7 Things to Know About Pre-Construction Condo Investment

7 Things You Need to Know Before Investing In Pre-Construction Condos

Thinking about investing in pre-construction condos? The good news is that condos make for a sensible purchase decision whether to live in or purely for investment.

However, simply owning a condo does not earn you any money, and in fact, it can become a liability as well.

Most investors opt for condos in the pre-construction market. Getting in early at the development stage is an exciting prospect, especially as you have a choice over the developer and location.

So, the big question is what should a buyer look out for a pre construction condo investment?

Here are the top 7 things you need to know to ensure your condo investment is a sound one.

1. Invest In A Builder Before You Invest In A Building

Investing in pre-construction condos. Real estate investment.This is a universal real estate truth that I tell all my clients. Investing in a pre-construction condo becomes inherently less risky when you invest only in reputable builders.

Choose a developer who has a solid track record of executing on their development plans in a timely fashion and without excessive delays.

Start by checking out the developer’s post-closing history. Keep in mind, this isn’t exactly just pre-construction condo investment. However, it’s important when you want to make sure you get the best resale condo value. Considering the builder is a crucial decision one must think about before pushing through with any real estate investment. This is also true if you want to resale condos as a business.

Doing so can give you more insight into why the real estate property may or may not be the best investment. There is also a couple of important factors to take a look at when investing in a builder and their reputation.

Remember that in most pre-construction condos, you’re purchasing the real estate based a floor plan — a completely bare unit.

A) Did They Complete Their Buildings? How Delayed Were They?

Delays are inevitable with a pre-construction condo, it’s just how it is. Me, personally, I like delays. First off, the more the project delays, the longer time you have before you need to close on the brand new condo. All the while you’re leveraging the appreciation of the property market 5 to 1 (assuming you have 20% down, as is the case with most pre-construction developments).

Secondly, if delay notices are handled improperly, which they typically are, you’re likely eligible for up to $7500. This is what’s known as a delayed occupancy rebate, and is thanks to Tarion.

The typical length of the delay is around 3 to 8 months from the initially marketed occupancy date. In my opinion, this is acceptable. However, if a developer’s past projects continually get delayed a year or more, that may potentially indicate other issues. An example being poor financing.

B) Did Their Buildings Stand The Test Of Time? What About The Condo Maintenance Fees?

What real estate projects did the developer complete 5+ years ago? Are the projects in good standing financially today?

Long term success inspires confidence compared to a lack of data or experience. Investors understandably want to put their money in tried and tested ventures.

As for the condo maintenance fees, look for red flags like special assessments or huge increases.

While it may not be entirely the developer’s fault, condo fees could be the result of poor management.

You’re looking for trends here, not outliers. Consistently good quality buildings, with good resale, and stable maintenance fees are all green lights for your pre-construction condo.

2. The 10 Day “Cooling-Off” Period

Pre-construction condo cooling-off period. Real estate purchase.The 10 Day cooling-off period is mandated by Ontario law on all new condominium purchases in the province. It gives you an advantage in the Pre-Construction market that you just don’t have in Resale. [1]

When you purchase a condo from a developer, you have 10 calendar days from the date of signing to decide if you want the unit or not. The 10 day grace period has no obligations, no penalties, no “gotchas”.

I recommend using the 10 Day cooling-off period to your advantage. In Toronto real estate, the market is growing rapidly and buildings sell out on average within 3-6 months from the date of sale. Typically, builders increase pre-construction condo prices regularly and change incentives as they open up sales to the public.

The 10 day cooling period allows you to reserve the price and the incentives. It also ensures the builder cannot sell the condo suite to anyone else or change the price on you.

There are two things I recommend doing during your ten-day cooling. The first one is to have a lawyer review your Agreement of Purchase and Sale with the builder. The aim here is to give you the scoop on closing costs & what the fine-print legal-jargon says.

Secondly, take a look at other options. Go look at another comparable pre-construction condo project. Compare the prices and incentives to be sure you’re getting a good deal.

3. Interim Occupancy vs. Closing: What’s The Difference?

Pre-construction unitsInterim Occupancy is when you get the keys and can move into your property – but technically, you don’t own your condo just yet. With condominiums, you have two ‘closing’ dates:

A) What Is Interim Occupancy For Condos?

The first is Interim Occupancy when you get the keys to your unit. Occupancy for owners is staggered, usually a couple of floors per week, that way everyone isn’t moving in on the same day. [2]

At this point – the building isn’t registered yet. If you bought with a good builder, typically registration and the final closing will happen within 6 months after interim occupancy. Condo builders like Tridel are notorious for moving extremely quickly and efficiently to get their buildings registered quickly.

