Residential vs commercial: two different games

Residential and commercial SMSF property aren’t variations of the same thing. They’re completely different sports.

When people talk about SMSF property, they often talk as if it’s one thing.

It’s not.

Residential property and commercial property are completely different games. Different rules. Different risks. Different strategies. Different outcomes.

Choosing the wrong one for your situation is like showing up to a cricket match with a tennis racquet. You’ve got the wrong equipment for the game you’re playing.

Let’s make sure you’ve got the right equipment.

Tennis vs cricket

Tennis and cricket both involve hitting a ball with an implement. That’s about where the similarities end.

Different playing surfaces. Different scoring systems. Different equipment. Different skills. Different fitness requirements. Different seasons, even.

You wouldn’t say “I’m good at ball sports” and assume that makes you equally good at tennis and cricket. You’d recognise they’re different games requiring different approaches.

Residential and commercial property are the same. Yes, they’re both property. Yes, they both involve buying something, renting it out, and hopefully making money. But the rules, risks, and strategies are completely different.

Let’s break it down.

The side-by-side comparison

Factor	Residential	Commercial
Buy from related party?	Never	Yes (if business real property)
Lease to related party?	Never	Yes (at market rate)
Typical yield	2% to 4%	5% to 8%
Capital growth potential	Higher (historically)	Lower (generally)
Vacancy risk	Lower	Higher
Typical lease term	6 to 12 months	3 to 10 years
Who pays outgoings?	Landlord	Often tenant
Borrow (LRBA) to buy?	No new loans from Y 10 Aug 2026 p	es (business real roperty only)
Liquidity (ease of selling)	Better	Worse
Tenant pool	Large (everyone needs housing)	Smaller (businesses)

One note on the borrowing row before we unpack the rest: existing residential loans are grandfathered, refinancing them is allowed, and contracts exchanged before 10 August 2026 were protected even where settlement came later. Chapter 6 has the whole story.

Let’s unpack some of these.

The related party difference

This is the biggest difference between residential and commercial, and it’s worth understanding deeply.

Residential property: You cannot buy residential property from a related party. You cannot rent residential property to a related party. No exceptions. No workarounds. It’s prohibited.

Commercial property: If the property qualifies as “business real property”, you can buy it from a related party and lease it to a related party. This is a huge exception that opens up powerful strategies.

What qualifies as business real property? A property that is used wholly and exclusively in one or more businesses. This includes offices, factories, warehouses, retail shops, and similar. It does not include residential property, even if you run a business from home.

This distinction matters because it enables one of the most powerful SMSF strategies available: buying your business premises through your super.

The business premises strategy

If you own a business that pays rent for premises, you’re sending money to a landlord every month. Money that leaves your ecosystem and never comes back.

What if your SMSF owned those premises instead?

Your business pays rent. But instead of going to an external landlord, it goes to your SMSF. Your super fund grows. The rent is a tax-deductible expense for the business. The rental income in the super fund is taxed at just 15 per cent (or zero in pension phase).

The money stays in your ecosystem. You’re paying yourself instead of a stranger.

This is legal. This is encouraged. This is one of the main reasons business owners set up SMSFs.

But it only works with commercial property. You can’t do this with residential.

The borrowing difference (new in 2026)

Until August 2026, the borrowing question was about difficulty: residential LRBAs were harder to get, commercial often easier. The 2026 ban turned a difficulty difference into a legal one.

From 10 August 2026, a new LRBA can only be used for business real property. If you want residential, the fund pays cash. If you want to borrow, the property has to genuinely qualify as business real property: used wholly and exclusively in one or more businesses. A warehouse, a shop, a medical suite, an office qualifies. A house with a home office does not. Mixed-use property and vacant land sit in the grey zone and need professional eyes before you sign anything.

That asymmetry now does a lot of the choosing for you. If your balance can’t buy residential outright, residential is off the table regardless of how much you like it. Which makes the rest of this chapter more important, not less: the game you can actually play is the one worth understanding deeply.

Raj’s opportunity

Raj has been running his IT consultancy for fifteen years. For most of that time, he’s rented office space in an inner Brisbane suburb. Currently, he’s paying $42,000 per year in rent.

That’s $42,000 per year going to his landlord’s retirement. Not his.

Raj’s SMSF has $650,000 in it. He’s been thinking about what to do with it for years. It’s mostly in managed funds, earning decent but unspectacular returns.

Then his accountant suggested something.

“What if your SMSF bought an office and leased it to your business?”

Raj did the maths.

A suitable office building in his area costs around $700,000. His SMSF could put down a 35 per cent deposit ($245,000) and borrow the rest through an LRBA. The loan repayments would be around $38,000 per year.

His business would pay $42,000 per year in rent to the SMSF. That covers the loan repayments with $4,000 to spare for rates, insurance, and maintenance.

Instead of his rent enriching a landlord, it would be building equity in his own super fund. Over time, the loan gets paid down, the property (hopefully) appreciates, and Raj’s retirement balance grows.

