How commercial yield differs from residential
Commercial leases usually make the tenant pay most outgoings, such as rates, land tax, insurance and repairs. That is called a net lease. So the rent the owner keeps is closer to the gross rent than with a house, and commercial yields are usually higher. The trade-offs are longer vacancies, lease incentives and more exposure to the economy.
Commercial property is generally valued by its cap rate: net operating income divided by value. If similar properties are selling at a 6.5% cap rate, a property earning $59,850 a year in net income is worth about $920,800. That is what the calculator’s valuation line shows. See cap rate in the glossary.
Worked example
The default figures: a $900,000 property on a net lease at $63,000 a year, with a 5% vacancy and incentive allowance.
| Figure | |
|---|---|
| Gross yield | 7.00% |
| Net operating income | $59,850 |
| Net yield (cap rate) | 6.65% |
| Yield on total cost ($950,000 including purchase costs) | 6.30% |
| Value at a 6.5% market cap rate | $920,769 |
What to check beyond yield
- Lease length (WALE): how long the income is locked in. A high yield with one year left on the lease carries more risk.
- Tenant quality: a national tenant on a long lease is worth a lower yield than a start-up.
- Rent reviews: fixed annual increases or CPI reviews.
- Who pays outgoings: confirm in the lease, not the listing.
- Vacancy: commercial vacancies can run for months, so be cautious with the allowance. See rental vacancy rates for the residential comparison.
- GST: commercial property usually involves GST. Prices and rents in the calculator are GST-exclusive. Get advice on the GST treatment of your purchase.
Commercial property is not affected by the 2027 residential negative gearing changes. For the residential equivalents of these measures, see property investment metrics explained.
Frequently asked questions
What is a good yield for commercial property?
It depends on the asset, location and lease. Commercial yields are usually higher than residential, reflecting longer vacancies and more risk. Compare with recent sales of similar properties.
Is cap rate the same as net yield?
In practice, yes: net operating income divided by value or price. Check how outgoings and vacancy were treated in any quoted cap rate.
How do you value commercial property using a cap rate?
Divide net operating income by the market cap rate. $59,850 / 6.5% = about $920,800.
General information only. This calculator and content do not consider your personal circumstances and are not financial, tax or legal advice. Speak to a licensed professional before making investment decisions.