Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 199

Four tips on what makes a good commercial property

Direct investment in commercial property is typically better suited to experienced investors who have built a residential portfolio and want to diversify their assets. However, many investors fail to consider some of the most basic principles of commercial property investment.

Here are four general tips that will help to identify a good commercial investment property that delivers higher and more consistent returns.

1. Favourable lease agreements

Commercial property leases can be between three and 20 years, depending on the size of the premise and type of tenant. Therefore, investors acquiring a tenanted commercial property need to be particularly aware of the conditions of the lease agreement.

Properties may be marketed with a ’10-year lease’. However, clauses in the contract may allow the tenant to vacate sooner without penalty, or there could be rolling optional exits every three years, for example.

2. Multi-tenant properties

Acquiring a multiple-tenant property mitigates disruptions to cash flow in the event of vacancies. For example, take a commercial premise that can only be leased to one tenant. If that single tenant leaves, the owner will need to manage without rental income until the premise is re-leased. For example, owning premises with three separate retail spaces with three separate tenants means if one tenant were to leave the owner would still receive rental returns from the two remaining tenants.

3. Look past the headline rental returns

Ensuring the property provides high returns might seem obvious, but many investors fail to understand the total yield a property will deliver. For example, a property may have a headline yield of 8%, but rental reviews could be linked to the tenant’s performance, meaning rent increases may only occur if the tenant is recording a certain amount of revenue. This could weigh heavily on investor returns if the tenant’s business is underperforming.

Investors also need to consider incentives paid to the tenant, vacancy periods and outgoings not recoverable from the tenant. These items will all have an impact on the final yield that a property delivers.

4. The quality of an existing tenant

A high-quality tenant provides peace of mind that the tenant will pay their rent on time. National franchises, large publicly-listed companies or multi-national corporations are good examples as they are typically well-established and profitable businesses. Do your homework on the tenants as part of your due diligence when buying a property.

While there are many factors to consider when buying commercial property, these are a few key considerations for investors.

 

Damian Collins is Founder and Managing Director of property investment consultancy Momentum Wealth. This article is general information and does not consider the circumstances of any individual.

  •   27 April 2017
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Seven property depreciation tips for EOFY

Australia tops Asia-Pacific for property investment

We should be encouraging self-sufficiency

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Latest Updates

Investment strategies

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Retirement

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

The ASX is full of broken blue chips

Investing in the ASX 20 or 200 requires vigilance. Blue chips aren’t immune to failure, and the old belief that you can simply hold them forever is outdated. 

Shares

Buying Guzman y Gomez, and not just for the burritos

Adding high-quality compounders at attractive valuations is difficult in an efficient market. However, during the volatile FY25 reporting season, an opportunity arose to increase a position in Mexican fast-food chain GYG.

Investment strategies

Factor investing and how to use ETFs to your advantage

Factor-based ETFs are bridging the gap between active and passive investing, giving investors low-cost access to proven drivers of long-term returns such as quality, value, momentum and dividend yield. 

Strategy

Engineers vs lawyers: the US-China divide that will shape this century

In Breakneck, Dan Wang contrasts China’s “engineering state” with America’s “lawyerly society,” showing how these mindsets drive innovation, dysfunction, and reshape global power amid rising rivalry. 

Retirement

18 rules for ageing well

The rules to age successfully include, 'the unexamined life lasts longer', 'change no more than one-eighth of your life at a time', 'nobody is thinking about you', and 'pursue virtue but don’t sweat it'.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.