Residential or commercial? Find out which investment will provide a better yield
Sydney’s Northern Beaches are beautiful – and expensive. Many people assume commercial property such as warehouses or office space will always give you the strongest cash flow. Not so. Right now, select residential markets are delivering yields higher than most commercial properties with the added kicker of capital growth, far better leverage, much lower vacancy rates plus more secure and dynamic lending.
For example, Darwin’s residential gross yields are the strongest of any capital (around 6.5% overall, circa 5.8% houses and circa 7.8% units and townhouses) and the vacancy rate is approximately 0.7%, showing high rental-market pressure and severe housing shortage. While in Perth, the average gross yield is around 3.7% for houses and 4.9% for units and townhouses, and the rental vacancy rate is tight at 0.7%.
These statistics put those capitals in sharp focus for risk- adjusted residential returns. What’s more, the right residential purchase carries less risk and more flexibility than many other commercial investment options.
Why focus on residential first?
Tight rental conditions drive rent growth. Australia’s vacancy rate has hovered near historic lows (around 1.0% to 1.2% in 2025), keeping upward pressure on rents and yields.
Cycle timing matters. At the start of a boom, rental yield typically is two times higher than the long-term average before price growth accelerates, which is why early-cycle markets like Darwin have been on investor short-lists this year. In fact, Darwin has achieved the highest rental yield, coinciding with the highest price growth among all capital cities in 2025.
Compare to commercial
Think of a 70–120 square metre strata office suite in a suburban block. Recent sales suggest office yields are often in the 6% to 7% range, so on paper that can look similar to strong residential yields. But here’s the catch: office vacancies are still elevated across Australia, as high as 15%, and suburban/metropolitan markets have been softer than prime CBD locations. That can mean much longer gaps between tenants, bigger incentives to pay the prospective tenant, and more negotiation to fill space – which chips away at your headline return. In addition, when the time comes to sell, it usually takes longer to find the right buyer, which means the capital growth potential may be significantly suppressed.
By contrast, the right residential markets (picked for tight vacancy rate, high yield and rent growth) can deliver comparable income without the same leasing risk or incentive costs – and you keep the upside of broader buyer demand and capital growth when the cycle turns. Plus residential rents and capital values usually grow faster than commercial and are far easier to time the market cycles. Take residential property in Perth or Darwin for example:
you’re getting strong yields on the ground, tight vacancy rate and broad tenant appeal. Add a granny-flat, subdivision potential or smart upgrade, and you may lift the yield further. Then, when the cycle matures, you sell the asset at a lower yield and roll into the next market – potentially doubling your rent again and starting the cycle all over.
Here’s a practical pathway Beaches investors can use to out-earn commercial on a risk-adjusted basis while keeping finance options friendlier:
- Enter early-cycle, high-yield markets – target cities where gross yields start near 5% to 7%, and vacancy rate is tight. Darwin, Adelaide and parts of Perth fit this brief today.
- Hold through the growth upswing – let high rental yield do the heavy lifting first; capital growth boom typically follows as conditions tighten. Keep buffers healthy and avoid over-gearing.
- Recycle capital on a rhythm – after approximately seven years, consider selling a now lower-yield asset and rotating into the next early-cycle market to lift portfolio rent again and refresh your growth runway. Residential rents will usually grow faster than commercial rents, especially when you sell at the top of the cycle to buy the high yield properties at the bottom of the cycle, which will also give two growth booms instead of one.
- Be strategic with finance (the secret weapon) – use lenders that allow security substitution (also called a security swap/loan portability). You can sell property A and move the loan to property B, preserving structure and potentially reducing costs and downtime between opportunities. Not all lenders offer this, so work with a specialist investor finance broker who knows how and why to do this.
- Bottom line for investors – residential done right can rival, and often beat, commercial on yield plus growth, with deeper tenant demand and more flexible lending. Focus on early- cycle, high-yield markets, keep finance portable, and follow a disciplined rotate-and-repeat rhythm.
Not all suburbs are created equal
It’s worth remembering that even within high-performing markets like Darwin, Adelaide and Perth, not every suburb delivers the same outcome. The same is true across Australia – each city moves through its own cycle, and within that, individual suburbs can behave very differently. That’s why research at the suburb level is crucial. Understanding which pockets show the right mix of yield strength, low vacancy, infrastructure growth and affordability can be the difference between a good investment and a great one. With the right data and expert guidance, you can replace your income within about seven years, so seek great advice to create a better future for yourself.
Richard Sheppard is the founder and chief property wealth planner of inSynergy Advisory in Manly. For 20 years inSynergy has helped Australians grow their wealth through property, providing expert guidance to investors seeking to maximise their results and secure their financial future. Ph 1300 425 595 / insynergy.net.au