Commercial Property Deal Analyser

How to Analyse a Commercial Property Deal in Australia

A commercial property purchase is not like buying a house. Lenders do not assess commercial loans based on your personal income the way they do for residential mortgages. Instead, they focus on the property's ability to service the debt. The metric they use is the Debt Service Coverage Ratio (DSCR), and understanding it is the single most important step before you make an offer on any commercial property.

Enter your deal details into the calculator above and it will show you the DSCR, net yield, cash-on-cash return and what happens to your repayments when the rate resets at the next review period. That gives you a realistic picture of whether the deal works, not just what the monthly repayment is.

How DSCR Works for Commercial Property Loans

DSCR is calculated by dividing the property's net operating income (NOI) by the annual loan repayments. Net operating income is the gross rent minus vacancy allowance and all operating expenses. If the property generates $68,000 in NOI and the annual loan repayments are $52,000, the DSCR is 1.31x. That means the property earns 31% more than it needs to cover the loan.

Most Australian commercial lenders require a minimum DSCR of 1.25x to 1.50x. Some major banks want 1.50x or higher. At the lower end, non-bank lenders may accept 1.20x for strong deals with quality tenants and long leases. Below 1.25x, most lenders will either decline the deal or require a larger deposit to reduce the loan amount and improve the ratio.

The DSCR is not static. It changes whenever the rent, expenses or interest rate changes. That is why the stress test in the calculator above matters so much. A deal that passes at today's rate may fail at a rate 2% higher, which is exactly what happens at a rate review if the market has moved.

Commercial vs Residential Loan Assessment

If you are coming from residential property investing, commercial lending will feel different. Residential lenders assess your personal income, debts and living expenses. Commercial lenders assess the property's income first, then your financial position as a secondary check. This means two buyers looking at the same commercial property may get very different borrowing outcomes depending on the lease, tenant and property type, not their salary.

Loan terms are shorter. Most commercial loans run 15 to 25 years, not 30. Deposits are larger, typically 25% to 35% versus 10% to 20% for residential. Interest rates are higher, roughly 6% to 9% versus 5.5% to 7% for standard home loans. And the biggest structural difference is the rate review period. Residential borrowers can fix for 1 to 5 years and then roll onto a variable rate with no forced reassessment. Commercial borrowers face mandatory rate reviews every 1, 3 or 5 years where the lender can adjust the rate based on current conditions.

Understanding Net Yield on Commercial Property

Gross yield is the number agents put in the listing. It is the annual rent divided by the purchase price. A property rented at $84,000 per year with a price of $1,200,000 has a gross yield of 7.0%. That sounds good. But gross yield does not tell you what you will actually earn.

Net yield subtracts vacancy allowance and real operating expenses from the rent before dividing by the price. If vacancy costs you $4,200 and expenses cost $12,000, your net operating income drops to $67,800, giving a net yield of 5.65%. That 1.35% gap is the difference between what the agent tells you and what you will actually experience as the owner. On a $1,200,000 property, the gap represents roughly $16,200 per year in costs that gross yield hides.

Use the net yield breakdown tab in the calculator to see this gap clearly. It is one of the most common traps for first-time commercial buyers.

What Happens at a Rate Review Period

This is where commercial property loans differ most from residential, and where most first-time commercial buyers get caught out. A rate review period is a contractual date, typically every 1, 3 or 5 years, when the lender reassesses your interest rate.

At the review, the lender looks at current market rates, the property's performance (including vacancy and rental income), the borrower's financial position and the loan's LVR based on a current valuation. If market rates have risen, your rate will rise with them. If the property has declined in value, the lender may require a partial repayment to maintain the agreed LVR.

A deal that works at 7.00% may not work at 9.00%. If your DSCR drops below the lender's minimum at the new rate, you may need to find additional security, pay down part of the loan or refinance to a different lender on less favourable terms. The rate review stress test in the calculator above shows exactly how much buffer you have before this becomes a problem.

Typical LVR Limits for Commercial Property

Commercial LVR limits are lower than residential. Most lenders offer 65% to 75% LVR for standard commercial property, meaning you need a deposit of 25% to 35%. Some will stretch to 80% for prime assets in strong locations with long-lease tenants, but this is uncommon. Specialist or secondary properties like hotels, service stations and single-use buildings may be capped at 50% to 60% LVR.

Industrial properties in metropolitan areas typically attract the best terms. Office and retail in CBD or fringe locations are assessed on a case-by-case basis depending on tenant quality, lease length and market vacancy rates. Regional commercial property usually has lower LVR caps because of the smaller buyer pool and higher vacancy risk.

If you are buying commercial property through your SMSF, LVR caps are even lower. Most SMSF lenders cap commercial at 65% to 70% LVR. See our SMSF commercial property page for the full picture.

