The Complete Guide To Buying Commercial Property

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Buying Commercial Property: A Complete Guide

Are you thinking of expanding your property portfolio, then you might consider buying a commercial property. Unlike residential property, the commercial property market is different. Commercial and Industrial properties are rented out to businesses, and owners generate their profits from rental income and from capital growth.

Historically people feel more comfortable with residential property, because most people get to live within it, so therefore be a part of the purchase and the growth. There is this comfort factor surrounding it.

Commercial property investing definitely isn’t easier than residential property investment. If anything, there are a few more risks involved, but whilst it may seem daunting to step into the commercial property market, it’s not insurmountable, but based on the significant differences, buying commercial property requires investors to have a broader understanding of the economy, so it is generally advised that you conduct extensive research before investing in commercial properties and ask yourself the following questions:

  • What are the differences in investing in commercial property versus residential property?
  • What are the pros and cons of buying commercial property?
  • What factors should you consider before buying commercial property?
  • And what is commercial property depreciation?

The Differences Between Buying Commercial Property Rather Than Residential Property

There are many differences when investing in commercial investment property  compared to buying residential property, and of course most are centred around the financial gain and risk differences between the two.

Financial Aspirations

What is the purchasers desire for financial gain on an investment?

If you are looking for a greater return on rental income then this is where commercial property is seen as the premium properties to invest in. The rental yields on commercial properties can be twice as much as on residential properties. 

This is especially true after all of the outgoings are taken into account. In residential properties all of the following are paid by the property owner: council rates, water rates, body corporate, maintenance and so on, which reduces the net yield substantially. By contrast commercial properties typically tenants are responsible for the outgoings. So, there’s an opportunity for a much greater net cash-flow return, which in turn gives you the cash to build on your property portfolio.


The general consensus is that commercial property ownership comes with greater risk. But generally this is offset as most people who invest commercially generally have a starting portfolio already, whereby they have some residential properties to maximise the capital growth due to the ever increasing residential property market. 

Although there are plenty of benefits to buying commercial property, you also need to be aware of the price you may have to pay for those higher returns. Commercial property historically does not perform as well in terms of capital growth.

Given the perceived risk associated with buying commercial property, banks often ask for a high deposit and charge higher administrative fees and interest rates.

For that same reason, commercial properties are harder to sell, resulting in a possible lack of liquidity.  

Due to the longer duration of commercial property lease agreements, it’s more challenging to replace a commercial tenant than a residential one.

Commercial properties aren’t in as high of a demand, so vacancies between different commercial property tenants tend to be longer. The demand for commercial real estate is significantly more elastic, which means that the demand for commercial property frequently fluctuates compared to the residential property because people always need home. The leases are also more complex and are reliant on solicitors.

Depending on the age and style of the commercial building,  depreciation rates fluctuate due to the construction and fit-out. And given that the property is generally bigger,  renovations will cost significantly more if you wanted to upgrade your commercial property.

Buying commercial property triggers GST which could cost you up to 10% of the purchase price.


Essentially, instead of buying a property with tenants living in it, you’d be buying a property with tenants working from it.

Your main goal is to generate cashflow when commercial investing, rather than capital growth, so this means that who you have for tenants and their success is also paramount to your success. 

The tenant of the commercial property generally incurs the cost of maintenance and repairs expenses, so in most cases, commercial property owners generate a higher rental income which means that they are more likely to deliver a positive cash flow.

Commercial property tenants are also responsible for paying expenses such as rates and taxes as well as insurance whereas residential property tenants aren’t.

Commercial property tenants also sign long leases, which gives owners greater security and higher rental yields.

Tenants usually maintain/upkeep the property and there is less room for unforeseen circumstances.

Pros & Cons Of Investing In Commercial Property

Now that we understand the differences between commercial and residential property, what are the pros and cons of going down the commercial property route? Let’s discuss a few.

Pros Of Investing In Commercial Property

Commercial properties tends to offer a good level of income return while offering capital growth potential. 

Commercial properties tend to offer higher yields with a rental yield anywhere from 5% and  above and these higher yields equal more potential for positive cash flow. A reliable passive income has been established. 

Commercial properties offer annual rent increases that are fixed when signing and generally the increases are higher than inflation, ranging between 3% and 4%.

There is a tax benefit whereby you can claim depreciation tax deductions

Most commercial properties are positively geared

Mostly all of the operating and maintenance expenses related to the property can be passed back to the tenant and lease terms are typically much longer than for residential property.

Historical evidence also shows that a well-diversified portfolio of commercial property tends to be less volatile while offering greater overall return potential other investments.

Cons Of Investing In Commercial Property

Some disadvantages to purchasing a commercial property is that there are far longer negotiations involved including contracts with tenants.

Commercial businesses rely on the economy and market forces, as evidenced during Covid.

A greater deposit required as a percentage as opposed to residential properties.

