Condominiums are becoming a more appealing alternative for real estate investors all around Canada. When it comes to Toronto, nearly half of Toronto condos were sold to condo speculators, according to a CIBC analysis. This pattern is unsurprising. The lessened maintenance burden frees up the investor’s time, while condo complexes’ appealing locations help recruit better renters. Obviously, condominiums are far more inexpensive than single-family houses. Not to mention, if you do already own your own home, you can leverage your equity to purchase a pre-construction Toronto condo.
Related Read: How To Use The Equity In Your Home To Invest in Real Estate
Purchasing a pre-construction condo is an excellent method of getting into the market, the asset will almost certainly have risen in value by the day you take possession. When purchasing pre-construction, however, there are several traps that an investor might fall into. Make sure you don’t make these expensive errors:
– Failing to buy your condo from an experienced developer
In today’s hot marketplaces, it’s tempting for new developers to get in and try to make fast cash. Unfortunately, this lack of expertise may lead to a slew of issues. Expect delays in delivery deadlines if the project management team is new, or financing delays for example.
Some of these risks are mitigated by purchasing an investment property from a seasoned developer. Even the most seasoned developer’s track record must be researched as part of a condo investor’s due diligence.
Related Read: The Seven Best Condo Developers In Toronto
– Ignoring the rental potential
Toronto’s current rental vacancy rate is quite low, while you’re likely to find a tenant, you’ll want them to be reliable and paying a healthy rent! Consider if the area has rental possibilities while looking for pre-construction. Do tenants want to live there and will they pay you well to do so? An empty apartment is the epitome of negative cash flow.
Do your due-diligence and market research to determine how much rent you’ll be able to charge per square foot. Or better yet, hirer a knowledgeable Toronto realtor who knows the ins and outs of the Toronto real estate market, who’s an investor themselves, to guide you.
– Underestimating the increase of Maintenance Fees and Mortgage Interest
So, you’ve found the right investment and you are ready to sign? Consider that the condo fees on which you’re based your calculations are estimates provided by the developer at the time of closing. Residents may vote for a tax increase after the property is incorporated in order to build up the contingency fund or pay for modifications to common features that the developer neglected. Not to mention that these costs increase year after year.
Mortgage interest follows the same logic. Remember that we’ve had access to low-cost money since 2007. Mortgage rates, on the other hand, might fluctuate depending on the state of the economy. Consider the possibility that interest rates may increase during the next decade, affecting the profitability of your investment.
– Being over-impressed with amenities
Spas, elegant lounges, wine cellars, and dog walkers are all wonderful add-ons that can entice potential renters. Condo fees — those regular payments that don’t develop wealth – can also cost you a lot.
Don’t get swept up in the developer’s hoopla since you’re not purchasing this apartment for yourself or your family. Fancy facilities may grab tenants’ attention, but they do not always convert into longer leases. Renters want the essentials, but there’s a limit to how much they’ll spend for frills.
– Spending on upgrades that you really don’t want
Too frequently, condo investors believe that omitting a certain update would restrict the amount of money they can make from the unit. The fact is that unless you live in your city’s most affluent neighborhood, renters will not be ready to spend hundreds of dollars extra for cosmetic improvements.
Hardwood vs. engineered flooring, quartz vs. granite countertops, and high vs. low floors are just a few instances of expensive renovations that don’t always convert into higher rentals. Prospective renters will be able to see the flats just as well. The goal is to choose a choice that is comparable to the premium upgrade.
– Underestimating the closing costs
Some of the closing expenses at the time you sign are projections of what you’ll owe when you take possession, depending on the developer and the market you’re in. Legal expenses, land transfer taxes, and pre-paid property taxes are all predictable. Expenses such as municipal development levies, on the other hand, may come due suddenly.
The developer pays the municipality development charges, which were estimated when the developer filed for the permission. These may add up to thousands of dollars between the time the project is authorized and the time you obtain the keys. When feasible, negotiate a ceiling on such variable closing fees. Otherwise, save aside money for a rainy day fund.
Pre-construction condo investors may fear that if they do not close fast, they may miss out on a fantastic offer. Why not sign right away if the numbers look good and the research is sound?
