Guest columnist Laura Stewart, REC Director of Sales. Piece originally from Medium.com/@laurasplaylist.
I’ve been in real estate for over 5 years and in that time have had the pleasure of helping a few hundred individuals purchase pre-construction condos either for themselves or as an investment. Through all of these transactions I have gotten invaluable experience when it comes to the process as well as a great sense of the roadblocks people face when making such an important decision.
I’m writing this post from the perspective of purchasing a pre-construction condo as an investment, specifically in the Toronto area, in hope to shed some light on the process, provide some tips so you can avoid unnecessary angst and hopefully inspire some of you to take action.
What I realized is that you have to jump in right away if you are interested, getting in at the first stage is important. Prices go up so quickly, within even a week they can go up by more than a few thousand. As an investor if you purchase at even the second stage of the process you are putting more money down than you need. I was so hesitant even after doing my research, I knew the benefits and I did my due diligence but it’s still such an intimidating process. As soon as I signed the paper, I couldn’t have been more excited. All the anxiety and hesitation seemed silly. If you do your research and are financially prepared you’ve made a safe investment.
When you’re looking into investing in real estate you quickly realize that every purchase you make compounds. Saving a dollar here and there adds up to a large amount over the years; especially not buying those extra shoes I really didn’t need. Affordability is definitely a concern for any first-time investor. What I did was create a secondary account that held 10% of my earnings for each month. It made it so much easier to create an investment fund because I never saw the money in my account, this helped me avoid any undue stress. It might be more comfortable for you to start off with a smaller property and ease into a larger purchase. Dipping your toe in before you dive might be the safest course of action.
Let’s start off with a simple understanding of what a pre-construction condo investment is. As a buyer, you are essentially purchasing a unit from a blueprint, 3–4 years in advance of it being completed, and you reserve it by making deposit payments over that same time frame.
1. Location — The old adage “location, location, location” is important for any investment property and perhaps even more so when it comes to a pre-construction condo. In many cases you are purchasing into a project that will not be built for another 3 to 4 years and with that comes a certain amount of uncertainty as to whether or not there will be demand for your unit once it’s built. What’s worked well for my clients, is purchasing in an area with a proven track record and that, more often than not, means in a downtown core, or in an area right on transit taking you to the downtown core. Yes, you will be paying a higher price per square foot for a unit in a high demand location, compared to something in the outskirts, but it is as close to a guarantee as you will have that your unit will not sit vacant for long once built.
2. Builder Reputation — Now that we know the location for which we are going to buy in, we now must pick among projects and the best way to do this is by researching the builders. Consider their reputation: Have they completed projects in the past? Have they completed their projects on time? Did they deliver what they promised? Do they have building permits already in place? You will weed out a number of projects simply by asking these questions.
3. Incentives — The third item you want to consider when purchasing a pre-construction condo is the incentives that are being offered by the developer. Most importantly, make sure you are receiving the following:
Right to lease during occupancy: There are two important dates when purchasing pre-construction, one is the occupancy date which allows the buyer to move into the unit without actually closing on the property yet. This doesn’t happen until the second date, registration. During this occupancy period, the developer is applying for condominium status with the city which can take 3–6 months. During this time period you will be paying property taxes and maintenance fees, so you want to ensure your ability to lease it out so you are not out of pocket those expenses.
Capped development charges/levies: At the time of registration, the city will impose additional taxes and fees onto the developer who then transfer those charges onto the buyer. It’s important to know what your closing costs are upfront so you can save appropriately during the 3–4 year construction period. Make sure these development charges are capped so that if the city imposes stricter fees, you the buyer, will not be forced to make up the difference. If the fees are lower than your capped amount, you will only be charged the lower amount.
Right to assign the unit: I always tell my investors that if they can close on their purchase, they should. The idea is to get a tenant in to start paying down the mortgage, perhaps giving you some additional cash flow while also reaping the benefits of passive appreciation. However, in a 3 year window, there are unforeseen problems that may arise and some buyers are just not able to secure a mortgage and close on their property. It’s extremely important then, to ensure that you have the right to sell you condo before it’s finished being built. Make sure you understand what criteria has to be met before the developer will allow this but it is usually after 80% of the building is sold and construction has commenced.
Now that we understand the 3 most important factors when purchasing pre-construction, I wanted to point out a few more considerations.
1. As an investor, you want to make sure that you are purchasing your unit as early in the sale process as possible; preferably at first access. The only way to do this is either by knowing the developer personally or by purchasing with a Platinum Sales Agent who is working the project. What happens is the developer will release a select number of units at initial pricing to those few Platinum Agents; once those units are sold, the developer will then release more units to a larger group of agents but at a higher price. This process happens a few times until the units are finally released to the general public at a much higher price. As long as you buy in the early stages of pricing, you as the investor will reap the benefits of the forced appreciation being implemented by the developer.
2. When assessing a project, be sure to look at the deposit structure as not all projects are the same. Make sure whatever structure it is, you feel comfortable with the payments.
3. HST is not included in the purchase price and the amount you will have to pay at closing will be roughly 7.0–7.5% of the price so be sure to have those funds available. Having said that, as long as you show the CRA that you have a 1 year lease agreement in place, they will provide you with a rebate.
4. When you purchase a pre-construction condo in Ontario, you are automatically given a 10 Day Cooling Period. During these 10 calendar days, you now have time to do your due diligence which should include a lawyer review of the agreement. For any reason, if you do not wish to move forward with your purchase, you simply rescind the agreement with the developer. The lawyer will be looking for the following:
a. Are the incentives promised included in the agreement?
b. Are there any hidden fees?
c. Are pets and short term rentals allowed?
d. What are the critical dates that the developer needs to meet?
5. Try not to get caught up in choosing the “best” possible unit. If you can find a layout where there is little to no wasted square footage then go for it. Do not worry if the unit is located on a lower floor, doesn’t have sunlight or doesn’t have a view. There are usually $1,000 premiums per floor and up to $10,000 premiums for views. As tenants are looking to only stay for 1 to 2 years, they are more concerned with keeping their rents low, making it difficult for you to recoup some of those additional costs.
6. Roughly 1 year before occupancy, the developer will ask that you pick your colours and finishes for the unit. As an investor, I suggest going with the standard finishes included in your purchase price. Most units now come with laminate flooring, stainless steel appliances and at the very least, granite counter tops. Similar to floor premiums, tenants will not pay more simply because the finishes are better, so save your money and go with the basic package.
Now that you know what is involved in buying a pre-construction condo, get out there are do it! The longer you wait, the more expensive it will be, making it increasingly difficult to get into the market. Take a leap of faith, work with people who you trust and enjoy the process!