B) What Are Interim Occupancy Fees?

Interim Occupancy Fees are what you pay the builder to occupy the unit. You don’t have the title to your unit until registration, so your mortgage doesn’t start just yet. Some people call this “rent to the builder” or “phantom rent” – but simply put, it’s just:

C) Your Monthly Condo Maintenance Fees

Your condo fees start with the interest payment on the 80% borrowed for the purchase (assuming 20% down). The builder uses the Bank of Canada key rate to determine your interest payment, and the payment is made to the builder directly.

During the time of interim occupancy, your monthly carry costs will actually be lower than after registration. This is because you haven’t started the principal payment on your mortgage yet.

Other condo fees include maintenance fees for the general upkeep of the building as well as any facilities. Though these condo fees are shared among all residents reducing the amount you have to pay.

D) What Is Final Closing?

The final closing is when the builder registers the Condo Corporation with the City. This is when your bank pays the builder the 80% balance, when your mortgage starts, and when you receive the title for your unit.

This is also when final adjustments and closing costs will be calculated and paid. This includes factors such as legal fees and land transfer tax. Plus any other closing costs as outlined by your Agreement of Purchase and Sale.

Once you’ve completed the final closing process, you will receive the official title and your mortgage will be registered. – GTA Homes

4. Closing Costs: Development Fees & Levies on Your Investment

Real estate closing costs. Buying a condo.If you’ve ever heard “Pre-Construction condo Horror Stories,” they were likely referencing some outrageously inflated closing costs that were levied against the buyer on the final closing.

These are rare, but they do happen – however, they only happen to people who didn’t do their due diligence. Like those who bought with an untrustworthy builder. Or anyone who worked with realtors or lawyers who don’t specialize in pre-construction condos.

Here’s the reality: You need to work with specialists who know what they are doing. In this specific case – you need to ensure that you have someone making sure your developmental and municipal fees and levies are capped.

You get what you pay for when you choose the right people for the job.

A) What Are Development Fees & Municipal Levies?

Development fees and municipal levies are determined when a property is developed. When a building goes up, the population density for the neighbourhood increases. [3]

The city is going to determine the impact on the neighbourhood. As a result, they will charge the builder a per-unit price. This funds the local infrastructure needed to support the residents that the building is bringing in. For example, new streets, parks, schools, future transit solutions, etc.

If your Agreement with the builder wasn’t reviewed by a good lawyer in the ten days, and you had an uneducated realtor guiding you, it’s very possible that your closing costs aren’t capped.

In that case, if the City charges the builder $25,000-50,000 per unit (which is not uncommon for most areas in the city), the builder will pass that cost along to you on the final closing.

However, if your Agreement of Purchase and sale has pre-capped closing costs, or if your lawyer amends the contract and has them capped for you, the builder can only charge you that capped cost.

For many developments, you can expect to get your closing costs capped at $7,500-10,000 for one-bedroom units and $10,000-15,000 for two bedrooms or larger.

The takeaway here? It’s critical to have a pre-construction realtor and Lawyer on your side when you walk into the sales center. The sales reps that work for the builder represent the builder, you need to have representation on your side.

It doesn’t cost you a penny (and no, you won’t get a discount for not using a realtor).

5. HST Rebates For Investors On Condos

HST is included in the price when you purchase a condo. If you’re moving into the property yourself, or one of your family members is, that’s all you need to know.

However, as an Investor, you need to be aware that on the final closing, you’ll be charged HST again. Without going into too much detail here, you can get 100% of your HST rebated if you file for it within 1 year and provide the government with a one-year rental lease agreement proving that you rented the unit out. More on that in this video. [4]

6. Assignments: Selling Pre-Construction Condos Before Closing

Signing a real estate contract. Investing in pre-construction condos. Rights reserved. Assignments are your way out, or your way to cash out, of Pre-Construction units before the unit or building is actually complete.

They’re called assignments because you’re simply assigning the Contract between you and the builder to a buyer – since no real property exists yet.

Assignment flipping is somewhat prominent but has slowed since the CRA decided that it may start applying income tax to the capital gains on an assignment sale. That’s if they determine your intention was to flip the unit before closing.

Regardless, your right to assign is your way out of a pre-construction contract should life change. It also applies if you simply want to pull your profits and not close on the unit.

Generally speaking, most builders prohibit the listing of assignments on MLS. For that reason, assignment sales can typically be more difficult than resale condo listings. Many people try to assign their unit themselves through Kijiji or word of mouth, but I highly recommend avoiding this route for a couple of reasons.

