As the condominium industry continues to grow exponentially over the years, so does the number of people who want to invest in such types of real estate. Whether for actually settling in, for rental, or for future resale purposes, condos are gaining popularity, not just in the Greater Toronto area but the rest of Canada. A rising number of investors have opted to place their money in pre-construction real estate to ride the wave of this boom.
Statistics Canada 2020 data showed that almost 40 percent of condos in Toronto aren’t even occupied by the owner, which means they are either rented out, used as a secondary dwelling, or totally vacant. This highlights that property owners do not just see condo units as a place to live in but as vehicles for generating profit through rent.
To obtain the optimal value for a condo property, one of the most popular strategies these days is to buy the unit even before the construction process has begun. By purchasing a pre-construction unit, the investor gets to buy for a lower price on speculation that the property will return the investment in a few years (usually three to five years) at a higher value.
If you’re planning to purchase a property for the first time, chances are you will start with the one that’s either in resale or pre-construction (mostly because it’s cheaper than buying a brand new house). Aside from more affordable ownership, there are plenty of benefits to buying a property before building. Let’s have a more in-depth look at this real estate strategy.
What are Pre-Construction Condos?
Simply put, a pre-construction condo is a unit that you purchase before the building has even started or been completed. Your visual of the finished product will depend on the house model or a 3D representation of the space. Many real property buyers purchase before building not just because it is cheaper than buying a fully finished unit, but also because a pre-built unit can still allow customizations.
Condo developers usually start selling in the early stages of planning to help fun the remainder of the project. At times, developers will begin selling while the project is still in the concept phase, while others already have a broad and printed vision for the area. In certain situations, everything is already set in place. The construction of the property will only begin when you book an appointment with the developer and sign a contract to buy.
Why Invest in Pre-Construction Condos?
A property that has not been built yet can deliver high returns under the right circumstances. While you depend mostly on architectural plans as the basis for investment, developers usually offer huge discounts at this stage. This is largely because they need the investor money to continue with the construction process. By agreeing to share some of the risks by buying before the shovel goes into the soil, a buyer is rewarded with better pricing based on current appraisals. Because of the wait and the risk, pre-construction condo buying is recommended more for those who want to invest and not necessarily own a home.
Strategy: Tips on Buying a Pre-Construction Condo
Let’s say you’re investing with the goal to make a profit in the future. That only means that you should be very mindful of the location of the unit before buying. Remember, you will eventually rent it out or sell it to somebody else at a higher rate, so it has to be somewhere that the public will want to be in. Is it accessible to transport? Are there supermarkets or schools nearby? What are its amenities? These are just some of the questions you need to ask before you put your money down.
Identify who your target buyer is. Are you looking for a first-time homeowner, a long-term renter, someone looking for short-term stays, or do you eventually intend to resell to another investor? By defining who your end-user is, you can make a more practical decision of which pre-construction development to buy into.
The earlier you buy, the better the price. If you are decided on a specific development, you will want to purchase the unit at the earliest time possible. The more concrete is poured into the project, the higher its selling price becomes. If you have the funds to get started and the property has a pretty good forecast, it will be wise to signify your interest.
- You pay for the lowest price possible for the property.
- You get to choose which units you’d like.
- You get to select the floor level, views, and floor layouts.
- You can apply customizations, if necessary.
Perhaps the most significant risk to buying a pre-construction condo is when the project does not push through, whether through force majeure or a bankruptcy. In this situation, you will likely get a refund that’s equivalent only to what you’ve paid the developer, minus applicable charges and taxes.
Another possible scenario is when future rental and property prices hike sharply that it would be difficult to find a renter or buyer. This can happen when there’d be an economic crisis. When the property market also gets too saturated with too many condo developments, there might not be a large enough market to sell to.
How to Maximize Your Profit
There are several ways to shield yourself from the potential risks of pre-construction investments.
- Purchase the lowest-cost unit of the type of condo you are eyeing.
- Try to invest in a project that’s at least one year out, so you know it’s really happening.
- Look into up-and-coming and potentially profitable locations; don’t just focus on what’s popular now.
- If the property is located in the city center, buying a parking space might not be practical or necessary.
- Find out if you can get any tax breaks for the project.
- Check out its amenities; would these be attractive to your future renter or buyer?
- Try to invest in the higher floors, as great views are solid selling points.
- Advertise early; most renters prefer to be first users.
Expert Advice on Buying Pre-Construction Real Estate
Is it better to by now in this seller’s market or should you wait until the market goes down? How do you best use your personal equity in the most profitable way given this environment?
Experts are still leaning toward real estate investment. The average market price will continue to grow, due mostly to expanded immigration especially in Ontario. This increases the demand for housing significantly, combined with low interest rates on mortgages currently in place. If one does decide to purchase a real estate, the next critical question would be what and where to buy.
The answer to this question depends on the client. For example, buying a cash-flow property could bring higher profits but it could also bring you to the next taxation bracket. It’s also a much more hands-on type of investment, which might be suitable to a semi-retired client or someone else who has more spare time to manage a property. Obviously, you can use a property management service, but that will lower the monthly cash flow return from the investment itself.
Another great way to invest is by buying pre-construction condos. There are great benefits to purchasing condos that are preselling, such as not needing to arrange a mortgage until the closing date, which might take up to three to four years ahead. A huge advantage from this is the ability to sell the condo before it is ready to be occupied. By doing that, you can avoid expensive closing and development changes.
Overall, buying a pre-construction condo in GTA has both its advantages and risks. As an investor, you must carefully assess how much you want to put down and what you can afford should a downturn happen. To ensure that you get the most out of your investment, conduct thorough research on the track record of the developer itself, the prognosis for the property market in your area, and the current economic situation (and where it is expected to be several years from now).