How To Invest In Pre-Construction Condos
Pre-construction condos are a constantly developing opportunity in the Greater Toronto Area, and really any urban setting in North America. This is when you purchase from a blueprint after the location has already been decided upon before development begins. You won’t be able to touch, see and smell the unit. It’s a passive investment that builds appreciation during construction. When you buy at the current value you wind up with future returns, while deposits are paid out in increments. The funds are tied up for about 4 years. The typical cost of entry is approximately $100,000. You have a floor plan and the builder will provide a very accurate concept of what the final product will look like. If you want to buy or invest in real estate in any populated environment, this might be the best possible option to take. This type of purchase is generally for people building out their portfolio, as it will take about 3 years until residency is possible.
There are 3 things that you need to look at when delving into pre-construction: location, the builder and the incentives. When it comes to location, it’s an absolute necessity. I prefer the downtown core or a building in close proximity to transit lines, as that’s where demand is the highest. The next factor that must be looked at is the builder. We want to ensure that the builder has a strong reputation, that they are experienced. The purchaser wants to make sure they’re not a test subject for the builder’s first operation. Look at their other locations to see the quality of their work. The third thing we like to look at are the incentives being offered to the investor that make being part of the initial release more desirable. The range of 3–4 benefits will be what piques your interest as a purchaser. The incentives are about protecting you as an investor. Most of all, you want a clause for assignment. This gives you the ability to transfer the rights to sell the prospective property to someone else before completion, the clause is generally used in case of financial hardship. Most investors use it to flip the unit for profit before completion. The next incentive you want in the agreement of purchase and sale is the right to lease during occupancy. It allows the investor to rent out the unit between registration and occupancy. Generally, with this type of investment you have this option. This gives you the opportunity to rent out the apartment to a third-party. If you’re looking into this as an investment you want to ensure you have this, so a tenant can pay off your property. You will also have some cash flow which you can use to expand your real estate portfolio.
The Green Belt Legislation had a negative impact on building out, as the areas where you can build in Toronto are getting lower and lower each year. Laws are in place to ensure that there will always be natural land around the area. The best option is to build up, as urban sprawl is rapidly dwindling in the GTA. This is great to ensure that we retain a sense of nature in the city, but it does create a challenge for the rapidly increasing migration. There are so many people coming into the country. According to Statistics Canada, there are approximately 125,000–150,000 people coming into the GTA year over year. While interprovincial migration, is between 25,000–30,000. There is a massive call for housing. We have such a strong and diverse economy, so if it does dip it will go back up quickly.
When you purchase a pre-construction investment, you get a 10 day due-diligence cooling period. This gives the purchaser the option to back out without any repercussions and get the deposit back. After this time to reflect, there is no going back as the deposit is locked in. You can use the assignment clause to transfer the property to another individual, only when 90% of the building is sold. This is so you’re unable to compete with the builder.
Why do you want to buy pre-construction? This is one of the simplest ways to generate a profit in real estate. Though, it does take a while to see your investment develop into something you can build wealth from. The longer you wait, the bigger the payout will be. Put in the work and bide your time. We’ve seen prices double in as little as 10 years.
To begin the process of delving into pre-construction, you can buy a condo that’s around 500 square ft. This does sound small, but it lends itself to opportunity to expand your portfolio. When it comes to this kind of investment cash flow is not the end goal. You won’t make an excessive amount month to month, those funds are best put aside in case any issues arise. Passive appreciation and principal recapture are what will generate you the large payout you desire. Passive appreciation is the value of the property growing throughout the years. Principal recapture is the amount of capital being repaid down on the mortgage. You can leverage and re-leverage it to pull your money out and make the most out of your investment. One of the biggest benefits to purchasing a pre-construction condo is the ability to have a flexible down payment structure. The 20% needed as an investor, is broken up for a period of 2–3 years, which allows you to save and the ability to utilize it somewhere else.
You want to buy this investment in the initial stages. If you are purchasing when it hits advertising, it’s too late. If you invest right at launch, you will get preferential treatment and better pricing. The price can be a difference of $100,000.
It’s wise to purchase in an area that is up and coming, so the value will rapidly increase. If a subway station is being built it will increase in value more than other opportunities. If you are planning on buying and holding, it’s best to purchase a more general type of unit that will cast a wider net. This will make it easier to find tenants on an ongoing basis.
How do you know you’re getting a deal? You want to compare it to other projects, look into the builder’s reputation, ask for referrals and work with a platinum realtor. A platinum realtor is a Toronto agent who has a strong record with the skills and credentials required to best help you. Google the top 3 realtors in your area, if they do only 10 deals a year in this field, they mostly likely won’t have first access pricing.
It’s most important that you get educated. You need to take a leap of faith to get started. Take action now to see results for your future. This is how so many people develop long-term wealth. Google is such a useful tool and a great place to start, but it’s not everything. Build your network of a finance, realtor and legal team. Getting professionals with a proven track-record can be your biggest asset.