One property costs you $21,000 a year, the other puts $24,000 in your pocket

Something pretty significant just happened to residential property investing in Australia and I don’t think most investors have worked out what it means yet.

From 1 July 2027, negative gearing on established residential property will be limited to new builds.

If you already own an established investment property, or contracted to buy one before the Government’s cut-off on 12 May 2026, you’re grandfathered in and not affected.

But going forward, the rules change, and here’s the interesting part: commercial property is excluded from the negative gearing change.

I’m not telling you this because I think everyone should suddenly sell their residential properties and buy commercial. I’m telling you because for decades, negatively geared residential property has had one enormous thing helping it make sense: the tax system helped investors carry the loss.

Now that advantage is being wound back.

So forget the politics for a minute. Let’s look at the numbers.

Same investment, different outcome

Imagine you’ve got $1.4 million to put into an investment property.

You could buy a Sydney residential property yielding around 3.3 per cent or you could buy a commercial property yielding around 6.25 per cent.

Those percentages might not look dramatically different but the dollars do.

A $1.4 million commercial property at a 6.25 per cent net yield produces around $87,500 a year.

Borrow 65 per cent of the purchase price ($910,000) at 7 per cent, and your interest is roughly $63,700.

That leaves you: +$23,800 a year.

Now let’s look at the Sydney residential property.

At a 3.3 per cent gross yield, it produces about $46,200 a year in rent, before rates, insurance, property management, repairs and maintenance take their bite. Allow 25 per cent for those costs and you’re left with roughly $34,650.

Interest on the same $910,000 loan at 6.1 per cent is about $55,510.

Now you’re: -$20,860 a year.

Same $1.4 million property value. One puts roughly $24,000 into your pocket. The other requires roughly $21,000 to come out of it. That’s a difference of around $44,000 every year.

Historically, the residential investor could at least say, “Yes, I’m losing money each year, but I can negatively gear some of that loss while I wait for capital growth.”

For established properties bought after the government’s cut-off, that equation is changing.

That’s why I think investors need to start looking at this differently.

Investors were already moving

Here’s the other interesting part.

Money was moving into commercial property before these changes were announced.

Commercial property transactions reached $87.8 billion last financial year, up 25.7 per cent.

And it isn’t all giant warehouses and CBD office towers; it’s medical centres, childcare centres, neighbourhood shopping centres, large-format retail and smaller office assets.

Medical, aged care and childcare property alone accounted for $7.23 billion in transactions, up 72.5 per cent in 12 months.

Retail has also quietly come back. Neighbourhood shopping centre transactions reached a decade-high $2.8 billion, while large-format retail is averaging around a 6.1 per cent yield with vacancy of just 2.8 per cent.

Queensland has been particularly strong.

It now accounts for more than a quarter of Australia’s commercial property transactions, compared with about 17 per cent in 2018/19.

Why? Population growth, limited land in some markets and expensive construction bills all impact heavily.

And growing demand is generated for the services people need regardless of what happens to the economy, namely healthcare, childcare, food, essential retail and local services.

But here’s where I need to give you a warning.

A higher yield does not automatically mean a better investment

This is probably the biggest mistake I see new commercial investors make.

They see a 7 per cent yield and think, “That’s better than 6 per cent.”

It’s not necessarily.

I’d rather buy the right property at 5.5 per cent than the wrong one at 7 per cent.

Because who’s paying that rent? How long is their lease? What happens when the lease expires? Who pays the property’s outgoings? How much money will you need to spend on the building? Can the tenant actually afford the rent? If they leave, how difficult will they be to replace?

A property yielding 6.5 per cent with two years remaining on the lease to a weak tenant can be considerably riskier than one yielding 5.5 per cent with ten years remaining to a strong national operator.

The listing won’t necessarily tell you that but the lease will.

I’ve spent 15 years around commercial property, and very few of the disasters I’ve seen happened because somebody chose retail instead of industrial, or office instead of medical.

They happened because somebody fell in love with the headline yield and didn’t properly understand what they were buying.

So should you abandon residential property?

No, is my position. Residential property can still be an excellent investment and commercial property can be a terrible investment if you buy the wrong asset.

But the equation is changing. Established residential property is losing a tax advantage investors have relied on for decades.

Meanwhile, commercial property can offer significantly higher income from the same amount of capital, and commercial has been specifically excluded from the negative gearing change.

That doesn’t mean buy commercial property tomorrow.

It means that if you’re planning your next investment, you should probably run both sets of numbers before automatically buying another house.

Because the question isn’t, “Is residential or commercial better?”

The question is, “What does my money actually do for me in each one?”

And after these changes, the answer may look very different from what Australian property investors have been used to.

If you’re going to do the maths, do it before everyone else does.