What is a turnkey property? Turnkey pros and cons explained

For property investors purchasing from a developer, more often than not, you’re going to be buying a turnkey property.

These are properties where you buy a completed product from a developer – with the property ready to rent from day 1.

But, turnkey properties aren’t right for all investors and come with their pros and cons.

So, in this article, you’ll learn what a turnkey property is and hear both sides of the argument, so you can decide whether a turnkey property is right for you.

And just so you know, here at Opes Partners, we only deal with Turnkey properties. So you might think ‘this is just going to be biased’. That’s not the case. This will still be a fair, honest, article based on facts. That’s so you can make the right decision for yourself.

Do you have a question or comment about turnkey properties? Feel free to leave your thoughts in the comment section at the end of the page.

What is a Turnkey Property?

A turnkey property is where you buy a finished property from a developer that is ready to be lived in or rented out. It’s an all-in-one package.

But that doesn’t mean the property has to be built yet. Often, home buyers will sign a contract to buy a turnkey property from a developer that will be built in 12+ months.

The distinguishing feature of a turnkey property is that you sign a sale and purchase agreement (contract) to buy a completed property from the developer. You are not hiring a developer to build you a property.

That means that the developer will often design the properties and market them for sale, instead of you finding a plot of land and choosing what gets built there.

That does mean that you have less say on the final product for a turnkey property as opposed to when you use a progressive payment contract.

What’s the alternative to a turnkey property?

If you still want to invest in a new build property, but turnkey properties aren’t right for you, then you might decide to use a progressive payment build.

This is where you hire a developer or construction company to build a property for you. In this case, you’ll buy the land, decide what gets built, and then pay the developers as they build the property.

The distinguishing feature of a progressive payment build is that you are not buying a finished product from a developer. You are hiring them to build a property for you.

What are the pros of a Turnkey Property?

There are pros and cons for property investors wanting to purchase a turnkey property. Let’s start with the pros.

Pro #1 Fixed costs (most of the time)

Most of the time turnkey properties have fixed prices. You sign a contract with the developer to buy a property for $1,000,000 and once it’s finished you’ve paid them $1,000,000.

If the cost of building materials goes up, or there are delays in the property getting built, the developer usually can’t put the price up on you.

There are some cases where they can, but we’ll discuss those in the cons section.

The fixed price is a big pro for this type of contract because:

• You’ll know the price you need to pay from the get-go.

• Banks have a preference for turnkey purchases because they are a fixed price.

This tends to be a big pro for first-time investors and first home buyers because they often have a limited budget. That means they need to know that the cost of the house won’t rise rapidly.

This model is very different from when you hire a developer to build you a house. Because under that arrangement it is much easier for them to pass on higher building costs or the cost of delays to you.

Pro #2 Low Deposit

When you sign up to buy a turnkey property, you’ll pay a small deposit.

This is usually 10%, but is negotiable.

You then don’t pay any more money to the developer until the property is built. That means you can effectively get started in property with a low deposit.

Let’s say you have a 10% deposit saved, but you need a 20% deposit for the bank to say ‘yes’ to your mortgage application.

Some investors and first home buyers will put a turnkey property under contract and pay their deposit. They’ll then save the other 10% while the property is under construction.

This means they can buy a property in today’s market, even while they don’t have the full deposit they need straight away.

Pro #3 Less risk if the developer goes bankrupt

The other major benefit is that there is very little risk to you if the developer goes under.

When you sign up to buy a turnkey property, you’ll pay a deposit. This is usually 10%, but is negotiable.

This is typically held in a solicitor’s trust account. That means the developer won’t use this money to complete the development.

But, they take it so they know you are serious, and to protect themselves if you decide to not pay the rest of the money.

What happens if the developer then has financial troubles and goes bankrupt?

Not much, because you don’t own anything. You don’t own the land or the half-finished house.

Your money is still sitting in with the developer’s solicitor.

You’ll get your money back (with interest). You can then walk away and look to buy something else.

Though it should be noted, that not all turnkey contracts are set up this way, so it’s best to check with your lawyer when looking at buying a property.

Compare that to if you hire a developer to build you a house. What happens if they go belly up?

You own the land, you own the half-finished house, you own all of the problems.

To be fair, you might have some insurance (e.g. a Masterbuild guarantee) that means another builder will step in to finish the job.

