility and suitable height-limit
- Have minimal restrictions (if any), on water usage and discharge or noise, along with no major environmental concerns
- Flexibility to add offices or showrooms to the premises
- Boast high ceilings as many tenants use stacking shelves for storage
Specialty
Specialty commercial properties encompass a wide range of assets, such as service stations, childcare centres, hotels, and pubs. The performance of these assets is driven by factors like sector-specific business confidence, interest rates, and the overall health of the economy. A high-quality speciality asset will:
- Offer scarcity: For example, investing in a childcare centre could be risky if multiple similar developments are underway in the same area.
- Feature secure leases: Backed by reliable, long-term tenants, ensuring stable income.
What to look for in a high-grade commercial investment
Selecting the right commercial property is a vital step toward creating a successful investment. By focusing on key factors like location, building quality, and reliable tenants, you can make informed decisions that build your financial future. Here’s what to consider:
LOCATION
The location of a property is crucial—it’s where the value begins. A busy, high-traffic area is more likely to attract thriving businesses that want to rent your space. In contrast, properties in quieter or hard-to-access spots may struggle to generate consistent demand.
VACANCY
Pay close attention to the number of vacant shops, offices, or warehouses nearby. High vacancy rates can signal that the area may not support businesses effectively, making it harder to find tenants. However, some vacant properties are part of the owner-occupier market, where businesses buy spaces for themselves.
BUILDING QUALITY
A modern, well-maintained property requires less upkeep and appeals to tenants. Choosing a property that’s in excellent condition reduces the likelihood of costly repairs, ensuring a smooth investment experience.
TENANT STRENGTH
The value of a commercial property is closely linked to its tenants. Long-term tenants, such as dental surgeries, beauty salons, or veterinary clinics, are a great asset. These businesses often invest heavily in their fitouts and build customer loyalty in their location, making them less likely to move.
What Is a Good ROI for Commercial Property?
A good return on investment (ROI) for commercial property typically ranges from 6% to 12% per year depending on the asset class, market conditions and location. Factors such as rental income, lease terms, tenant quality and capital growth all influence ROI. High-yield properties in emerging markets or properties with secure long-term tenants often deliver stronger returns. At Rethink Investing, we help you maximise ROI by identifying high-performing commercial properties and offering expert strategies to enhance your investment outcomes.
Value-Adds and Ways to Increase your Commercial Property Investment
Buying under market value immediately increases the value of your property as it is already worth more than the purchase price.
Some tenants occupying industrial assets build mezzanines to create more space or provide an office for their business.
Many are built without council approval and cannot technically be added to the square footage of the building by law until approved by council. Do your research here as there may be an opportunity to secure the property for less and then retrospectively approve the add-on through council, giving you an instant increase in the property’s value.
More ways to add value to an investment property:
- Adding more square meterage to the property or dividing-up space can add significant value to your commercial property.
- Adding highly desirable assets such as storage or parking to your commercial property are both great options as both are highly sought after by tenants
- Increasing rents can have a huge effect on the portfolio, as it increases cash flow and capital growth.
- Increasing the length of your lease will increase the security on the property which will mean investors will value your property at a higher rate.
Learn more about how to add value to your investment property
What Is the Average Return on Commercial Property in Australia?
The average net yield on commercial property in Australia generally falls between 5% and 10% per year depending on the property type, location and market conditions. Industrial properties often deliver the highest yields, ranging from 6% to 8%, while office and retail properties typically yield between 5% and 7%. Specialty properties, such as childcare centres or medical facilities, may offer returns at the higher end of the spectrum due to their secure, long-term leases.
Capital growth can further enhance total returns, particularly in high-demand areas or during rising market cycles.
What Will a Good Commercial Property Buyers Agent Do For You?
Conduct comprehensive tenant research and due diligence
The first step is to thoroughly investigate the tenant and their business, both past and present. Determine how long they’ve been at the premises, verify their rent payment history, and ensure they are up to date by requesting an arrears report.
In commercial property, the value of the building is heavily tied to the quality of its tenants. A property without reliable tenants holds little value, so it’s crucial to ensure any current tenants are fully vetted before purchasing. Additionally, focus on acquiring properties that can attract high-quality tenants in the long term.
Understand the asset classes
Understanding where each asset class is in its cycle and which investments will remain strong over the next decade is key to making a smart purchase. Depending on your personal criteria—such as buying in a capital city, prioritising high cash flow, or diversifying your portfolio—a skilled buyer’s agent will identify the type of commercial asset that best aligns with your goals.
Understand the locations you’d like to buy in
It's crucial that your buyer's agent has a strong understanding of the market in your desired areas, including property lease and sale values, upcoming infrastructure developments, and the local population demographics.
