Residential or commercial real estate, what makes a better investment?

Residential property investment offers stability, consistent capital growth and easier management, compared to potentially higher-yield but riskier commercial properties.

Investing in property is a popular choice for many Australians, but the decision between residential and commercial property can be challenging. Each option presents unique opportunities and risks, making it essential to understand the key differences before diving in.

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Entry costs & financing

Residential properties generally have lower entry costs and are easier to finance. Lenders often view residential mortgages as less risky, offering more favourable terms and lower interest rates compared to commercial loans.

Tenant types & lease terms

Residential properties are typically leased to individuals or families on shorter, more flexible leases, often ranging from six months toa year. In contrast, commercial properties, which include offices, retail spaces, and industrial units, are usually leased to businesses on longer terms, often three to five years or more. This results in more stable income for commercial properties but potentially less flexibility, especially in gaining valuable uplift in rental income opportunities.

Return on investment

Commercial properties can offer attractive rental yields, averaging 5%+, compared to standard or established residential properties, which typically yield on approximately 4%. However, property selection is crucial for residential investing, as multi-rental properties (such as dual income and duplex) consistently provide higher rental yields, often at above6-8%.

Market volatility

The commercial property market can be more volatile, closely tied to the business cycle and economic conditions (think pandemic and lockdown periods not that long ago). Residential properties, particularly in desirable locations, tend to be more resilient, with demand driven by long term high housing demand.

Why choose residential property?

• Stability - residential properties offer a more stable and less volatile investment option.
• Capital growth - residential properties in high-demand areas tend to appreciate consistently over time.
• Ease of management - managing residential properties is generally simpler, with fewer specialised maintenance requirements.

While commercial property can offer attractive yields, residential property investment in Australia provides a more stable and accessible option for long-term investors, particularly those new to the property market.