Investing in commercial property
Commercial property differs from residential in lease structure, tenant pool, and lender terms. A primer for owner-operators and investors.
Lease structure
Commercial leases are typically 3-5 years with options to renew, vs residential's 12-month rolling. Tenants usually pay outgoings on top of base rent (council rates, insurance, water) — net rent is closer to gross rent than in residential. Rent reviews are written into the lease — fixed % or CPI annually, market review at option.
Vacancy is the big risk. A residential vacancy is typically 2-4 weeks. A commercial vacancy can be 6 months or more depending on asset class and submarket.
Lender terms
Commercial property lenders typically lend to 65-70% LVR (vs 80-90% residential). Rates are 1-2% above residential investment rates. Loan terms cap at 15-25 years vs residential 30. Most commercial loans are interest-only for the term, with the principal repaid via property sale.
Lender focus is the income stream — quality of the lease (term remaining, tenant covenant) drives valuation as much as the building itself.
Common entry point: SMSF + own business
Many small business owners buy their own premises through their SMSF. The business pays market rent to the SMSF (deductible business expense), the SMSF holds the asset (taxed at 15% in accumulation, 0% in pension), and the owner has security of tenure for their business.
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