But, if your developer does go under, you’ll have fewer hassles if you’ve got a turnkey property as opposed to a progressive payments property.

Pro #4 Lower interest costs

As mentioned, when you buy a turnkey property you often only pay a small deposit upfront (e.g. 10%). Then you pay the rest at completion.

If you are borrowing most of the money to buy this property, that means you don’t take out the bulk of the mortgage until the property is ready to be moved in to.

For investors that means that you don’t start paying your mortgage until the tenant is almost ready to move in.

That’s important because that way you’re not paying for a second mortgage out of your pocket.

Compare that to if you’d hired the developer to build the property for you. In that case, you make regular payments to the developer as they build you the house.

For example, you might need to make a payment to them once the foundations are laid, and another once the roof is on.

If you are borrowing the money to pay the developer, then you are going to start incurring interest costs from the bank before someone has moved into the property.

For investors that means paying a second part-mortgage before any rent comes in. And for first home buyers that potentially means paying a part-mortgage and rent at the same time.

Pro #5 You don’t have to find the land

When buying a turnkey property, you’ll typically buy into a project the developer has designed and is promoting.

This means you can look at the area the developer is building in, see if you think it’s a good place to invest in or not, and then make a decision.

But, you don’t have to find the land, and you don’t have to design the properties that are being built.

Compare that to a progressive payments build. In that case, you need to find the land you want to build on, purchase it and then contract a developer or builder to construct the house.

What are the cons of a turnkey property?

But while there are pros to turnkey properties, they also have their drawbacks.

Con #1 Higher purchase price

Turnkey builds tend to be more expensive, compared to Progressive Payments.

There are two reasons for this.

#1 – The developer is paying the interest.

Under a turnkey, the developer owns the land and therefore pays the interest costs for any money used to buy the land. This is the same with all the construction costs. So they need to charge you for this.

Compare that to if you hire them to build a property for you, you’ll cover the interest costs. So they don’t charge you for them.

But there’s more to it than that, developers often pay a higher interest rate than you will.

If you go to a bank and get a loan, you might pay 4.5% at the time of writing.

If a developer does the same, their rate might be 7% or higher.

That means the interest costs in building a turnkey property are often higher than for a progressive payments build. That pushes the cost higher.

#2 – The developers take on more risk

Not only does the developer take on higher interest rates, but they also shoulder the bulk of the risk.

If there’s a building delay in a turnkey build, the developer wears the cost. Higher cost of building materials? The developer wears the cost of these too.

So the developer will make up for some of this risk by charging the buyer more than they would if they were just hired to build the property.

Con #2 Less ability to customise

If you hire a developer to build a house for you, you can customise it however you want.

In some cases, you might take a standard design from the developer and then customise it to your tastes. Or, you might design one from scratch with an architect.

You can’t do that as much with a turnkey property.

With turnkey, you’re buying a finished product, off the shelf. So you don’t have the same ability to change things to suit what you want in a property.

For investors, this often is not much of an issue since they aren’t living in the property themselves. But, it can be an issue for first home buyers.

Con #3 Developers can still put up the price

Although we said that turnkey contracts are a fixed price, there are some instances where the developer may push the price up.

How can they do this?

Some contracts have a period between when you lock in your contract unconditionally and when the developer becomes unconditional.

This means during this time, you can’t cancel the contract, but there are some instances where the developer can.

Now, this can be for a lot of genuine reasons.

Perhaps it’s because the developer needs a certain amount of presales locked in before the bank will lend money for the project.

Or, it could be the developer needs to get resource consent and may need to have the flexibility to change some things in the contract if there are unforeseen problems.

But, while these reasons are genuine, the risk here is that the price of materials goes up during this period.

So, the developer can then cancel the contract and ask you to re-sign at a higher price.

But if you don’t want to pay the increased price, you don’t have to. You can choose not to sign the new contract and walk away.

There’s a bit more to it than that, so if you want to dig deeper, check out our Can Developers Increase The Price of New Builds? article.

Who builds Turnkey Properties?

Not all developers build turnkey properties. Some, as we have discussed, deal with progressive payment contracts.

Most of the big name developers tend to build turnkey properties, like Williams Corporation, Fletcher Living, Woolfbrook, and Mike Greer.

Here at Opes, we exclusively work with developers who build turnkey properties.

However, we also work with developers you may never have heard of (like Aedifice and Oaks Living).

