Turnkey vs Land and Build: How do they differ, and why does this matter?

Wondering what the difference is between a turnkey and land and build investment property, and how it impacts you?

When looking at a property to purchase off the plan, you may have seen them classified as either a ‘turnkey’ property or ‘land and build’ package.

In some instances, like on our website, this is classified as a ‘funding’ type. Because at the end of the day, the product you get will be the same.

The key thing that sets a ‘turnkey’ property and a ‘land and build’ property apart is the process with which you fund the investment.

SO, HOW DOES THE FUNDING WORK?

When you purchase a ‘turnkey’ property you will generally pay a deposit of 10% of the purchase price. You’ll then have nothing more to pay on the property until settlement. At this point, you’ll be required to pay the remaining amount to the vendor.

When you purchase a ‘land and build’ package, however, the financing gets a little more involved.

The purchase of the land and the building of the home is financed separately into two mortgages. One for the land. The other to fund the construction of the home.

• Like with a turnkey property, you will initially pay a 10% deposit on the home once you’ve signed the S&P agreement and you’ve completed the due diligence period.
• Once that’s all done and the title is issued for the land, you’ll settle on the land and start paying interest on the amount you’ve lent to fund this back to the bank. This can generally be fixed at interest only for 12 months.
• The construction mortgage will be advanced as milestones are reached – think of them as ‘progress payments’.
  You will typically receive an invoice from the builders, which you will pass to the bank, which will advance you the money that you then pass onto the builders.

This mortgage will be on a variable interest rate until the build is complete and the final settlement payment is passed onto the builder.

WHAT ARE THE PROS AND CONS?

With a turnkey property, not having to worry about covering the cost of a mortgage while you can’t receive income from a tenant could be a huge pro. The time between paying the deposit and settling on the property could give you additional time to save a bit extra money to cover the total cost of the property.

However, as the builder is having to cover the interest costs for purchasing the land on which the house is being built as well as all the construction costs upfront, the purchase price for a turnkey can be higher than that of a land and build property,

But, while the purchase price of the land and build might be lower, you will have more upfront costs than with a turnkey. And you’ll be covering the mortgage re-payments before you can get tenants in to pay the rent.

You may also notice that a turnkey property will often be a townhouse, whereas a land and build package is more likely to be a stand-alone property.

DOES THIS CHANGE THE GROWTH POTENTIAL OF THE PROPERTY?

The way that your investment property is funded does not impact the potential growth or yield of the property you’ve purchased. That comes down to other factors like property type, location, size, etc.

CAN I HAVE MORE INPUT INTO THE DESIGN OF THE PROPERTY IF I PURCHASE A LAND AND BUILD PACKAGE?

While in some instances a land and build package may provide more flexibility in the end product (with you able to decide on floor plan, colour palate and finishings), with the properties we sell for investors the design and inclusions have already been decided by the vendor.

This is great for you as you know exactly what you’re getting upfront and there are fewer decisions for you to make during the build, so other than regular progress payments there’s little for you to do.

HOW DO I CHOOSE WHETHER TO GO FOR TURNKEY OR LAND AND BUILD?

The decision about which property you purchase as an investor won’t just come down to the funding type. You’ll also want to make sure the property fits with your other criteria, like price, location, and potential returns.

Which funding type best suits your situation will largely depend on your cash position – whether you have enough surplus cash to cover the costs of the mortgage on your investment property before you have paying tenants or not. If you do, a land and build package could be a great option, but if you don’t, a turnkey may be a better option as you won’t have mortgage costs until the house is complete and ready for renters.

For the best advice on whether a turnkey or land and build property is right for you, talk to your enable.me financial adviser. Once you’ve locked down your investment property criteria, come talk to us and we’ll help you find a property that fits.