The issue is that not having your lawyer evaluate the paperwork might put you at more danger. Liabilities such as no municipal levies caps (see above), loose delivery date provisions, and flexible floor plan declarations will be identified by a qualified lawyer. The buyer is entitled to a 10-day cooling-off period in several regions, including Ontario. So, if you’re in a competitive market and fear you’ll lose out, take advantage of this time, and have your lawyer evaluate the contract.
Related Read: Understanding Closing Costs Before You Purchase
– Failing to review the preliminary bylaws
Some condominium projects have outright rental bans. While this is an uncommon occurrence, it is one that might cost a condo investor money. In most circumstances, the developer would have notified you of his bylaw ahead of time. You have no recourse if it was in the bylaws at the time you signed the sales agreement. This error is almost eliminated when a lawyer is involved from the beginning of the process.
This is the most common blunder made by condo investors. You have a 10-day cooling off period after purchasing a pre-construction condo investment.
If you engage with a Top Condo Real Estate Agent, they should inform you of the situation and what you should do at that time. The first thing you should do is get your copy of the Agreement of Purchase and Sale reviewed by a Preconstruction Condo Lawyer. The charge for a review is usually approximately $400 (plus taxes). It may be more costly to evaluate the contract in more sophisticated instances.
The second point to consider is whether or not you can seal the transaction. Whether you want to pay for everything out of your own money or take out a loan to do so. You must be ready to complete the transaction. If you don’t have enough finances or equity, you’ll need to speak with a mortgage broker to ensure you’ll be able to close on time. It must also be completed within the 10-day cooling-off period.
The final consideration is when you intend to Assign. Taxes are a part of the assignment process. Assignment arrangements are difficult, and the taxes associated with them are much more so. When it comes to Assignments, you’ll need a skilled Tax Lawyer and a top Toronto Condo real estate agent.
– Buying only for short term rental, without focusing on due diligence
Make sure the preliminary bylaws enable you to acquire an investment for Airbnb or other kinds of short-term rentals if you intend on doing so. Keep in mind that after the residents have incorporated, many projects prohibit short-term rentals.
In rare circumstances, the developer may be persuaded to insert short-term renting grandfather provisions. However, since conditions differ from province to province, it’s wise to speak with a real estate lawyer first.
– Overly relying on the floor plans
When you purchase new condominiums, you’re purchasing a product that will be built in the future. One of the most common errors made by early investors is relying too much on floor plans and brochures. The finished product will most likely vary from the photographs in the brochures, and the floor plans may alter as well.
The issue is so severe that one of the most well-known and largest Canadian condo developers utilizes it as a top marketing tactic, delivering condo lobbies that are extremely similar to the renderings. Even that major developer warns that designs and features are subject to change at any time, with or without warning.
When you buy a pre-construction condo as an investment, you must also get TARION insurance. TARION covers certain small differences, but the coverage is rather restricted, and to be fair, you can’t depend on it too much.
– Failing to come up with an exit plan
Another error that investors may make when purchasing a pre-construction condo is not having an exit plan. The following are two major concerns that every condo buyer could have:
What if my life plans change between now and the time my unit is delivered? To cope with this, you’ll need to include an Assignment provision in your buy and sell agreement. If you engage with an experienced Toronto condo real estate agent, they will usually be aware of this. However, if you do not have an expert condo Realtor on your side, you must request this.
If your circumstances change, you may sell your purchase and sale agreement to another buyer using the assignment right. As assignments are intricate business, there are a lot of nuances involved. You should get expert assistance with these. Especially since the tax implications can be quite severe.
Must Read: Flipping Pre-Construction Condos: What You Need To Know
What if the price of my apartment hasn’t increased sufficiently by the closing date?
What would you do if the market fell, and your investment was in the red?
A solution, similar to other investments, may be to keep it until it returns to the green. After you’ve purchased your condo, you may rent it out for a few years until it reaches the value you want, at which point you can sell it and profit. When you consider this, you can see that real estate is a long-term investment. So, if you don’t get the early performance and/or ROI you desire, plan to have your asset for a few more years.
– Ignoring the Costs of Completion That Aren’t Visible
Some people still make the mistake of believing that the purchase price is everything. When purchasing a pre-construction condo, however, you will be responsible for additional closing charges.
Land Transfer Tax, Levies and Development Charges, Legal Fees, Utility Hook Up Fees, and HST are all additional fees to consider. Some of the expenditures may be reduced or eliminated.
