Are pre construction condos a good investment?

Are pre-construction condos a good investment? We get asked this question all of the time. Especially now, during a changing market. If you’re looking for new condos for sale in Toronto, you’ll be pleased to learn that condo sales have increased dramatically in recent years, especially in larger Canadian cities. As land inventory has become more constrained and the market, increasingly competitive, many investors have turned their focus on pre-construction condo investment options. Let’s uncover the most important FAQs.

What is a pre-construction condominium?
What is a pre-construction Platinum or VIP condo launch?
Why do people prefer to invest in Toronto pre-construction condos?
The Advantages of pre-construction condos
Myths about buying pre-construction condos
Important tips to keep in mind as you buy pre construction condos
Understanding Leverage: Using a Line of Credit

What is a condominium?

A condominium is a home or structure that has been split or subdivided into several living units. After then, each unit in the building is sold separately to individual investors or owners. Every owner in the condominium complex owns a piece of the land on which the condo was built. If you’re debating whether or not condos are a good investment in 2022, we discuss all the details on investing in Toronto’s condo market in this article, “Why It’s [Actually] A Good Time To Invest in Toronto Condos.

What is a pre-construction condominium?

Before we answer the question, “Are pre-construction condos a good investment?” let’s  talk about what makes a condo ‘pre-construction’?A pre-construction condo is a condo that has yet to be built. To finance the build, developers typically sell all or the majority of their units prior to starting construction. Typically, sales start four years before the building is estimated to be complete.

What is a pre-construction Platinum or VIP condo launch?

When developers sell a condo they hire a sales team to sell their building. The sales team has pre-existing relationships with real estate agents who regularly sell pre-construction. They typically launch buildings in the following phases:

  1. Family & Friends
  2. Platinum Agents
  3. VIP Agents
  4. General Agents & Public

Thinking about investing in pre-construction condos? Ensure you are prepared and well-educated on the topic. Our blog is a great place to start but ensure you download our guide to investing in pre-construction condos here.

Why do people prefer to invest in Toronto pre-construction condos?

To find out if pre-construction condos are a good investment, it’s important to understand why many investors prefer pre-construction condos vs re-sale condos. To start, investors are becoming increasingly interested in Canadian – and more specifically – Toronto pre-construction real estate as historically, the Toronto real estate market has performed quite well. Gaining on average 6% in equity per year, Toronto pre-construction condos are a great option for anyone looking for a long-term, stable and passive investment vehicle.

The Toronto real estate market is quite insulated, has a high rental rate and low vacancy rate. For more information, read this article we wrote on the topic, Why it’s still a great time to invest in the Toronto real estate market.

The Advantages of Pre-Construction Condos

1. Availability of extended deposit programs

When you consider if pre-construction condos are a good investment you should start with the financials. One of the primary advantages of purchasing a pre-construction condo is the deposit structure. The deposit, which can range from 15% to 20%, will generally be spaced out in installments over a number of years. This allows you to invest less money up front than you would a re-sale investment unit which requires all 20% upfront as a down payment. Optimizing your financial return is truly one of the largest benefits of pre-construction Toronto condos.

You will have plenty of time to save that down payment thanks to the prolonged deposit structure included with pre-construction condo developments. The length of time it will take to finish the project, which typically ranges from 3-5 years, will allow you the opportunity to save a bit more should you need to – a benefit unique to pre-construction real estate.

This extended deposit scheme, as well as the time it takes to start and finish building a condo, can help first-time purchasers save money. Many of these first-time condo owners see it as a compelled investment or a way to save money. After all, it’s usually simpler to put money aside when you know you’ll be paying for an apartment.

In theory, if you don’t have to pay the full 20% down payment upfront you can invest those funds elsewhere or if you’ve financed your purchase on a line of credit you would save that interest expense.

The average price of a pre-construction condo in Toronto is offset by the extended deposit structures that developers offer. The average price of a pre-construction condo in Toronto is $1400psf. We explain why pre-construction prices don’t sell for less than the last launch (even when the market corrects itself) in this blog, “Why $1400psf is Toronto’s New Real Estate Norm”.

2. You get to take advantage of today’s prices

Buying a pre-construction condo investment in Toronto is similar to investing in stock market futures. As a result, you may acquire at today’s pricing with the expectation that prices will rise in the future. Long-term property values have risen at an average historical rate of 5% per year. When you work with a seasoned real estate agent and investor they can help guide you to properties in areas with stronger probabilities of appreciation. Such areas may include gentrifying neighbourhoods or areas with new infrastructure such as Toronto’s new transit LRT lines. Since pre-construction condos won’t come to fruition until 3-5 years post-purchase buyers can really take advantage of buying in up and coming markets.

3. You get a [mostly] hands-off experience

When considering if pre-construction condos are a good investment it’s important to know how involved you want to be in your investment. While owning or investing in real estate may be rewarding and thrilling, it is typically a hands-on process. As a result, many potential investors and purchasers are passing up this chance due to worries about property management and maintenance. One of the most significant advantages of acquiring pre-construction property is the 3 to 5 year period during which development may be completed without interruption. Your only tasks may be ensuring your cheques don’t bounce and a singular round of picking finishes/upgrades.

