When buying pre-construction, many agents will include an assignment clause in an investor’s purchasing agreement, which basically says, “you can sell your property prior to or during the occupancy phase without actually having to close the register (for a nominal fee).” While this assignment clause might seem like a solid back-up plan, as an investor, there are a number of reasons why you should avoid enacting this clause and choose instead to rent for at least one year post-occupancy.
Decreased Profit due to Unfinished Building
When a property first finishes and is taking occupancy, it’s likely that the building will still be a “work in progress”. Amenities won’t function properly. Common spaces will be unfinished. Elevators will be grounded and hallways taped for paint. It’s not a good time for a buyer to see the full potential of the building, which means that they’ll put in lower bids and you won’t maximize your profits at sale.
Increased Competition due to Inventory Surge
After construction, it’s not abnormal for investors who are misguided by their agents (or want to cash out quickly) to sell at occupancy. What this does is create a massive amount of inventory in a building, which means buyers have more choice at a time when the building is in less than tip-top shape. This inventory surge serves to lower bids even further, driving down the selling price and diminishing profits.
Higher Taxes due to HST Conundrum
If you decide to flip your building without renting for one year, you’ll not only forfeit your HST rebate (max $24,000), but will also need to pay HST (13%) on the deposit you’ve already paid to the builder as well as the net profit from your sale. Let’s say, for example, you pay a $100,000 deposit to your builder and sell the property for $100,000 net profit. You not only have to pay $26,000 in HST (on top of your break-even) but you forfeit your tax rebate, for a net loss of $50,000. On top of this, you also run the risk of being deemed a trader rather than an investor in a quick sale, which means the government can charge 100% of your gains as income, rather than 50%.
While that temptress assignment clause might seem like a good idea at the time of occupancy, in the long run it’s best to hold onto your property for at least one year before negotiating a sale. At this point the building will be in fine form with a well-developed reputation, there will be less inventory for buyers to choose from and you will have cashed in on some well-deserved tax cuts and rebates.
If you’re thinking about investing you definitely want to check out our Guide to Investing in Toronto Real Estate for everything you need to know. Don’t forget to sign up as an Insider. Our Insiders receive Platinum first access to the hottest and most lucrative pre-construction opportunities in Toronto.