Read more about the top 5 developers you’ve never heard of.

On the other hand, some developers don’t focus as much on turnkey properties. Developers like Ashcroft Homes, Golden Homes, Landmark Homes, and David Reid. These developers tend to do more progressive payments type contracts – where you hire them to build you a house.

Who are TurnKey Properties the right fit for?

Turnkey properties tend to be a good fit for passive buy and hold investors, and first home buyers – especially if you don’t already own a piece of land you are ready to build on.

Turnkey builds are simpler, lower risk, and lower hassle compared to hiring a developer to build a house for you.

You can sign a contract, walk away for 12 months, and then come back to get the guys for your property that is ready to be moved into.

Who Are TurnKey Properties The Wrong Fit For?

However, if you’re someone who already owns a piece of land and you want to build on it, then you are more likely to use a progressive payments contract.

Why? Because in this instance you might be looking to customise your own forever home and want to detail every aspect of it yourself.

Or perhaps you are an advanced investor, and you want to subdivide a piece of land and build several properties. In both these cases, a turnkey build will likely not be the right fit for you. Instead, a progressive payments build may be the way to go.

However, if you are a renovations-based investor hunting for the next BRRRR project then neither new build contract is right for you.

We’d expect to see investors like this walking through existing homes and bidding against them at auction.

What are the common mistakes investors make when buying a TurnKey Property?

If you do decide that a turnkey build is the right option for you, there are three common mistakes that you’ll want to avoid.

#1 Thinking all Turnkey Properties are the same

When you think of a turnkey property – you probably think of something that is truly ready to be lived in straight away.

But, this isn’t always the case.

Some turnkey properties don’t include curtains, blinds (or other window coverings), landscaping (like grass), or even a mailbox.

So sometimes a property that uses a turnkey contract, may not be 100% turnkey in practice.

So you need to bear this in mind when you’re looking at properties online on TradeMe or a developer’s website.

Often a property will be advertised at a seemingly cheap price. Then you find out later that this price is low because there’s still another $20k of work to be done.

So be sure to enquire about what the property doesn’t include, and be sure to enquire about drapes and blinds in particular – as these are often missed.

For any Opes investors reading this – all the properties are fully turnkey including drapes and blinds unless otherwise stated.

#2 Not using a specialist lawyer

Turnkey contracts aren’t one-size-fits-all. Every contract is different, with different clauses and wordings.

This is where a specialist property lawyer, as opposed to a run-of-the-mill lawyer, can be an invaluable asset to you when purchasing a property.

Contracts are loaded with jargon that can be a barrier to buying a smart investment property, or not.

However, this jargon becomes second nature to a lawyer who’s reading them day-in and day-out.

Even seemingly “black and white” contracts can often give the developer a lot of flexibility in the fine print. Some flexibility is necessary, but there might be some clauses you are uncomfortable with.

For example, a developer may not be able to get the exact black corrugated iron stated in the initial specifications. Usually, the contract will allow the flexibility to get grey.

While clauses in the contract must allow for some flexibility, you don't want the high-quality materials listed in the original spec exchanged for lesser quality.

An example of something an investor might not be comfortable with is if you think you’re buying high-quality Fisher and Paykel appliances, only to find the developer has replaced them with a cheaper, more budget brand.

A specialist lawyer will go through these clauses and make sure there are appropriate protections or will negotiate them where necessary.

#3 Thinking the price is fixed

As we have discussed earlier in this article there is the possibility to change the price of a fixed price contract.

Their ability to increase the price depends on the wording of your specific contract. That’s why it’s important to ask your lawyer the question –

“In what circumstances could the developer increase the price of this property”

You can also learn more about the situations where a developer can do this through our video.

How do I buy a Turnkey Property?

The “normal” routes for buying a New Build property can be the same as any other purchase. You can search TradeMe, go through a real estate agent, or go to a developer directly.

However, there is one other alternative that most Kiwis don’t think to consider, which is to use a property investment company like Opes’ Partners.

This is where you build a property investment plan with a Financial Adviser, who then goes and selects the suitable New Build investment properties to fit your plan.

Should I Buy A Turnkey Property?

All things considered, turnkey properties are a great fit for investors who are starting out, who want certainty, and who don’t want to take on the risk of building a property themselves.

But, there are also risks involved too, so make sure you have a specialist lawyer who can look over your contract and help you stay protected.