Are you thinking about purchasing pre construction condos? The good news is that condos are a wise investment, whether for living or for financial purposes.
Most investors prefer pre construction condos. Getting in early on the development stage is an intriguing prospect, especially when you have a choice of developer and location. So, what should first-time purchasers look for in an investment when condos are in the pre construction stage?
Here are the top 7 things you should know to secure a profitable condo investment.
1. Invest In A Builder Before You Invest In A Building
This is a universal fact that I tell all of my clients. When you only invest in recognized builders, making a pre construction condo investment automatically becomes less risky.
Choose a developer or reputed builder who has a proven track record of completing construction plans on schedule and without unnecessary delays. When looking for the best resale condo value, look into the developer’s post-closing history.
This is also true if you intend to resell condos as a business.
Keep in mind that in a market like this, you are buying a fully empty unit based on a floor plan.
A) Did They Complete Their Buildings? How Delayed Were They?
Construction delays are unavoidable with a preconstruction condo unit; it’s just the way it is. First off, the more project delays there are, the more time you have before closing on the brand-new unit. All the while, you’re leveraging the property market’s appreciation 5 to 1 (assuming a 20% down payment, as with most pre construction developments).
Second, if delay notices are handled incorrectly, which they frequently are, you may be eligible for up to $7500. This is known as a delayed occupancy rebate, and it is provided by Tarion.
The normal duration of the delay is 3 to 8 months from the first advertised occupancy date. This is okay in my opinion. However, if a developer’s previous condo projects are consistently delayed by a year or more, this could suggest other problems. Poor financing is one example.
B) How Long Did Their Structures Last? What About Condo Maintenance Fees?
What real estate projects did the developer complete more than 5 years ago? Are the projects financially stable today?
Long-term success inspires confidence more than a lack of facts or experience. Investors obviously like to invest in tried-and-tested companies. When it comes to condo maintenance fees, watch for red flags such as special assessments or large increases.
You’re looking for trends here, not exceptions. Consistently high-quality structures with high resale value and predictable maintenance rates are all positive indicators for your desired investment property.
2. The 10 Day “Cooling-Off” Period
Ontario law requires a 10-day cooling-off period for all new condominium purchases in the province. It gives you an advantage in this type of condo market that you don’t have in resale.
When you buy a condo from a developer, you have 10 calendar days (the “cooling off period”) from the date of signing to decide whether or not you want the unit. Most pre construction condo builders constantly raise prices and alter incentives when they begin to accept public bids. You can reserve the purchase price and the incentives throughout the 10-day cooling period. It also prevents the builder from selling or raising the price on you.
I recommend doing two things throughout your ten-day cooling period. The first is to have a lawyer analyze your Agreement of Purchase and Sale with the builder. The goal here is to provide you the inside scoop on closing costs and legal jargon. Second, consider your alternatives. Explore another comparable pre construction condo project. Compare prices and incentives to ensure you’re getting a fair pre construction condo Toronto real estate deal.
3. Closing vs. Interim Occupancy: What’s the Difference?
Interim Occupancy is when you get the keys and can move into your property, but you don’t technically own it yet. There are two ‘closing’ dates for condominiums:
A) What Is Condo Interim Occupancy?
The first is Interim Occupancy, which occurs when you receive the keys to your unit. Owner occupancy is staggered, usually a couple of floors per week, so that no one moves in on the same day.
The building is not yet registered at this time. If you purchased from a reputable builder, registration and final closing will usually take place within 6 months of the interim occupancy period. Condo builders have a reputation for working fast and effectively to register their structures.
B) What Are Interim Occupancy Fees?
Interim Occupancy Fees are the fees paid to the builder in order to occupy the apartment. Because you will not obtain the title to your unit until registration, your mortgage payments will not begin until registration. This is sometimes referred to as “phantom rent” or “rent to the builder,” however it simply means:
C) Your Monthly Condo Maintenance Fees
Your condo expenses begin with the interest payment on the 80% loan (assuming a 20% down payment). The builder calculates your interest payment using the Bank of Canada key rate, and the down payment is made straight to the builder.
Your monthly carrying costs will be cheaper during interim occupancy than following registration. Other condo fees include maintenance fees for the general upkeep of the building and any facilities.