A pre-construction condo investment pays the same land transfer tax as a comparable resale property. Levies and development charges, on the other hand, are frequently changeable. A Top Realtor and their lawyer could be able to assist you in having some of those charges eliminated or at least limited to a certain amount. Utility hook-up costs are the same way.
The HST, on the other hand, is a different story. You can’t haggle with the Canada Revenue Agency on that. Please let us know if you are able to reach an agreement with CRA in the comments section. In most cases, developers put a portion of the Rebatable HST in the contract. Because you will be the primary occupant of the unit, the developers need you to sign a pre-construction condo investment agreement stating that the HST rebate would be credited to the developer.
As a result, they incorporate it in your contract. If you are an investor and do not intend to use the property as your primary home, you must pay the HST share at closing to a maximum of $24,000. Your lawyer will be able to apply for a full rebate provided you intend to rent the unit out and have a contract in place. In such case, seek the advice of a tax lawyer, account. The HST issue with pre-construction condo investments is a little confusing. We have firms that can assist you in paying it and receiving it back. You may reach out to us for additional information.
Related Read: Understanding the HST Rebate in Ontario
Tips to keep in mind when you buy a pre-construction condo
Now you are aware about the mistakes that people do at the time of purchasing a pre-construction condo. Along with that, you will also need to keep some important tips in your mind as well. Here are some prominent tips to keep in mind as you invest in a pre-construction condo.
– Expect delays in construction
Don’t be fooled by the estimated completion dates you’re given. Be prepared to wait twice as long as you anticipated, as with everything construction-related. This implies you shouldn’t be in a rush to move in by a set date, especially if you’re purchasing a pre-construction apartment where a move-in date is uncertain.
The worst thing you could do is sell your current house and then find yourself in dire need of a new home. The time will be difficult to coordinate, and you will have no influence over when the sponsor completes their task.
– Keep your eyes on allowed variances
Pre-construction condo buyers should be wary of building variations authorized in the original selling design. A dishonest developer will take full use of the regulating papers’ permissible variations to defraud purchasers as much as feasible.
For example, several essential characteristics like as square footage and ceiling height will normally enable a difference of plus or minus 5% in presenting blueprints. So simply expect a sneaky, inexperienced developer to provide 5 percent less than claimed on numerous important KPIs.
– Look for commercial unit owners
One of the risks of purchasing a new construction condo in a mixed-use building is that the offering plan may provide commercial condo units, which are often held by the sponsor, unfair benefits.
When commercial condo unit owners take up 20% of the building’s total floor space, the offering plan may indicate that they are only liable for 2% of the building’s shared utility bills (i.e., common area electricity bill). Alternatively, the offering plan might say that commercial condo unit owners are only accountable for $10,000 in special assessments per year, implying that substantial façade repairs would be solely borne by the residential unit owners.
Is any of this reasonable? Certainly not. However, the fact is that ground-floor commercial apartments generate a lot of rental money and are very appealing to developers to keep for themselves. As a consequence, many commercial condo apartments in new construction buildings are held directly or indirectly by the sponsor. So, while purchasing in a mixed-use new construction building, keep in mind that the sponsor developed the offering plan that regulates the structure!
– Negotiate the closing expenses
In a poor market when developers are worried about selling inventory and keeping lenders pleased, buying a pre-construction condo usually means you’ll have more negotiation flexibility. However, in Toronto’s ever-competitive real estate market buyers don’t have much power, even when purchasing Toronto pre-construction. So what can you negotiate on closing? You can negotiate your development charges and fees so that they are ‘capped’ and don’t increase beyond a set amount. It’s important to have a really great – and experienced – real estate lawyer on your team.
– Negotiate contract deposit
When purchasing a new construction property in Canada, the contract deposit is normally 10% of the purchase price in a standard resale agreement, although it may occasionally be designed to escalate to up to 20% over time as the project nears completion.
Fortunately, just like everything else in real estate, the size of the contract deposit is negotiable, particularly in a depressed market when developers are more willing to negotiate. – But that’s not the Toronto market and the time is not now. You can expect little flexibility on this one, but developers have been known to push payment 30-120days back for ‘extended deposit structures’.
