Commercial Property: What Counts as a Good Return on Investment?

If someone tells you there’s a magic number for a good return on commercial property, take it with a grain of salt. The truth? It depends—on the city, the type of property, the type of tenant, and even how much you’ve borrowed to buy the place.

Let’s get straight to the point: investors usually aim for a higher return on commercial real estate than on residential stuff. We’re talking numbers like 7% to 10% net yield for a decent property, but it can swing higher or lower depending on the deal. Why is the bar set higher? Commercial properties generally come with more risk—vacancy periods, tough tenants, market shifts—so you want stronger returns as compensation.

If you’re looking at a shiny office space in a prime part of town or a warehouse with a big-name company, the returns might settle on the lower end because, well, there’s less risk. But that tiny shop in the suburbs with a start-up as the tenant? That’s where investors want a fatter slice.

Before jumping in, you’ve got to know exactly how to work out your returns and what those numbers truly mean for your wallet. If you mess up this part, you could end up stuck with a property that only looks good on paper but bleeds cash in real life.

• Defining ROI for Commercial Property
• How to Calculate Your Returns
• The Numbers: What’s Considered 'Good'?
• What Affects Your ROI?
• Mistakes That Can Kill Your Returns
• Real-World Tips for Better Investment Decisions

Defining ROI for Commercial Property

When people talk about ROI in commercial property, they’re usually talking about how much money you make on the money you put in—compared to what you could have made sticking it elsewhere. It’s not guesswork or gut feeling; it’s a straight-up calculation that shows if your investment is working for you.

For most investors, the two main numbers matter: gross yield and net yield. Gross yield is simple—it’s the yearly rent you collect divided by the property’s price. But that’s just the top layer. The real deal is net yield, which accounts for everything you actually pay out, like maintenance, insurance, property taxes, and vacancy periods. That’s what tells you the actual return going into your pocket.

Here’s the basic formula for net yield:

• Net Yield (%) = (Annual Rental Income – Annual Expenses) / Purchase Price x 100

If a property makes ₹10 lakh a year in rent, but you spend ₹2 lakh on costs, and you paid ₹1 crore for the place, your net yield is 8%. Easy, right? That’s the number you want to compare to other investments, like fixed deposits or the stock market.

To really nail down ROI, you should also look at:

• Capital growth: Has the property’s value gone up since you bought it?
• Leverage: If you took a loan, did that boost your returns after paying the interest?
• Vacancy risk: How likely is it that you’ll have months with no tenant?

ROI can look different based on the property type and location. For example, retail spaces in city centers might give lower yields but see faster capital growth, while industrial properties on the city edge might offer higher yields but slower price climbs.

If you’re not sure what’s counted as a good ROI, compare these numbers to your alternatives. If your fixed deposit can give you 7% risk-free, would you settle for 6% from a commercial property that can stay empty for six months?

How to Calculate Your Returns

You can’t call a deal good or bad until you know exactly what your returns look like. Most folks in commercial property go straight for two things: net yield and total return. These are more useful than just guessing or hoping for the best.

The net yield (also known as net rental yield) is the bread and butter. It tells you how much income you’re left with, after covering stuff like property management, repairs, rates, and insurance, but before you pay taxes or any loan costs. Basically, it’s the clean number that helps investors compare deals.

• Add up your yearly rental income (find the number in your lease agreement).
• Take away running costs—think management fees, repairs, maintenance, and any council rates.
• Now, divide that result by the property price (what you actually paid, including stamp duty and legal fees), then multiply by 100 to make it a percentage.

If, for example, you buy a warehouse at $1,000,000 and after all your costs your yearly rent left is $80,000, your net yield is 8%. Easy math, but it tells you a lot.

But don’t stop there. If you’re thinking about growth or selling in the future, check out your total return. This includes capital growth—how much the property value has gone up since you bought it. Say you own the place for a couple years and the value jumps by $100,000, you add that capital gain to your rental income, subtract costs, and work out the total percentage return versus your original investment.

• Combine your annual net rental income and any increase in property value.
• Subtract any selling costs or major expenses you faced while owning.
• Divide by your total initial investment (all cash and costs).

If you see flashy numbers but there’s a risk of big, expensive repairs or long vacancy spells, that will eat into your returns faster than you’d think. Always dig deep into the real expenses. Even little costs—like higher water bills or tiny management charges—add up over time.

When it’s time to compare properties, stick with net yields and actual commercial property returns, not just glossy headlines. The numbers don’t lie, so make them your best friend before you sign anything.

The Numbers: What’s Considered 'Good'?

When folks throw out numbers about what makes a 'good' return for commercial property, it’s not just guesswork. There’s a lot of history and market data packed into those figures. In most major cities, a typical range for net yields (what you pocket after costs) sits between 6% and 10%. If you see something lower than 6%, it’s usually a super-prime location—think top business districts with rock-solid tenants. Get above 10%, and you’re likely looking at something riskier, like properties in less developed areas or places with short leases.

The commercial property sector is all about weighing risk versus reward. Here’s what investors are generally seeing in 2025:

So, if someone offers you an office building in a downtown area with a stable 7% net yield, that’s generally seen as solid in 2025. Compare that to a small warehouse out past the city edge with a 12% return—you’re earning more, but you’re also taking on more headaches (empty months, tenant issues, maybe even zoning surprises).

