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Has residential property had its day? Experts unpack when it’s time to transition to Commercial
Australia’s residential property market, long regarded as the cornerstone of wealth creation, may no longer be the guaranteed source of passive income it once was, according to leading industry figures.
Low rental yields, tighter lending conditions, and shifting demographics are challenging the traditional model of residential investing. For investors seeking both capital growth and sustainable income, a different approach may now be necessary, two property experts recently told Smart Property Investment.
InvestorKit founder and CEO Arjun Paliwal and head of commercial Chris Huxter shared in an exclusive Smart Property Investment roundtable discussion that relying solely on residential
assets can leave investors with impressive capital accumulation but insufficient cash flow for Retirement.
You can listen to Paliwal and Huxter speaking at the roundtable on the Smart Property Investment show here.
“For those looking to build a large passive income, you will need a large base of residential assets to tick the income target, which can be inefficient,” Paliwal said.
“At some point, even if it’s not property, take it somewhere else: to dividends, annuities. But to end your working life with residential property, it’s not very productive, income wise.”
Paliwal, at the helm of InvestorKit which was recently named Real Estate Business’ Innovator of the Year – Residential Buyer’s Agency, warned that while residential property remains a strong
wealth-building tool, it is also a poor income generator.
“In over 2,000 portfolio plans, few deliver the strong base of passive income needed without commercial property investing. You can accumulate millions in residential property, yet end up with little ongoing income,” he said.
The roundtable explored the point at which investors should consider pivoting from residential to commercial assets, particularly during the consolidation phase of their investment journey.
Seasoned investors often consolidate multiple residential properties into fewer commercial assets, reducing debt and freeing capital, a strategy that becomes especially pertinent when
approaching retirement or seeking cash flow.
“Those seeking $200k+ passive income inflation adjusted are often Investors nearing retirement that go on to consolidate their residential assets to move into commercial property,” Paliwal said.
“By selling or downsizing, they free up capital – to purchase commercial properties with higher yields, typically moving from 3–4 per cent gross to 5–7 per cent net. This transition works well late in the wealth-building journey, as commercial lending offers lower leverage and higher yields, making it an ideal time to shift from residential to commercial.”
The pivot can also occur as part of a treasury management strategy, widely used by businesses, clubs, and other organisations seeking to invest surplus profits in a tax-efficient Manner.
“By using a company structure or other strategies, they avoid top personal tax rates and channel funds into commercial property,” Paliwal explained.
“Unlike traditional residential investing, this uses leftover profits rather than borrowed money, creating positive cash flow and building assets efficiently. Essentially, it’s a deliberate approach
to reinvesting surplus funds into high-yield commercial property while keeping the investment Tax-optimised, subject to advice from your accountant.”
So, what should you look out for when pivoting to commercial?
Despite its appeal, the strategy’s success depends on understanding macroeconomic conditions and recognising that higher yields often correlate with higher risk, the experts said.
Unlike residential properties, commercial tenants are businesses rather than individuals, requiring a different approach to market assessment and lease analysis.
“When assessing commercial property, we put the property aside at first because the tenant is a business, not someone seeking shelter,” he said.
“So, we start with macro trends – industries, economics, locations, and how resilient different business types are. Work-from-home changed office demand: suburban hubs have filled quickly, while some Melbourne CBD offices now offer high yields because of higher vacancy and falling values. Commercial can go wrong too when vacancies drag and interest rates rise.”
Identifying businesses likely to withstand technological disruption, particularly from artificial intelligence (AI), is a crucial consideration for commercial investors. Trades and essential services, including plumbing, electrical work, and construction, continue to provide stable demand and long-term leasing potential. “A multi-year lease with a large national tenant gives you real security,” Paliwal said.
“You’re not going to have issues there, and the business itself is effectively AI-proof for certain industries at this stage.” Further illustrating the point, Paliwal cited NVIDIA CEO Jensen Huang’s statement about how
plumbers, electricians, and builders are expected to be in high demand. In addition, industrial storage and logistics remain highly sought after due to tight supply and
ongoing construction activity.
Despite the hype, markets with rising vacancies or oversupply, particularly in some regional areas, present higher risks for investors. “Specialty industrial is inflated, but still fundamentally strong because supply is tight,” Huxter Said.
“Demand will remain; people always need space to store equipment, especially near construction activity. Industrial isn’t going anywhere.”
Retail also offers opportunities, although significant upfront investment and limited new supply make securing established assets critical. Huxter noted that demand for retail space is set to continue growing nationally, with roughly 2.1million square metres required by 2032.
“If you can secure one, through a syndicate or solo if you’ve got the means, I’d do it,” he said.
The InvestorKit methodology
InvestorKit evaluates commercial properties using a methodical approach that balances market opportunity, financial prudence, and operational oversight, a framework they call the “three Ms”.
Market analysis begins with the asset type, focusing on sectors considered defensive, including industrial facilities, medical suites, and neighbourhood shopping centres anchored by strong
Tenants. Location is a critical factor within this analysis, with vacancy rates, leasing speed, and broader economic resilience determining whether an investment will hold value over time.
Management addresses the operational risks that can quietly erode returns. Huxter emphasised the importance of having experienced property managers on site, explaining
that even small issues, like a leaky roof or structural defects, can drive tenants away if not identified and addressed early.
Financial buffers are also integral to the strategy, with money reserves to overcome short-term Hurdles. By maintaining reserves of three to six months’ gross rent, investors can weather temporary vacancies or unexpected expenses without disrupting cash flow, ensuring stability in a market where certainty is rare.
While prioritising the three Ms is critical to securing financial stability through commercial property, Huxter warned against simply chasing the best yield. In particular, he highlighted that higher returns often signal potential problems.
According to the expert, properties delivering 5–7 per cent net yields generally offer a balance between income and security, providing predictable returns without exposing investors to
unnecessary risk.
“Moving up towards seven per cent net yields, it’s not a space Arjun and I like to play in,” he said. “Those returns often signal unreliable tenants, building issues, or missed rent. There are good deals above seven per cent, but you have to tread carefully because capex, tenant, and location
risks all rise.”
Time in the market
By combining macroeconomic insight with tenant evaluation and structured risk management, investors can make a strategic shift from residential to commercial property, generating
sustainable income without compromising asset growth.
For those seeking long-term financial security, the message from InvestorKit is clear: residential property may continue to accumulate wealth, but commercial assets are increasingly critical for
generating reliable cash flow and preparing for retirement.
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