The short answer. In the model, commercial entry is typically tested at Stage 3 Consolidation, once the borrowing test shows no further residential headroom and yield becomes the constraint. Below that stage the model still shows it as an option. Outcomes depend on the property, lease and market.
The five differences that matter
Every difference between commercial and residential in Australia flows from one root distinction: who pays the outgoings. In residential, the landlord pays council, water, insurance, land tax, and maintenance. In most commercial leases, the tenant pays them via a net lease.
That single structural difference cascades into the five things you actually feel:
| Metric | Residential | Commercial |
|---|---|---|
| Gross yield | About 3.5% (houses) to 4.6% (units) | 5.5-8.5% depending on sector |
| Net yield | ~2.5-3.0% after costs | ~5.5-8.0% on net lease |
| Vacancy risk | Low, 2-4% typical | Higher, sector-dependent 3-8% |
| Lease term | 12 months typical | 3-10 years with options |
| LVR available | 80%, sometimes 90% | 65-70% typical |
| Interest rate | 6.5% typical | 7.0-7.5% typical |
| Capital growth | 3-7% p.a. (historical range, not a forecast) | 3-5% p.a., income-driven |
| Cash flow | Usually negative Y1 | Usually positive Y1 |
| Serviceability impact | Full loan on serviceability | Net rent covers modelled interest (lender treatment varies; broker confirms) |
Figures are model reference figures, not quotes or forecasts. Residential yields are whole-stock gross yields (Cotality, August 2026); commercial rates are the model's sector net cap rates. Actual yield, vacancy and growth vary by property, lease and market.
The trade-off in one sentence
Residential trades cash flow drag for capital growth. Commercial trades capital growth for cash flow. Both compound over time. The modelled outcome of the mix depends on the stage inputs and the goal entered.
Cap rate is the number that matters
In residential, you look at gross yield. In commercial, you look at cap rate. They sound similar. They are not the same.
Cap rate = net operating income / property price. Net operating income is rent minus outgoings that the landlord actually pays. On a net lease where the tenant pays everything, cap rate = rent divided by price. On a gross lease where the landlord pays, it is rent minus outgoings divided by price.
Cap rate is what the market pays for the income stream. Higher cap rate means the market discounts the income (more risk perceived, more compensation demanded). Lower cap rate means the market has bid up the property (perceived safer, willing to accept lower yield).
Cap rate ranges by sector
| Sector | Cap rate range | Why |
|---|---|---|
| Prime CBD office | 5.5-6.5% | Institutional buyers, long leases, low volatility |
| Suburban office | 6.5-8.0% | Wider tenant pool, more competition |
| Retail (main street) | 5.5-7.0% | Foot traffic, tenant mix matters |
| Retail (strip / neighbourhood) | 6.0-8.5% | Tenant covenant varies wildly |
| Industrial (metro) | 5.0-6.5% | Post-pandemic tightening, logistics demand |
| Industrial (regional) | 6.5-9.0% | Smaller pool, longer sale periods |
| Medical / healthcare | 5.5-7.0% | Long leases, sticky tenants, growing demand |
WALE and why it is the second-most-important number
WALE is Weighted Average Lease Expiry. It tells you, weighted by rent, how many years until your tenants' leases expire.
A single-tenant property with a 7-year lease has a WALE of 7. A three-tenant property where tenant A (60% of rent) has 3 years left, tenant B (30%) has 5 years, and tenant C (10%) has 2 years, has a WALE of 3.5.
Why it matters: short WALE means near-term re-leasing risk, which means near-term vacancy risk, which means the bank wants a bigger buffer and the market discounts the property. Long WALE means predictable income for years, which means banks and the market pay up.
The tracker treatment. StratMap models WALE-driven vacancy uplift automatically. Baseline vacancy = sector default. Uplift stacks on top: 5+ years WALE adds nothing, 3-5 years adds 2 percentage points, 2-3 years adds 4 pp, under 2 years adds 6 pp. This is why the same property with the same rent can have very different modelled cash flow depending on lease terms.