– Keep your eyes on unexpected closing notices
Because a pre-construction condo purchase might take months or even years to finalize, purchasers who have forgotten about their purchase may be shocked by a notice to close from the sponsor.
It’s crucial to realize that new construction purchase contracts enable the sponsor to issue a notice to close as soon as specific requirements, such as getting a temporary Certificate of Occupancy, are completed. The closure date is usually provided 30 days’ notice, which might be inconvenient if you’re on a lengthy trip. Ensure that your lawyer negotiates the right to a 10- or 15-day adjournment without penalty.
– Figure out the difference between marketing square feet and real square feet
One of the most common shocks we’ve encountered with customers is that the square footage of their apartment seems to be considerably smaller after it’s finished. The trouble is that the “square feet” described in marketing materials isn’t fixed in stone, and if you read their tiny print or footnotes well enough, you’ll see that it’s even noted as “subject to change.”
The fact that what developers promote as square footage is total square footage, not “walls in” square footage, is a typical explanation for this. Columns, internal walls, and non-usable places, such as where an A/C unit is installed, are often included. When it comes to walled-in square footage, it’s common for it to be 20% smaller than what’s advertised.
Don’t count on the square footage being as stated unless it’s specified in writing in your contract. To ensure that you receive precisely what you see upon completion, have it in writing in your contract that the square footage will not alter beyond a small amount (which a buyer’s agent may assist you with).
– Understand all early-bird privileges
Check for early bird and friends and family incentives, such as “Platinum” “First Access” and “first tier pricing,” when purchasing into a pre-construction or new development condo building. A buyer’s agent with a large network will be able to provide you with insider knowledge on the greatest pre-construction condo offers and when first-tier pricing will be available before things become public.
This is also the optimum time to secure your preferred condominium. Being one of the first few purchasers provides you access to a larger pool of unit options, enabling you to acquire the view, unit level, and corner unit of your dreams.
Ask us about getting Platinum First Access and what buildings launch this month.
– Make sure that you write down all terms and conditions on paper
We encounter a lot of customers who look at sales brochures or drawings and then question why the final product isn’t exactly what was described. Developers are authorized by law to modify some variables from the promised product, and this will be stated in the small print. Square footage, ceiling heights, balcony depth, layouts, finishes, appliance brand, and specific amenities are just some of the things that may alter.
– Check how the monthly maintenance fee would change along with time
As previously stated, the square footage of your pre-construction apartment may alter after delivery due to the fact that square footage is calculated differently. Your unit square footage may alter after a project is finished due to unanticipated construction concerns. This may have an impact on your HOA dues or maintenance costs per square foot. Read Anatomy of HOA Expenses to learn more about your monthly maintenance fees in Canada.
Furthermore, until a specified proportion of the building is sold, the developer remains the owner of the building after delivery of the new condo project. The condo complex will be passed over to a newly created condo board organization at that moment. The condo developer specifies how monthly maintenance costs will be determined in the condo building contracts.
When the condo building is finished and the developer leaves, the condo association that takes over will reevaluate how HOA fees are computed. In a real-world scenario, the association will have a better understanding of the actual costs and would most likely hire the services of a luxury condo building management company. Once the building has changed hands, it’s a good idea to budget for a 5-15 percent rise in HOA or monthly maintenance costs.
Related Read: Understanding Condo Maintenance Fees
– Don’t ignore third party incentives
If you’re considering purchasing a pre-construction condo because of the free golf membership or third-party beach club access, keep in mind that these benefits frequently have an expiry date. Third-party memberships to golf clubs, beach clubs, and other private clubs usually expire after a year or are dependent on enough new owners purchasing in.
So, find out how long a promoted gratis membership or third-party amenity will endure, how much it will cost to keep the subscription after it expires, and what happens if the benefit doesn’t materialize.
Condo investors who purchase units before they are built have a lot to gain, particularly in hot markets. The age-old golden standards of real estate investment, however, remain true: due diligence, statistics over emotions, and research. Having a top buyer’s agent on your side while purchasing pre-construction condominiums is a good idea. It puts a market specialist on your side who is knowledgeable with the preconstruction condo purchasing process, as well as the developer, in many cases. This agent can provide you vital information into the developer’s product, previous buildings, and performance, explain the “what” behind the small print, and help you negotiate the important points, sign your contract, and finalize your next pre-construction condo acquisition.