Cash-on-Cash Return Explained

Cash-on-cash return answers a different question from yield. Yield tells you what the property earns relative to its purchase price. Cash-on-cash return tells you what you earn relative to the actual cash you invested. For leveraged investors, this is the more useful number.

The calculation is straightforward: take the annual cash flow after debt service (NOI minus annual loan repayments) and divide by the total cash invested (deposit plus stamp duty plus other purchase costs). If the cash flow after debt is $10,000 per year and you invested $425,000 in cash, the cash-on-cash return is 2.4%. If the cash flow after debt is negative (the loan repayments exceed the NOI), the return is negative, meaning you are subsidising the property from your own pocket.

Cash-on-cash return is heavily influenced by LVR. A larger deposit means more cash invested and often a lower return, even though the deal is safer. A smaller deposit means less cash invested and potentially a higher return, but with more risk. The calculator above shows both metrics so you can see the trade-off.

Commercial Property Expenses Most Buyers Underestimate

On paper, commercial property looks simpler than residential because many commercial leases are "net" leases where the tenant pays outgoings directly. In practice, there are always expenses the owner carries.

Vacancy is the biggest one. When a commercial tenant leaves, the property can sit empty for 3 to 12 months depending on the location, property type and market conditions. During that period you receive no rent but still carry insurance, rates and loan repayments. A 5% vacancy allowance assumes roughly 2 to 3 weeks of vacancy per year. For retail and office in secondary locations, 10% or higher is more realistic.

Property management fees run 5% to 7% of gross rent for commercial, comparable to residential. Council rates, water rates, building insurance and land tax are ongoing regardless of vacancy. Maintenance reserves are often underestimated: commercial buildings have lifts, air conditioning systems, fire compliance, roofing and car park maintenance that residential properties do not. Allow 1% to 2% of the property value per year for maintenance and capital expenditure.

When to Speak to a Commercial Finance Broker

A commercial finance broker adds value differently from a residential broker. Commercial lending has fewer lenders, more variation in policy and much more deal-by-deal negotiation. The same property can attract a 6.5% rate from one lender and an 8.5% rate from another depending on how the deal is presented, the borrower's entity structure and the lender's appetite for that property type.

A good commercial broker will know which lenders are currently writing in your property sector, how to present the DSCR and lease profile to get the best assessment, and how to structure the loan (term, review period, LVR, security) to match your goals. If your deal is marginal at current rates, a broker can often identify a lender with more flexible policy or suggest structural changes that improve the DSCR without changing the property.

If you have run your numbers through the calculator above and the deal looks tight at a +2% rate increase, or the DSCR is sitting between 1.25x and 1.50x, that is exactly when broker advice is worth the most. Talk to a commercial finance specialist before you commit.

Types of Commercial Property and How Lenders View Them

Not all commercial property is assessed equally. Lenders have strong preferences based on property type, and understanding those preferences helps you anticipate the terms you will receive.

Industrial and warehouse properties are currently the most favoured by lenders in Australia. They have low vacancy rates, growing tenant demand (driven by logistics and e-commerce) and relatively simple building structures. Expect the best LVR and rate offers in this sector.

Office property is more complex. CBD office has faced higher vacancy since 2020, and lenders scrutinise tenant quality, lease length and building grade carefully. Suburban office with long leases to government or national tenants can still attract strong terms.

Retail property varies widely. Essential-services retail (supermarkets, medical, fuel) is well-regarded. Discretionary retail in suburban strips carries more risk. Lenders will look hard at foot traffic, competing centres and the tenant's trading performance.

Medical and healthcare properties are popular with lenders because of long lease terms, stable tenants and strong sector fundamentals. If the property is purpose-built, the tenant base is usually sticky.

For a full guide on financing each type, visit our commercial property loans hub. If your business is looking to buy its own premises, see buying business premises for the owner-occupier angle.

How This Calculator Helps You Prepare

This calculator does not tell you whether to buy a specific property. It tells you whether the financial fundamentals of the deal are sound. Use it to check three things before you go further.

First, check the DSCR. If it is below 1.25x at the current rate, the deal is unlikely to pass lender serviceability without a larger deposit or a lower price. If it is between 1.25x and 1.50x, it is marginal and worth stress-testing carefully. Above 1.50x, the deal has a comfortable buffer.

Second, check the rate review stress test. Commercial borrowers face mandatory rate reviews, and a deal that passes at today's rate may fail at a rate 1% to 2% higher. The stress test tab shows exactly where your break-even is.

Third, check the net yield. If the gap between gross and net yield is large, the property's expenses are eating into your return more than you might have realised. Compare the net yield to your borrowing cost. If your net yield is below your interest rate, the property is negatively geared before you even account for debt repayment.

Walking into a broker meeting with your DSCR, stress test and net yield numbers already modelled puts you in a stronger position than 90% of commercial property buyers. It shows you have done your homework and helps the broker focus on structuring the deal rather than explaining the basics.