D) What Is Final Closing?
When the builder registers the Condo Corporation with the City, the transaction is complete. This is when your bank pays the builder the 80% balance, your mortgage begins, and you receive your unit’s title.
This is also when final adjustments and closing charges are computed and paid. This includes things like property taxes, legal expenses, and land transfer tax. Plus any other charges specified in your Purchase and Sale Agreement.
4. Closing Costs: Development Fees & Levies on Your Investment
If you’ve ever heard “Pre-Construction Condo Horror Stories,” they were most likely referring to some ridiculously inflated closing charges levied against the buyer at the final closing.
However, they only happen to persons who did not do their research.
When a property is developed, the development fees and levies are set. The population density of a neighborhood increases when a structure is constructed. The city will assess the impact on the surrounding area. As a result, they will charge the builder a price per unit. This funds the local infrastructure required to support the residents that the building attracts. New streets, parks, schools, future transit solutions, and so forth.
If your agreement with the builder was not evaluated by a skilled lawyer within ten days, and you were guided by an uninformed agent, your closing costs may not be capped. If the City charges the builder between $25,000 and $50,000 per unit, the builder will pass that expense on to you at the final closing. When you walk into the sales center, you must have a pre-construction realtor and a lawyer on your side. The sales reps that work for the builder represent the builder; you must have representation on your side.
5. HST Rebates For Investors On Condos
The HST is included in the price of the property. That is all you need to know if you or a member of your family will be relocating to the property.
However, as an investor, you should be aware that you will be charged HST again at the final closing. Without going into too much detail, if you file for your HST rebate within one year and supply the government with a one-year rental lease agreement confirming that you rented the property out in the rental market, you can receive 100% of your HST rebate.
6. Assignments: Selling Pre-Construction Condos Before Closing
Assignments are a technique to get out of or cash out of Pre-Construction units before the unit or building is finished. Because no real property exists yet, you call them assignments because you simply assign the Contract between you and the builder to a buyer.
Assignment flipping is popular, but it has halted since the CRA announced that it may begin taxing capital gains on assignment sales. That is, if they find your objective was to flip the unit before closing. Regardless, your right to assign allows you to get out of a pre-construction contract if your circumstances change. It also applies if you just wish to make a profit without closing on the unit.
Many people try to allocate their resale units themselves through Kijiji or word of mouth, but I strongly advise against doing so for a handful of reasons.
- You are unlikely to receive fair market value. You may have to sell considerably below it to gain any attention from low-traffic media such as Kijiji and Facebook.
- Assignment sales need far more paperwork and legal hassle than typical condo purchases.
The basic line is that you should have a pre-construction realtor or team that specializes in assignment sales sell your unit for you (hint: we’re one of them). You have a much better chance of getting a fair price for your unit, and the commission paid is usually little when compared to the price difference you’ll make if you sell it yourself.
7. Fair Market Value
“You may sell pre-construction condos at a discount.” False. This is one of those misconceptions that you throw around as much as “if I don’t employ a realtor, the builder will give me a discount.”
It depends on the unit and the development, that is true. Some projects are priced 5% below market value, while others are 10% above. Sometimes a project with a price 10% below market value has one or two units with a price 10% above the resale market value.
Buying a pre-construction condo with 20% down or less allows you to leverage 100% of the asset’s appreciation at a five-to-one ratio. Before adjusting for inflation, the 20-year-over-year average for properties in C01 (downtown Toronto) increased by over 11.56% between 1997 and 2017. Remember, time in the market is more important than timing the market.
Is a pre-construction condo a better investment than a single-family house?
A single-family house will normally cost more than a condo because a house requires far more investment than a condo. Most residences will not include amenities such as playgrounds, pools, and gyms.
So, if you’re asking, “Is buying a condo a good investment?” The quick answer is yes. This investment will certainly pay off in the coming years.
So, are condos a good investment?
When investing in a real estate property in the pre-construction market, there are numerous aspects to consider. However, when it comes to condo investing, the features and amenities are more important than a single residence. As a buyer, this makes new condos a very appealing option.
When you consider their fantastic locations and transportation links, it’s easy to see why condos are such a good investment. We all need a place to live, after all. Why not do so in some of the most beautiful real estate your city has to offer?