The Pros and Cons of Commercial Property Investment

Commercial property investment sits outside the typical first home buyer conversation, but some buyers with small deposits consider it after hitting roadblocks in the residential market.

The deposit requirements alone make commercial property a different proposition. Most lenders require 30% to 40% deposit for commercial purchases, sometimes more depending on the property type and your circumstances. If you're working with a 5% or 10% deposit saved for a residential purchase, commercial finance won't be accessible without a guarantor, existing property equity, or a significant change in your financial position.

Why Commercial Loans Require Larger Deposits

Lenders treat commercial property as higher risk than residential. A commercial tenant might vacate with months of notice, leaving you with an empty asset generating no income while you search for a replacement. Residential tenants provide more stable occupancy, and even vacant residential property holds value as a place someone can live.

Commercial property valuations also fluctuate more than residential. A small office in a suburban strip might be worth considerably less if the surrounding area shifts to residential development or a major tenant leaves the precinct. Lenders protect themselves by lending less against the property value, which means you need to bring more deposit to the transaction.

The Income Test Works Differently

Residential investment loans let you use rental income to help service the debt, but lenders typically shade that income by 20% to account for vacancy and expenses. Commercial property loans assess serviceability using the actual lease in place, and if there's no tenant, many lenders won't consider the deal at all.

Consider a buyer who saved $40,000 and explored purchasing a small commercial unit in an outer Melbourne suburb. The property was listed at $280,000 with a tenant in place paying $18,000 per year. Even with a compliant 30% deposit of $84,000, the buyer was $44,000 short. The lender also required evidence that the buyer's income could service the loan if the tenant left, which added another layer of complexity. The deal didn't proceed.

Loan Terms Are Shorter and Less Flexible

Residential home loans commonly stretch to 30 years. Commercial loans typically max out at 15 to 20 years, and some lenders prefer even shorter terms depending on the lease length and property type. Shorter loan terms mean higher repayments, which affects how much you can borrow and whether the rental income covers your costs.

Commercial loans also come with fewer offset and redraw features. Some lenders offer these options, but they're not standard. You're also more likely to face valuation reviews during the loan term, and if the property value drops, the lender may ask you to reduce the debt or provide additional security.

Ongoing Costs Add Up Quickly

Commercial property owners generally pay for rates, insurance, land tax, and building maintenance separately from residential landlords. In many commercial leases, tenants cover some of these costs through outgoings, but if the property sits vacant, you're responsible for everything.

Commercial buildings also require different insurance. Public liability, building insurance, and loss of rent cover all cost more than standard residential landlord insurance. Strata fees for commercial units in mixed-use developments can also run higher than residential strata.

GST Complications for First-Time Investors

If you purchase commercial property as an investment and lease it to a business, you may need to register for GST. That means the purchase price might include GST, which you can claim back if registered, but it also means navigating BAS statements, tax invoices, and potential input tax credit claims. For a first-time buyer without business experience, this creates administrative work that doesn't exist with residential property.

Some commercial properties are sold as going concerns, which means GST doesn't apply to the sale. Others are not. Your conveyancer and accountant will need to be across the distinction, and that means additional professional fees before you even settle.

When Commercial Property Makes Sense

If you run a business and want to purchase the premises you operate from, commercial loans can make sense. You're paying rent either way, and owning the property means you build equity while securing your business location. Some lenders will also consider your business income alongside your personal income when assessing serviceability, which can improve your borrowing capacity.

For buyers without a business or significant deposit, commercial property rarely makes sense as a first investment. The entry costs, higher deposits, and income requirements create barriers that don't exist in the residential market. You're generally in a stronger position building equity through a residential investment property or your own home first, then considering commercial property later once you have equity to draw on.

The Residential Path Offers More Support

First home buyers have access to government schemes, grants, and stamp duty concessions that don't apply to commercial purchases. The Home Guarantee Scheme lets eligible buyers purchase residential property with a 5% deposit without paying lender's mortgage insurance. The First Home Owner Grant in Victoria provides $10,000 for new or substantially renovated homes. None of these benefits extend to commercial property.

Guarantor loans also work more smoothly in the residential space. Parents can use equity in their home to help you purchase your first residential property without handing over cash. Lenders are far more cautious about guarantor arrangements for commercial purchases, and many won't offer them at all.

If you're working with a small deposit and exploring your options, start with a conversation about what's actually accessible right now. Call one of our team or book an appointment at a time that works for you.

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