An experienced buyer's agent will also source properties on your behalf. Agents with extensive experience typically have larger networks, giving their clients access to more off-market opportunities. Off-market properties are highly valuable, as they reduce competition and can offer better negotiating conditions.
Commercial property buyers agents will also:
- Negotiate the terms of the contract on your behalf.
- Support you through the whole sales process.
- Link you up with the best rental managers in that area.
- Provide long term support. After settlement they will continue to support you with your property.
Meet our team of commercial property experts
5 Secrets to Success in Commercial Real Estate
Focus on Relationships:
Commercial real estate is a relationship-driven industry. Strong connections can set you apart, helping you secure the best deals, build rapport with agents who can provide exclusive off-market opportunities and gain the trust of sellers over competing buyers.
Time Your Purchase and Choose the Right Sector:
Different asset classes and sectors perform better at different times. For instance, while many CBD office markets are currently struggling, industrial assets are thriving. Timing and industry selection are key to maximising returns.
Prioritise Quality Locations Over Yield:
Don’t chase yield alone. For example, a 10% net yield in a small regional town may not offer the same long-term growth as a 6% net yield in a capital city. Quality locations provide more stability and potential for capital growth.
Select Assets That Are Easy to Re-Let:
Always consider the worst-case scenario. If you’re not confident in your ability to replace a tenant quickly, the asset may not be the right investment for you.
Conduct Thorough Research:
Investigate both the tenant and the property to ensure the income is reliable. Conduct comprehensive due diligence to confirm the asset is priced appropriately and aligns with your investment goals.
How Much Money Do You Need to Get Into Commercial Property?
You can get into the commercial property market with around $250,000. So that’s a 30% deposit, plus stamp duty, solicitor fees and your building and pest inspections. That figure is based on a $600K property boasting 100 square feet (perhaps a small physiotherapist or office or warehouse located in a capital city with high population growth).
These properties are good quality with smaller tenants and could still offer three-year lease options, so they’re a great investment all around. As for finance options, some banks are offering 80% leases now.
View our recent commercial property purchases
Key Commercial Property Investment Terms You Should Know
- Anchor Tenant: The primary tenant in a commercial property, often a significant draw for additional tenants or customers.
- Capital Gains: The increase in value of a capital asset over time.
- Capital Gains Tax (CGT): The tax applied to profits earned from the sale of a capital asset.
- Consumer Price Index (CPI): A measure of the average price change over time for a fixed basket of goods and services. Published by the Australian Bureau of Statistics, CPI reflects inflation and changes in living costs.
- Covenant: A condition included in a property deed or title restricting its use for specific purposes.
- Depreciation: The loss of value of a tangible asset over time. In real estate, it may also refer to value reduction due to market conditions.
- Due Diligence: A thorough investigation of a potential investment or purchase to verify all material facts. For property purchases, this includes examining the contract of sale, planning controls, and other relevant factors affecting land or building use.
- Fit-Out: The process of preparing a leased space for occupation by the tenant, often involving installations like flooring, partitions, and signage. Fit-out costs are typically borne by the tenant but may be negotiable.
- Gross Leasable Area (GLA): The total floor area available for tenant use, measured from the midpoint of shared walls to the outer edges of external walls.
- Gross Yield: The rate of return generated by a property, calculated as the annual rental income divided by the property value.
- Loan-to-Value Ratio (LVR): The proportion of a property’s market value that a lender will finance, expressed as a percentage.
- Mortgage Insurance: An insurance policy that protects lenders or borrowers against mortgage default. In Australia, Lenders Mortgage Insurance (LMI) is typically required for loans exceeding 80% of the property's value, with the borrower usually covering the premium.
- Negative Gearing: A strategy where borrowed funds are used to purchase an asset, and income from the investment is less than the costs of interest and maintenance. In Australia, the shortfall may be tax-deductible, and profitability relies on capital gains when the asset is sold.
- Net Operating Income (NOI): A measure of a property's profitability, calculated as total property revenue minus all operating expenses.
- Net Yield: Similar to gross yield but accounts for all outgoings and expenses, providing a more accurate measure of return.
- Sale and Leaseback: A transaction where a company sells its property to an investor and simultaneously signs a long-term lease, providing the investor with income.
- Sublease: An agreement where a tenant leases part or all of their rented space to another party, known as the sublessee or subtenant.
- Weighted Average Lease Expiry (WALE): The average remaining lease term for all tenants in a property or portfolio, weighted by either income or lettable area.
- Yield: The percentage return representing the income generated from an investment.
- Yield Compression: A decrease in the yield rate for a property, often due to rising property values and stable or declining rents.
