Are you thinking of purchasing a pre-construction condo as an investment? If so, Toronto is a great place to do it. With an impressive number of new buildings slated for construction—and plenty more in the pipeline—this city is full of great opportunities for real estate investors.
While the search for the right pre-con unit can be exciting, it’s not the same as hunting for a resale condo. To make a successful purchase that will provide attractive returns in the years ahead, it pays to understand the process—inside and out. If you’re ready to make your first pre-construction condo investment in Toronto, here’s everything you need to know…
Why pre-construction?
Toronto real estate: great in the long term
Like resale units, brand new condos in Toronto benefit from the city’s impressive appreciation rates. Based on long-term data, you can typically expect your property to appreciate by around 5 percent per year—though that number has been higher in recent years.
Pre-con, low-maintenance
After the initial agreement is signed, you likely won’t need to put a lot of effort into your pre-construction investment during the first few years. If you manage your property efficiently, it can remain relatively low-maintenance during the time that you rent it out and you won’t have to worry about unexpected things like leaks to the basement.
Great return, less risk
Investing always comes with some degree of risk. Fortunately, pre-construction units tend to be less risky—and better in terms of performance—than other types of investments, such as stocks and bonds. Condos are also more affordable than houses so a right condo purchase will hold it’s value better during the market and economic downturns better than most other investments.
Build your equity
Unlike rent, the mortgage payments you make on your unit will allow you to build equity. The result can be a significant influx of cash when it comes time to sell.
Things to consider before buying
Think ahead
A significant amount of time will pass between the day you purchase your unit and the date on which you take possession. You can expect to wait several years (typically 3-4) until your condo is completed, and there’s a good chance that you’ll also encounter delays. In other words: before you make a purchase, think carefully about where you’ll be a few years down the road.
If you need to sell your unit due to a major life change, you have the option of doing so on assignment (if the developer allows it). Put simply, this process entails selling the deed to your property before your condo has been completed.
Condo fees
Maintenance fees for brand new units typically start out lower than those you’d pay on a resale condo. That said, there’s a good chance that they’ll rise during your first two years of ownership (though this isn’t always the case).
The deposit structure
Deposits on pre-construction units generally range from 15-20 percent, though that number could be set as low as 5 percent as an incentive. While it varies from one development to the next, here’s what your payment structure could look like:
• A set amount at signing—anywhere from $3,000 to $20,000+
• The remainder of 5 percent, to be paid within 30 days
• An additional 5 percent, due somewhere between the 90-120 day mark
• Another 5 percent between 270-365 days after signing
• The final 5 percent on the interim occupancy date
Your taxes
Condo buyers must pay HST on new units. Fortunately, you can receive a full or partial rebate in most cases. The rules and requirements differ depending on whether you (or one of your immediate relatives) will be the end user of your unit, or whether you’ll be renting it out. Be sure you get all of the facts before making a purchase by talking to your lawyer and accountant.
First access or remaining inventory?
Getting early access to a new development can sometimes have big benefits, such as lower price, developer incentives and more choice when it comes to floor plans. That said, many investors are surprised to learn that remaining inventory can also come with some major advantages. Examples include an extended deposit period, cash back on final closing, waived assignment fees, or free parking.
To get the most out of your purchase—whether you make it in the earliest stages of development or later on—work with an agent who knows the pre-construction landscape and can work well with developers.
The view
Many modern high-rise condo buildings offer spectacular views, which can be a major selling point for buyers. That said, the unit you choose should have more to offer than a stunning vista. Unless a unit is directly facing the lake or a park, your view could be obstructed by a future development—something to keep in mind during the selection process.
The Process
1) Reach out to an agent
Once you’ve decided that investing in a brand new unit is the right choice for you, it’s time to get started! Reach out to an agent with expertise in the pre-construction market. They’ll get the ball rolling by discussing your needs and locating suitable options to meet them.
2) Look at floor plans
When you find the right development, your agent will help you find the best available floor plans. They’ll look at factors such as square footage and potential profitability, then align them with your preferences.
3) Sign your agreement
Once you’ve found the ideal future unit, it’s time to sign your agreement and seal the deal! Be sure that you have all the necessary personal documents with you at the time of signing.
4) The cooling-off period
After signing the purchase agreement, pre-construction buyers are given 10 days to carefully consider their purchase. This cooling off period provides you with the opportunity to review everything and back out of the deal if needed. During this time, it’s a good idea to get your legal representative to review your agreement and ensure that all of your ducks are in a row.
5) Get pre-approval
Obtaining pre-approval for mortgage financing is an important step toward condo ownership. Since your pre-con development won’t be registered yet, this process will be different than it would be if you were opting for a resale unit. Your agent can help you understand the steps involved—and recommend a great lender.
6) The first cheque cashed
Your first cheque will be cashed immediately after the cooling-off period ends. For all subsequent payments, it’s important to ensure that you have the required sum in your bank account. Consult the dates in your purchase agreement as a reminder.
7) Start customizing
Around one year before your unit is completed, your developer will get in touch with you regarding your design preferences. This is your chance to choose the finishes that match your tastes!
8) Interim occupancy
The time between when your unit is completed and the date when you officially take ownership is known as the interim occupancy period. You can rent out your unit during this time if the developer allows you to do so, and you’ll also start paying monthly fees. It’s important to note that this period is often shorter than investors expect—in some cases, the interim occupancy and registration date can be on the same day.
9) Take ownership
Your building can be officially registered once it passes all necessary inspections. You’ll be notified once registration has taken place, which usually happens around 4-9 months after your interim occupancy period begins. Your mortgage will take effect, and you’ll also need to take care of all remaining closing costs.
10) Renting out your unit
If you didn’t start renting your unit to a tenant during your interim occupancy period, now is the time to do it. An agent with investing expertise can help you find a great renter, and offer you advice to kick off your tenure as a landlord.
On the whole, purchasing pre-construction can be a great option for seasoned investors and first-timers alike. Of course, there are some risks involved. Working with the wrong developer can lead to long delays and even project cancellations. While you’ll get your deposit back if your development is canceled, there’s a possibility that the market will have changed significantly during the time that you were waiting for your unit to be completed. Unfortunately, you could be priced out of the market as a result.
The good news is, guidance from the right real estate professional can help ensure that you purchase from a developer with a great track record of successfully completing buildings in a timely manner.
Ready to invest in a pre-construction condo? I know the Toronto market, and how to buy a new unit that offers high potential returns. Click here for additional information on some of the recent and most talked about projects, or contact me with any questions and inquires.
Call or text: 416-500-5360 / Email: info@rashidnotash.com
