7 Things to Know About Pre-Construction Condo Investment

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

While the sole purpose of a condo is to live in, there are other things one can do with the condo. Condos are vast in number and are fast moving, both regarding purchases and rental.

Most nuclear families opt for condos nowadays because of easy maintenance and social life. Although simply owning a condo does not earn you any money, and in fact, it can become a liability as well.

Are pre-construction condos a good investment? Why buy a condo? Here are the things you need to know before investing.

1. Invest in a Builder before you invest in a Building

invest in the builderThis is a universal truth that I tell all my clients. Investing in Pre-Construction becomes inherently less risky when you invest only into reputable builders who have a solid track record of executing on their development plans in a timely fashion and without too many delays.

You also want to take a look at what happened post-closing with developments that the builder completed successfully in the past.

Keep in mind, this isn’t exactly pre-construction specific, it’s important when investing in resale to consider the builder as well – as that can give you more insight into why the building may or may not be the best investment you can make.

There’s a couple of important factors to take a look at when investing into a builder and their reputation:

A) Did they complete their buildings? How delayed were they?

Yes, but there not on schedule. Delays are inevitable with Pre-Construction, it’s just how it is. Me, personally, I like delays. First off, the more a project delays, the longer you have before you need to close on the 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 as a delayed occupancy rebate, thanks to Tarion.

3 to 8 months of delays from the initially marketed occupancy date is typical, and in my opinion, acceptable – but if a developers past projects continually get delayed a year or more, that may potentially indicate poor financing or other issues.

B) Did their buildings stand the test of time? What about the maintenance fees?

Yes, if you take a look at projects that the developer completed 5+ years ago. These are the projects in good standing financially today. As for the maintenance fees, look for red flags like special assessments or huge increases.

While it may not be entirely the developers fault, and 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

2. The 10 Day “Cooling” Period

dog infront of electric fanThe 10 Day cooling period is mandated by Ontario law on all new condominium purchases in the province, and 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 “gotcha’s”.

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

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

There’s two things I recommend doing during your ten day cooling. First, have a lawyer review your Agreement of Purchase and Sale with the builder 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 project, and compare the prices and incentives to be sure you’re getting a good deal.

3. Interim Occupancy vs. Closing: what’s the difference?

occupied signInterim Occupancy is when you get the keys and can move into your unit – but technically, you don’t own it 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 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 building 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

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 because you haven’t started the principal payment on your mortgage yet.

D) What is Final Closing?

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, such as legal fees, land transfer tax, and 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

men holding key and money bagIf you’ve ever heard “Pre-Construction Horror Stories,” they were likely referencing some outrageously inflated closing costs that were levied against the buyer on final closing.

These are rare, but they do happen – however, they only happen to people who didn’t do their due diligence, bought with an untrustworthy builder, or 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.

A) What are Development Fees & Municipal Levies?

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

The city is going to determine the impact on the neighborhood, and charge the builder a per-unit price in order to fund the local infrastructure needed to support the residents that the building is bringing in.

This might mean 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 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 unit 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 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 contractAssignments 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 if they determine that 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 or 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.

1. You’re unlikely to get Fair Market Value and may have to sell well below it to get any interest from low-traffic media like Kijiji and Facebook, and 2. Assignment sales involve a lot more paperwork and legal headache than regular condo sales.

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 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’s 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 – but 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 provided our market keeps heading in the direction that it has for the past years.

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

Time In The Market > Timing The Market.

a graph on Pre-Construction condo investments

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

It generally costs more to buy a single-family house. 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.

Besides the difference in square ft, one of the crucial contributors to the price of a single-family house 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 turns to answer to “is buying a condo a good investment?” in favor of condos.

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

So if you are thinking now, is buying a condo a good investment, 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 it is about buying a property. However, as we have analyzed, buying a condo should be on top of your list if you plan to get your hands on a new property. The features and amenities are much more when compared to an individual house.

If you are still thinking, explore few of the best pre-construction condos and newly built condos on Precondo.ca. Change the way you have been living. Explore the condo life for an easier and more comfortable way of living.


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/

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