These include:

1. You’re unlikely to get fair market value. You may have to sell well below it to get any interest from low-traffic media like Kijiji and Facebook.

2. Assignment sales involve a lot more paperwork and legal headache than regular condo sales.

The bottom line is, you’re better off having a pre-construction realtor or team who specializes in assignment sales sell your unit for you (hint: we’re one of them). You have a far better chance of getting fair market value for your unit, and the commission paid will generally be minimal compared to the price difference you’ll get versus selling it yourself.

Profit aside, assignments can be a bit messy contractually. If you wouldn’t want to risk selling your home or condo yourself, you definitely don’t want anything to do with an assignment sale – many realtors won’t even take them on for that reason.

7. Fair Market Value

“Pre-Construction Condos are sold at a discount.” False. This is one of those assumptions that gets tossed around about as much as, “if I don’t use a realtor, the builder will give me a discount”.

The truth is – it depends on the unit, and it depends on the development. Some projects are priced at 5% under market value, some are priced at 10% above market value. Sometimes, a project priced 10% under market value has a specific unit or two that are priced 10% over resale market value.

What I’m getting at here is – you’ll only know if you’re getting a good deal if you look around, keep updated on the market, and work with a realtor who knows the market.

Buying a pre-construction condo (like these) with 20% down, or less, allows you to leverage 100% of the asset’s appreciation at a five-to-one ratio.

Keep in mind, your downside is leveraged at the same rate. If you’re not over-leveraged with bad debt, and if you buy at fair market value or below – you’re going to realize capital gains at a rate that no stock or asset will match. This is provided our market keeps heading in the direction that it has for the past years.

Between 1997-2017, the 20-year-over-year average for properties in C01 (downtown Toronto) shows a near 11.56% appreciation before adjusting for inflation.

Time In The Market > Timing The Market.

A graph on Pre-Construction condo investments. Real estate prices in Toronto. Investing in pre-construction condos

Is A Pre-Construction Condo A Better Investment Than A Single-Family House?

You’ll generally have to pay more to buy a single-family house compared with a condo. This is because a house requires a lot more investment when compared to condos. Facilities such as playgrounds, pools, gym, etc. will not be pre-built in most houses.

The difference in square ft is a consideration. However, one of the crucial contributors to the price of a single-family home being higher is the fact that the owner of the house not only owns the house, but also the land on which it is built. This is one of the main factors that turn the “is buying a condo a good investment?” debate in favour of condos.

Another factor to consider here is demand and supply. The population of the world is increasing every year at a steady rate. The demand for condos will rise exponentially in the coming years.  As a result, the value of condos is bound to increase.

So if you are wondering: “is buying a condo a good investment?”, the shorter answer here is yes. In the coming years, this investment will definitely pay you back. You can also watch this video by Brett where he explains why pre-construction condos are a good investment.

So, Are Condos A Good Investment?

There are multiple factors that go into consideration when investing in a real estate property within the pre-construction market. However, when it comes to a condo investing, the features and amenities are much more when compared to an individual house. As a buyer, this makes condos a very attractive proposition.

When you then factor in their excellent locations and transport links, it’s clear to see why condos are such a worthy investment. After all, we all need a place to live. Why not do so in some of the most stunning real estate your city has to offer?

Before making any pre-construction condo investment, make sure you do your homework. Having trust in your developer and knowing all the costs or expected delays upfront are paramount.

Have questions about your condo investment? Explore the best pre-construction condos and newly built condos on Precondo.ca.


References

1. Hyder Owainati, What is the Cooling-off Period?, retrieved from https://www.ratehub.ca/blog/what-is-the-cooling-off-period/

2. Hyder Owainati, What is Interim Occupancy?, retrieved from https://www.ratehub.ca/blog/what-is-interim-occupancy/

3. Property 24, Rates, taxes and levies, retrieved from https://www.property24.com/property101/buyers-guide/rates-taxes-and-levies/15288

4. Hyder Owainati, How the HST Rebate Works With New and Pre-construction Condos, retrieved from https://www.ratehub.ca/blog/how-the-hst-rebate-works-with-new-and-pre-construction-condos/

One Comment

  • Tommy November 5, 2019 at 12:52 am

    Hey there I’m really confused on the Toronto pre con Market. I was jus wondering if I would be making a mistake in purchasing a pre con 1 bed room unit for a price tag of 625k. Which in essence is roughly 1400sqf which seems kinda of high with comparable pre con developems in the city. I have recently looked into No 31 pre construction building by Lanterra developments. jus wondering if you have any advice. Is there money to be made in the long term with prices as high as they are. Any feed back would be greatly appreciated.

    Reply

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