Ditching Residential? How to Pivot to Commercial Property Investment

The 2026–27 federal Budget has changed the tax equation for residential property investors. From 1 July 2027, negative gearing on established residential properties purchased after 12 May 2026 will no longer offset wages and other income. The capital gains tax (CGT) discount is being overhauled.

Commercial property investment was not mentioned once in those changes. For Melbourne investors who have built their strategy around residential property, that distinction is significant.

While that isn’t a reason to pivot blindly, now could be a good time to look carefully at whether commercial property suits your investment goals and strategy.

This article is general information only and does not constitute financial, legal or tax advice. We recommend seeking advice from a qualified accountant and solicitor before making any decisions.

What has changed?

To understand the opportunity, it helps to be clear about what changed and what did not.

For residential property, the Budget introduced two significant reforms. Negative gearing on established properties purchased after 12 May 2026 will be restricted from 1 July 2027. Rental losses will no longer be deductible against wages and other income. And the CGT discount is being replaced with an inflation-based indexation model and a 30% minimum tax rate on real gains accrued after that date.

Neither of these changes applies to commercial property. Investors in retail spaces, industrial sheds, office suites, medical centres, childcare facilities and other commercial assets can continue to offset losses against other income under the existing rules. The CGT changes do not apply to commercial property either – the existing 50% discount for assets held longer than 12 months remains available.

What are the benefits of commercial property investment?

Beyond the tax position, commercial property has a set of characteristics that have always distinguished it from residential investment.

Yields are typically higher

While Melbourne residential properties are currently yielding around 3 to 4% gross, according to PropTrack, commercial yields commonly range from 4 to 6% depending on asset type and location, with some specialist assets higher again.

This is important for investors focused on cash flow rather than pure capital growth.

Lease structures tend to be longer and more stable

Commercial tenants typically sign leases of three, five or ten years, often with built-in rent reviews tied to inflation or fixed percentage increases. That provides income certainty that residential leases – which are typically 12 months – don’t match.

Outgoings are frequently passed on to tenants

In many commercial lease structures, the tenant is responsible for council rates, insurance, maintenance and other outgoings. The investor receives a cleaner net income figure than a residential landlord typically would.

Depreciation benefits can be meaningful

Commercial properties often carry significant plant and equipment, including fitouts, mechanical systems and specialised infrastructure that can be depreciated, reducing taxable income. The specifics depend on the asset and how it is used, and advice from a qualified accountant is essential.

What factors should you consider before investing in commercial property?

Commercial property offers a genuinely different risk-return profile to residential, but that difference goes both ways, and there are some factors you should consider before deciding.

Vacancy risk can be more significant

An empty residential property still has relatively predictable re-letting timeframes. A vacant commercial property can sit unoccupied for months or longer, and the costs, including council rates, insurance and outgoings, continue regardless.

Liquidity is lower

Commercial property can be more difficult to sell quickly than residential. The buyer pool is smaller, the due diligence process is longer and market conditions can affect pricing more sharply. Investors who may need to access capital at short notice should factor this in.

Entry costs are higher

Between the larger deposit typically required (commonly 30 to 35%), stamp duty, legal costs and due diligence, the capital required to buy commercial property is more than a residential purchase. Getting the borrowing structure right from the outset is important.

Tenant dependence is real

A commercial property's value and income are closely tied to its tenant. A strong, long-lease tenant on a quality covenant is a significant asset. A vacancy, a tenant in financial difficulty or a lease expiry without clear renewal terms can change the investment picture quickly. This is why it's crucial for a commercial property investor to understand all the lease terms.

How does commercial lending work?

Commercial property loans differ from residential investment loans in several important ways.

Loan-to-value ratios (LVRs) are typically lower

Where residential investment loans may reach 80 to 90% LVR, commercial lenders commonly lend to 65 to 70%, depending on the asset type, tenant quality and lease terms. That means you will likely need a larger deposit or equity contribution.

Interest rates can be higher

Commercial loans are priced to reflect the additional risk and complexity of the asset class. Rates are typically one to two percentage points above equivalent residential investment rates, though this varies significantly by lender and asset.

Lender appetite depends on asset type

Some lenders are active and competitive across all commercial classes, while others have specific appetites or restrictions. Trying to secure funding fo a commercial asset without a broker who knows the commercial lending market can be time-consuming and costly.

Loan terms and structures differ

Interest-only periods, principal and interest terms, fixed and variable options and refinancing conditions all work differently in commercial lending, and the wrong structure for your situation can create problems later.

Is commercial property right for you?

Commercial property is not a straightforward substitute for residential investment, and the Budget changes alone are not a sufficient reason to make the move. But for Melbourne investors who are already thinking about how to use capital in a tax-effective way, commercial property may be a good option.

The tax benefits are unchanged and depreciation on plant and equipment can reduce taxable income in ways that a standard residential investment property does not. Yields are typically higher than residential and the types of leases used provide income certainty that residential tenancies rarely match.

However, commercial property requires more capital, more due diligence and a more experienced professional team than most residential purchases. The risks around vacancy, tenant quality and liquidity should also not be underestimated. Getting the asset selection right matters as much as getting the finance right.

That is where AXTON Finance comes in. We work with a panel of more than 30 lenders across both residential and commercial lending, and our team has experience across the full range of commercial asset classes. Not every lender is active across every asset type, and knowing which lenders are most likely to be competitive for your specific purchase can save considerable time and cost.

The conversation starts with understanding your financial position, your income and what type of asset and lease structure suits your goals.