The Stage 3 pivot
Some investors find lender serviceability tests limit further borrowing after several residential properties; the point varies. Your broker confirms. Serviceability calculations use notional rates (usually 3% higher than actual) and stress-test income against liabilities. Assessed capacity depends on income, debts and lender policy. Your broker confirms.
At this point, three options exist:
- Wait. 18-24 months while incomes rise, LVRs fall, and capacity rebuilds. Passive but slow.
- Pay down. Aggressive P&I on the highest-rate loan to shrink liabilities. Works, but slow.
- Commercial pivot. Buy a commercial property that services itself. Doesn't consume residential capacity.
How a commercial purchase is assessed (modelled comparison)
A commercial property with a positive cash flow lease services itself on paper. Some lenders weigh a commercial property’s own income more heavily. Policies differ and may still count the loan against you. Your broker confirms how a lender treats it.
Real numbers, roughly typical:
- $650k retail strip. 7% cap rate. Net rent $45,500/yr.
- 70% LVR = $455k loan at 7.5% = $34,125/yr interest.
- Positive cash flow ~$11,375/yr before tax.
- Modelled: net rent covers the modelled interest. How a lender treats it is for your broker to confirm.
Watch-out: LVR and rate premiums are real. 70% LVR means bigger deposit. 7.5% rate means higher borrowing cost. On top of that, commercial DD is harder (tenant covenant checks, lease review, WALE analysis, site inspection with commercial nuance). Commercial due diligence is a different skill set from residential, which is why the model tests it at Stage 3 by default.
Common commercial mistakes
Chasing yield without covenant
A 9% cap rate on a suburban office looks amazing until you discover the tenant is a two-year-old startup with 4 employees and 8 months of runway. High cap rate is the market pricing in risk. Sometimes the risk is real.
Ignoring lease review mechanics
Commercial leases have review clauses: fixed % annual escalation (usually CPI or a set %), market review (rent reset to market at option renewal), or ratchet (up-only) versus non-ratchet. A fixed 4% annual escalation is worth substantially more over a 10-year lease than a market-review clause where rent could go up, down, or nowhere.
Underestimating tenant fitout costs
When a commercial tenant leaves, the property may need substantial refurbishment before re-leasing. Painting, partition changes, aircon service, sometimes complete refit for the incoming tenant. Budget an "incentive" line for retail and office assets. Industrial is usually simpler.
Buying regional when you have no regional network
A high-cap-rate regional industrial building looks great on paper. When the tenant vacates in year 4 and you need to re-lease, you discover you have no property manager relationships, no local business network, no idea what the actual market rent is. Regional commercial rewards local knowledge.
When commercial does NOT make sense
- You are at Stage 1 or early Stage 2. Commercial due diligence is a different skill set from residential.
- You are cash-flow-constrained. The upfront deposit is bigger (30% typical), and if the tenant leaves you carry the outgoings until re-leased. Have a buffer.
- Your goal is short-term capital growth. Historically, commercial capital growth has been lower than residential over many periods, with returns weighted to income. This is not a forecast.
- You want a simple portfolio. Commercial adds complexity: cap rate compression risk, sector cycles, tenant management. If you want set-and-forget, residential is cleaner.
The framework applied
Model both, side by side, in the tracker:
- Scenario A: Continue residential. Property 5 at $750k residential. Cash flow, growth, serviceability impact.
- Scenario B: Commercial pivot. Property 5 at $650k retail with 7% cap. Cash flow, growth, serviceability impact.
Look at the two 10-year projections next to each other. Which one lands closer to your goal? Which one preserves optionality for property 6 and 7?
That is the framework. Not a rule, a comparison.
The compliance frame. Commercial property is not a financial product under the Corporations Act 2001. StratMap does not hold an AFSL. This article is educational. Commercial DD, tenant covenant assessment, and structural decisions should involve a licensed commercial buyers agent, a specialist commercial solicitor, and your accountant. The tracker models. Your professional team advises.