Lower market cap – residential property valued at over $9 trillion but commercial property is valued at just over $1 trillion – which means fewer properties to choose from.

Varying property types that can come with varying risk from banks and lenders, and as a result, different loan restrictions – complexity can make it difficult when it comes to lending

Properties can sit vacant for long periods if tenants leave and landlords need to consider physical obsolescence and environmental concerns.

What Factors Should Be Considered Before Buying A Commercial Property?

First and foremost you need a good understanding of the property market and the economy. You must be on top of market trends as the commercial market can fluctuate, so please seek professional help and also contact Select Legal who can assist.

In commercial property there are many factors to consider personally first. Maybe you want to move into your investment property in the future. Maybe you are just starting out. Maybe you’re more comfortable in the residential space. Maybe you are not in a position to scale your investments currently. You may not be able to diversify your portfolio adequately. In all of these cases, commercial property might not be the right move for you.

A commercial property investor should not think of just the one property,  they should think of it as a portfolio,  to hedge properties against each other as you don’t want to be left with 1 white elephant of a property. This is a good strategy. Of course you have to start with one, but diversification is important.

Investing directly in a commercial property is much more complex than residential investment, so it is recommended for experienced investors rather than someone without experience in commercial real estate, but if you are not experienced, gain that experience via research.

When considering commercial Property it’s always best to think about your long-term wealth strategy.

If your goal is to seek out additional cashflow and continue to build your property portfolio as quickly as possible, commercial property is definitely an avenue to pursue.

Other factors that are important:

Does the commercial property have an existing tenant. If you’re a first-time commercial property investor, you may want to consider buying a property with an existing long-term tenant to avoid extended vacancy periods. This is an ideal situation because you’ll already have a reliable tenant in place, fewer initial expenses and the lease agreement will cover the annual rent increases.

What location is the property in. With any property investment, location is a significant factor to consider when your property is vacant, and you need to find a tenant. You need to think about the location in relation to a suitable tenant. For example, if you’re thinking of buying a factory, you may want to consider an industrial area with a demand for manufacturing space. You’ll also want to consider the infrastructure. Is it close to major roads, airports or shipping ports? Are there transport hub facilities in the area?

How good is the property. Depending on the business you want to attract, you’ll have to make sure that you’re buying a commercial property attractive to those particular types of tenants. You’ll also want to make sure that the building’s actual structure is in good shape because you might want to hold off on any significant renovations until you have a tenant and a cashflow.

What Is Commercial Property Depreciation?

As a building gets older, its structure and the assets within the building are subject to general wear and tear. In other words, each year, the value decreases and thus, depreciates.

The Australian Tax Office (ATO) allows commercial property investors and its tenants to claim depreciation as a tax deduction if the property is used to produce income.

There are two types of commercial property depreciation deductions:

  • Division 43 – Capital Works Deductions
    • Division 43 capital works deductions refer to the depreciation of the structure of the building. Generally, commercial property owners can claim depreciation on a commercial building if it was constructed after 20 July 1982
  • Division 40 – Plant and Equipment
    • The term “plant and equipment” (or Division 40) refers to the fixtures and fittings found within the building. These are generally known as easily removable assets and span across light fittings and carpets to commercial pieces of machinery such as conveyor belts. Plant and Equipment assets are depreciated according to their value and effective life as determined by the ATO

Taking advantage of these commercial property tax depreciation deductions can result in a substantial cash flow benefit and optimised liquidity.

You can do this by ordering a depreciation schedule.

Simply put, a commercial property depreciation schedule is a report that details the tax depreciation deductions you can claim on your investment property. Make sure to check out our guide to why a depreciation schedule is essential for all property investors.

Tips From Select Legal

Select Legal suggest that you don’t try to navigate this all on your own, there are a range of property professionals that can help you when buying commercial property.

Find an independent investment adviser, accountant or Select Legal with extensive experience in commercial real estate.

Get educated so you fully understand the difference between residential/commercial. Research the market, understand the metrics and returns and do your due diligence when it comes to locations and types of properties you’re looking to buy. Discuss your plans with them before considering an investment in this sector

Prepare a budget and an understanding of your needs. Obviously a larger budget, rather than just trying to break into the market, is a big win because sellers are generally able to be more competitive with their offer.

Try to eliminate pitfalls  by buying with your head not your heart, remember to weigh up the pros and cons.

Select Legal Helps In Legal Matters Of Buying Commercial Property

When buying commercial property, you need to be aware of legal issues such as leasehold agreements, leases, mortgages, and so on. You should also consider whether or not there are any environmental restrictions on the building site.

We are a leading real estate law firm in Melbourne, with targeted experience in commercial property matters. Our lawyers are highly experienced in advising clients on all aspects of commercial property transactions, including lease agreements, sales contracts, purchase & sale agreements, construction contracts, project management, development projects, land acquisition, and more.

Contact Select Legal today for all your commercial property needs or request a quote which will only take a few minutes.

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