When we consider buying property, the two main options are residential properties and commercial properties.  Residential properties that those that people live in, whereas commercial properties are those where people carry on a business, eg a shop, restaurant, office etc. 

Sydney residential property prices are high (though in my humble opinion, reasonable considering these are the prices that people are willing to pay .... we thought they were high in 2015, 2014, 2013, 2010 as well).  Anyhow, these "high" Sydney prices are causing some people to consider other forms of property investment.  And this is where commercial property offers some significant advantages - and also some things to be mindful of.

Capital growth

Capital growth is virtually guaranteed in an A-Grade residential investment property.  It is not always guaranteed when purchasing a commercial property.  The capital growth of a commercial property is tied to its lease.  A vacant commercial property has little worth; a leased commercial property - particularly one with a good tenant and a long lease - is far more valuable.  When a commercial property is not tenanted, it may be months - and in some cases years - before a new tenant is found - so selling during this time may well mean selling for a loss.

For this reason, the capital growth potential of a commercial property is not as reliable as a residential property, where tenants are generally much easier to find and value is easier to establish.  Demand for residential property is always there - perhaps the property will be vacant for 2 weeks or so - but this is not the same as a commercial property that might be vacant for many months. 

The other factor affecting capital growth is that in many parts of Sydney, supply of housing is limited and demand is assured, and this maintains the property's value.  This is not always the case with commercial property because business is risky and businesses go broke all the time.

Demand for residential property is constant - everyone needs a place to live and emotionally, we have a need to love where we live.  Commercial property is different: we don't need to love our work place, demand is only there as long as the business is there, and capital growth for a commercial property is usually reliant on economic growth, rather than population growth. When the economy is in a growth phase, more new businesses start up and this increases demand for commercial premises and supports capital growth.  On the other hand, commercial property is more vulnerable during an economic downturn than residential property (because people need a home regardless of how the economy is doing).

Rental yields

Rental yields for residential property can range between 2.5% and 5%, whereas commercial property is generally 5% - 10%: significantly higher.  In essence, the risk of uncertain capital growth is offset by the increased rental yield.  The cash flow derived from the rental yield can be used to wards a deposit for a future property purchase, whereas had the investor purchased a residential property, that property would almost certainly be negatively geared, at least for the first few years, meaning no positive cash flow to contribute to a future purchase (although there would be equity).

Deposit

Banks are often much more reluctant to approve loans for commercial property investments, and often a 30% deposit is required.  The is in contrast to residential property where often only a 5% or 10% deposit is required.