How Commercial Property Can Transform Your Portfolio

TL;DR

I once offered a tenant $500,000 to leave a building I hadn’t even bought yet, because he was locked into an under-market rent with no way for me to reset it. The day I signed the deal to remove him, the property’s value jumped from $3.1M to $4M, without a dollar spent. Six months later, with a new tenant on a market-rate lease, it was worth $6M. That is capital growth in commercial property: it does not come from the market, it comes from unlocking what a lease is stopping you from doing. This piece also covers why the tenant is your biggest investor, the difference between net and gross leases, and when commercial property actually fits in a portfolio.

Watch the video

Watch Cal’s full interview on the I Call BS Property Podcast on YouTube: How Commercial Property Can Transform Your Portfolio.

The short version

People ask why commercial property over other investments, and the honest answer is comparative. Cash in the bank gives you a return but you can’t touch it or improve it. Residential can house you, but are you willing to sell it if your lifestyle needs it? Shares are liquid, you can transact instantly, but that liquidity cuts both ways. Commercial property is illiquid, a sale can take three to six months on a good day, with due diligence running anywhere from 30 to 180 days because you’re not just buying a building, you’re buying the tenant’s business and cash flow behind it. But that illiquidity can protect you. During COVID there was a stretch where commercial values in Australia barely moved, even while tenants stopped paying rent, because valuers simply weren’t re-pricing that fast. The share market, by contrast, dropped 15% overnight because everyone could pull their money out at once.

Then there’s the return itself. If I buy Woolworths or Wesfarmers shares, I’m getting a sub-6% dividend and I’d be happy with that. But I can have Woolworths or Wesfarmers paying my rent at 6% in a commercial property, which is already an arbitrage on the share market, and underneath those four walls is a finite piece of land that has its own inherent value. That’s the lever residential and shares don’t give you: you can add value with your own hands, manage the tenant, manage the lease expiry, redevelop, and create something people interact with differently tomorrow than today.

Here’s the deal that shows it best. I bought a retail showroom in Jandakot with a tenant paying about $110 per square metre gross, a rent struck during COVID with a 2% annual escalation and no market reviews, locked in for 5 plus 5 plus 5 plus 5 years. Market rent for that precinct, one of the best large-format retail strips in the country, was $230 to $240 a square metre, more than double what he was paying. He had a legal right to sit there at that rate for 20 years. So I offered him $500,000 to leave. He was retiring, going through a divorce, and took it within a week. I bought the property for $3.1 million. The day the tenant signed the agreement to go, it was valued at $4 million, a $1 million uplift without a tenant in place, purely because the ability to re-lease at market rate had been unlocked. Six months later I had a lease board up, secured an international tenant at market rent, and the property was worth $6 million before I’d even settled on it. No money down, and a $3 million uplift on paper.

The lesson cuts both ways. A lease in place isn’t automatically a better asset, it depends entirely on whether the rent is right. When it isn’t, the lease is what’s actually capping your upside, and removing that tenant is what unlocks it.

Once you own the asset, remember who’s really carrying it. The tenant is your biggest investor. Say you buy a $1 million building with the bank funding half of it: the tenant’s rent covers the bank interest, the outgoings, the water rates, land tax, council rates, gardening, air conditioning repairs, everything. Stop that rent and the whole structure changes. That’s why due diligence on commercial property goes so much deeper than residential, you’re assessing whether that business will still be standing and paying in five, ten, twenty years. I bought my first commercial property for $419,000, leased it to a gym for six years, and sold it two years later for $510,000. I didn’t know if that gym would still be there in twenty years, so I structured the exit around what I did know.

Lease structure matters too. A well-structured net lease means you as the owner carry almost no costs, the tenant pays land tax, management fees, council rates, water rates, repairs and maintenance, even your loss-of-rent insurance premium. Push it further into a triple net lease and the tenant can be structured to pay for building upgrades as well, generally short of major capital works, which usually stay with the landlord. Compare that to residential, where you’re paying almost everything and the rent often doesn’t even cover the interest, let alone the outgoings. That’s the arbitrage: positively geared cash flow from a grade-quality asset, without compromising on quality to get it.

So when does commercial actually fit? Rarely for someone with four residential properties and $100,000 cash, that’s already heavily weighted into one asset class. Typically it’s people 45 plus who want a more passive, land-backed investment they can still touch and plan around, an income they know is coming rather than hoping for capital growth they can’t predict. There’s also an underrated entry point: young professionals. Look at your own network, an insurance broker, a financial adviser, a dentist, a doctor, a chiropractor, people who run businesses and need premises to run them from. If you know the tenant’s covenant because you know the person, that’s a genuine edge. It’s not about replacing residential either. I hold both, and so does my own family, because diversification matters. Residential can be liquidated in about 30 days if you need cash; commercial can take months.

The thing I’m most cautious about in the market right now is non-bank finance. Australia’s banking system is heavily regulated by APRA, which limits how much individuals can gear. That discipline doesn’t apply the same way to non-bank lenders, and non-bank finance in commercial property has grown roughly 40% over the last three or four years. That’s fantastic when you want high leverage, but high leverage brings high risk, and if debt levels rise faster than asset values, the market is more exposed than the fundamentals suggest. It’s part of why timing entry and exit, and backing the relevance of the asset and the tenant, matters as much as the deal itself.

Where to go from here

Most people start with Cal’s Fortify Your Wealth series, a multi-part video series on the strategies he uses when the market shifts. There are also weekly videos on YouTube.

If you would rather talk it through, book a free intro call with the Investor Code team.

For the full framework, there is the Commercial Property Mastery online course.

Frequently asked questions

Why is commercial property considered illiquid, and is that a bad thing?

A commercial property sale can take three to six months, with due diligence running 30 to 180 days. That illiquidity can actually protect value: during COVID, commercial valuations in parts of Australia barely moved for months even while tenants stopped paying rent, unlike the share market which can drop double digits overnight.

What does “the tenant is your biggest investor” mean?

The tenant’s rent covers your bank interest, land tax, council rates, water rates, management fees and maintenance. If the bank funds part of the purchase, the tenant is effectively funding the rest through their rent, which is why understanding the strength of the tenant’s business matters as much as the building itself.

What’s the difference between a net lease and a gross lease in commercial property?

In a net lease, the tenant pays the outgoings, land tax, council rates, water rates and maintenance on top of rent, leaving the landlord with minimal costs. A triple net lease can go further, with the tenant contributing to building upgrades. A gross lease bundles most of those costs into the rent the landlord receives, similar to how residential typically works.

When is the right time in a portfolio to add commercial property?

Often later in an investing journey, once meaningful equity has been built, frequently around age 45 plus, when investors want a more passive, land-backed income they can plan around. It also suits young professionals with a network of business-owner tenants they understand well. It works best as a diversification alongside other assets, not a full replacement for residential.

What is a key risk to watch in the commercial property market?

Non-bank, less regulated finance, which has grown roughly 40% in Australia over the past three to four years. It enables higher leverage, but if debt levels rise faster than asset values, that is a risk building underneath otherwise sound market fundamentals.