Location, tenant quality, and lease length always shape these numbers. A long-term lease with a government tenant? Investors will accept a lower return for that peace of mind. A month-to-month lease with a pop-up shop? You want higher returns to make up for the risk.

There’s also the ‘cap rate’ everyone talks about. It’s just another way to describe the property’s yield, but people use it everywhere—especially in comparing deals. Properties with lower cap rates are seen as more desirable (like blue-chip stocks), so they usually fetch higher prices and offer lower returns.

Keep an eye on market reports from big real estate agencies. Each quarter they update what average yields look like in your area—handy for checking if a deal is genuinely good or just sounds good. Missing this step can leave you paying too much for too little return.

What Affects Your ROI?

Your return on investment for commercial property can look terrific or terrible, and the difference often comes down to a few big factors. Location easily tops the list. A property in a busy city center or a popular industrial hub is less likely to sit empty and can usually charge more rent. But go too far from the action, and you’ll find it harder to get and keep tenants at good rates.

Next, the type of tenant plays a huge role. If you’ve got a long-term lease with a stable company—think banks, government offices, supermarkets—you’ll get steady income. But properties with small businesses as tenants sometimes face empty months between leases, which drags returns down.

The state and age of the property matter too. Newer buildings might need less repair, while older ones often come with expensive surprises—think burst pipes or outdated wiring. Upkeep eats into profits, and if you skimp out, you risk losing tenants who expect basic standards.

Another big factor is your financing. If you’ve taken out a big loan, your interest repayments can wipe out those eye-catching returns, especially if interest rates go up. Higher leverage means more risk: you can get bigger gains when things go well, but losses pile up faster if rent drops or if you face longer vacancies.

Don’t ignore the bigger economy either. If the real estate market crashes or if a recession kicks in, even prime properties can lose value or sit empty. Tax rates, government policies, and changes in demand for office or retail space can all play a part.

Honestly, every decision you make—from picking the neighborhood to choosing the type of loan—shows up in your bottom line. Look at all the details before you run the numbers; one small misstep can shrink your returns more than you think.

Mistakes That Can Kill Your Returns

Blowing your returns on commercial property isn’t just bad luck—it’s usually a mix of avoidable mistakes. Even pros mess up if they get too comfortable. Let’s talk about the big blunders that hit investors the hardest.

• Overestimating Rental Income: It’s tempting to believe every tenant will pay top dollar and never miss a payment. Reality check: most landlords end up with actual income 5-15% lower than what they expected. Vacancy, late payments, or high turnover slam your bottom line.
• Underestimating Expenses: There’s more to pay beyond the basics. Insurance, property taxes, maintenance, and management fees eat up fat chunks of your profits. A Cushman & Wakefield study showed maintenance costs on older buildings can jump 10%+ a year.
• Ignoring Location Red Flags: Sure, a building looks solid, but if it’s in an area with falling demand or crummy transport, your risk of long vacancies shoots up. Data from Knight Frank shows retail properties in prime areas stay vacant an average of just 2-4 months, versus 8+ months for less-desirable spots.
• Poor Due Diligence on Tenants: A flashy new tenant doesn’t always mean safe cashflow. History matters—skipping background checks or financial vetting puts you one step away from tenant default, which can drag down your commercial property investment fast.
• Ignoring Lease Terms: Clauses in a lease make a huge difference to your returns. Short leases, lack of rent review clauses, or late payment penalties often turn into expensive headaches.
• Bad Financing Choices: Using the wrong loan product or ignoring interest rate rises burns through returns. Even a 1% jump in lending rates can slice profitability by 10%+ over a 10-year hold.

If you want a quick look at how these mistakes stack up in real life, check out this example table:

The margin for error in commercial property is tight. Being realistic about income, obsessive with costs, skeptical about locations, and strict with tenant checks is how you avoid turning a solid deal into a financial pain.

Real-World Tips for Better Investment Decisions

The commercial property game is loaded with moving parts, but a few habits separate the winners from the ones left scrambling. Here’s how you boost your odds of snagging a commercial property with real returns—not just pretty numbers on a broker’s brochure.

• Crunch all the numbers, not just the headline yield. Check the actual rent being paid, subtract vacancy risk, and factor in every expense—management costs, repairs, insurance, and council rates. Always check the net yield, not just gross—net is what ends up in your bank.
• Dig into lease details. Get smart about lease terms, especially the length and any rent escalation clauses. Long leases with top tenants can cushion your cashflow, but short rolling leases or dodgy tenants can turn your "good deal" into a hassle.
• Know the market rents. Don’t just trust what’s written in the listing ad. Compare rents from similar buildings in the same area. Overpaying means your ROI drops before you even start.
• Stress test your returns. Ask yourself: What if there’s a six-month vacancy, or if interest rates go up a couple of points? Play with best and worst case math before buying.
• Keep some buffer cash. Something always breaks, tenants move out, or there’s a gap between leases. Smart investors always have a pile set aside for these gaps—usually 3-6 months’ worth of expenses.

Check out a quick data snapshot showing average yields for common types of commercial property across major Australian cities (2024 figures):

Numbers shift all the time, but you get the idea—bigger risk usually means better returns, but you don’t want to gamble blindly. Listen to people with real track records, check your facts twice, and never skip your own homework. After all, even the smartest property can turn into a financial headache if you miss the details.