The business still gets to deduct the rent as an expense. The SMSF pays just 15 per cent tax on the rental income. When Raj retires and moves the fund to pension phase, the rental income becomes tax-free.

This is the commercial property sweet spot for business owners.

Raj proceeded. Three years later, the property has grown in value, the loan is being paid down, and Raj feels like he’s finally building something for himself instead of someone else.

When residential makes sense

One thing before the list. From 10 August 2026, choosing residential for a new purchase means buying without borrowing. Everything below assumes the fund pays cash.

Not everyone owns a business. And not everyone should buy commercial property.

Residential property in an SMSF makes sense when:

You don’t own a business that needs premises. The main advantage of commercial is the ability to lease to your own business. If you don’t have a business, that advantage disappears.

You want to prioritise capital growth over yield. Historically, residential property has delivered stronger capital growth than commercial. If you’re young and have decades until retirement, growth might matter more than income.

You want a more liquid asset. Residential properties generally sell faster than commercial. There are more buyers. If you think you might need to sell at some point, residential is easier to exit.

You’re more comfortable with residential. This matters. If you understand residential property, you’ve researched it, you know what to look for, that knowledge has value. Buying commercial because it sounds sophisticated when you don’t really understand it is a recipe for mistakes.

When commercial makes sense

Commercial property in an SMSF makes sense when:

You own a business that pays rent for premises. This is the killer app. If you’re paying rent to someone else, you could be paying it to yourself.

You want higher yield. Commercial yields of 5 to 8 per cent beat residential yields of 2 to 4 per cent. If you’re closer to retirement and need income rather than growth, commercial might suit.

You can handle longer vacancies. Commercial properties can sit empty for months or even years between tenants. You need the financial buffer to survive that.

You understand the commercial market. Commercial property is more complex than residential. Different lease structures, different tenant relationships, different valuation methods. Make sure you know what you’re getting into.

The vacancy risk

Let’s talk about the elephant in the room: vacancy risk.

Residential vacancy is usually measured in weeks. A well-located residential property in a decent market might sit vacant for two to four weeks between tenants. Annoying, but manageable.

Commercial vacancy can be measured in months or years. A commercial property without a tenant might stay empty for six months, twelve months, or longer. During that time, you’re paying rates, insurance, maintenance, and loan repayments with no rental income.

Why the difference?

Everyone needs somewhere to live. The residential tenant pool is enormous. There’s always someone looking for a rental.

Not everyone needs commercial premises. Businesses come and go. Sectors rise and fall. A property that was perfect for one type of business might not suit anyone else in the area.

This is why commercial yields are higher. You’re being compensated for taking on more risk.

Before you buy commercial, ask yourself: could my SMSF survive 12 months with no rental income? If the answer is no, you might be too stretched.

Who pays what

One of the nice things about commercial property is the lease structure.

Residential leases are typically “gross” leases. The tenant pays rent, and the landlord pays everything else: rates, insurance, maintenance, repairs.

Commercial leases are often “net” leases. The tenant pays rent plus outgoings. That means the tenant covers rates, insurance, and sometimes even repairs and maintenance.

This can significantly improve your net yield. A commercial property with a gross yield of 6 per cent might have a net yield of 5.5 per cent or more, because the tenant is covering most of the costs.

A residential property with a gross yield of 4 per cent might have a net yield of 2.5 per cent after you’ve paid all the outgoings.

When comparing yields, make sure you’re comparing like with like. Net to net, not gross to gross.

The lease term difference

Residential leases are typically six to twelve months. Tenants can leave relatively easily. Turnover is frequent.

Commercial leases are typically three to ten years, sometimes longer. A good commercial tenant might stay for a decade or more.

This is a double-edged sword.

On one hand, long leases mean stability. You know you’ve got rental income locked in for years. You can plan around it.

On the other hand, long leases mean you’re stuck. If the market moves and rents increase, you can’t bump up the rent until the lease expires. If you want to sell, buyers might not want your existing tenant.

Commercial leases also come with more complex terms: rent review clauses, make-good provisions, options to renew. You need to understand what you’re signing.

Making the choice

So how do you choose?

Start with your situation.

Do you own a business that pays rent? Commercial is worth serious consideration.

Are you an employee with no business premises needs? Residential is probably simpler.

How far are you from retirement? If you’re decades away, growth matters more. If you’re close, income matters more.

What’s your risk tolerance? Commercial has higher highs and lower lows. Residential is steadier.

What do you understand? The best investment is one you actually understand. Don’t buy commercial just because it sounds impressive.

There’s no universally correct answer. The right choice depends on you.

A note on mixed-use property

What about properties that are part residential, part commercial? A shop with a flat above it, for example.

These get complicated.

The residential portion is subject to residential rules. The commercial portion is subject to commercial rules. You can’t lease the upstairs flat to your daughter just because the downstairs shop is commercial.

Mixed-use properties can work in SMSFs, but they require careful structuring and advice. Don’t assume the commercial exception applies to the whole property.

Find your sweet spot, or have the guts to walk away.