…AND if you in fact didn’t want to pick out your finishes our team will happily handle that for you. When you work with my team, you’re hiring a Toronto pre-construction agent who has a full-service concierge team and who is also a top re-sale agent who can handle your sales and rentals.

4. You can go through a well-defined process

When purchasing resale, you’ll often find a plethora of attractive condominiums that sell in heated bidding battles. This is often the result of impulsive decisions made in the heat of the moment. In these instances, you must submit a competitive offer with no strings attached in order to purchase the home.

When buying pre-construction, however, you have a 10-day cooling-off period. As a result, you have the opportunity to evaluate the purchasing information with your attorney, realtor, lender, and financial adviser. You can also use this time to conduct further research on the region and builder. It’s a significantly more efficient method for evaluating this investment possibility.

5. New condos sell for more money

When it comes to the resale condo market, the bright and new property can attract both buyers and tenants alike. As a result, many individuals are willing to pay a higher price. So, as you consider if pre-construction condos are a good investment it’s important to also consider the optimal ‘sell’ or exit strategy. Should you sell while the building is still relatively new or should you continue to hold?

READ: Analyzing Your Toronto Real Estate Portfolio: When to Sell

Brand new condos require relatively minimal upkeep or work during the ‘build’ phase. After occupancy, you may decide to rent out your pre-construction investment condo and at that time you would take on tenants and the upkeep that comes with them.

Buildings, however, can become obsolete over time, and maintenance costs might skyrocket. When this happens in comparison to the rest of the market, a condo building’s value may begin to stall or become less desirable as potential owners will factor this into their carrying costs.

As a result, you should be aware that the condo is nearing the end of its useful life. If you opt to buy a new condo, on the other hand, you will have a fairly new property even after a number of years. You’ve also invested in a brand new building which means you won’t have to worry about old appliances or future renovations quite yet. Pre-construction Toronto condos have the opportunity to be both a great long-term and short-term investment option.

This is why many individuals prefer pre-construction real estate in Toronto, and pre-construction condo sales have been growing for several years. Pre-construction is seen as a passive, profitable, and fairly stable way to acquire property by home purchasers and investors.

We can’t forget to also mention that as the ‘new kid on the block’ your building will likely command some of the best prices in its neighbourhood – should you decide it’s time to sell and re-invest but that’s a story for another day!

6. Unique tax benefits

Investing in a pre-construction condo might also provide you with some unique tax benefits. For example, did you know that just 50% of all capital gains are taxable? You’ll be able to deduct a large portion of your expenses from your taxes, including the cost to carry your property like negative cash flow, property taxes, and even mortgage interest. This is definitely a reason why many investors consider pre-construction condos as a good investment.

It’s also worth noting that if you buy a pre-construction condo, you won’t have to worry about it showing up on your credit report.

7. No mortgage necessary until occupancy

You have no mortgage commitment until closing during the 3 to 5 year construction phase, apart from paying the deposit. The mortgage is only due at the time of closing. As a consequence, you may be able to own pre-construction real estate without it appearing on your credit report. Even better, you’ll have the freedom of owning a condo without jeopardizing your debt ratio or your ability to borrow money from any lender during this time.

What are the myths about investing in pre-construction condos?

Purchasing a pre-construction condominium is a significant financial commitment so let’s discuss some of the risks of buying pre-construction and some of the myths. For starters, it hasn’t been built yet, so you’re making a purchase based on drawings of what the finished building and suite will look like. Second, unlike buying a freehold property such as a house, you must pay for maintenance, upkeep, and shared utilities in addition to the purchase price. That’s why it’s crucial to weigh all of the pros and drawbacks of purchasing a pre-construction condo before making a decision.

Unfortunately, many people’s thoughts are clouded by a number of widely held misconceptions regarding the condo buying process. Continue reading to learn the reality behind seven of the most common pre-construction condo misconceptions.

  • They are all expensive and over-priced

Are pre-construction condos cheaper? While the truth is that Toronto real estate in general has become expensive – and so too has Durham and the GTA. In many situations, buying a condo is a more reasonable and desired alternative than buying a freehold property, especially in Toronto’s downtown area. “The single-family home market has become expensive,” says Stéfane Marion, chief economist at the National Bank. And for many this might feel like an understatement. ” This is the truth for places like Vancouver and Toronto.” According to the Globe and Mail, this has driven many first-time buyers into the condo market.

While we can’t argue that they haven’t become more expensive, we can explain why. But, it’s a long-winded explanation and deserves it’s own article entirely. If you’re interested, we explain here why Toronto is so expensive.

When it comes to pre-construction condos specifically you need to work with an educated realtor who knows how to invest. Not all pre-construction buildings are equal. They all aren’t a great deal. Just because you buy at the first Platinum phase doesn’t mean it wasn’t an over-priced launch. Get yourself a realtor who will tell you the truth and guide you to appropriate investments.

  • It’ll be forever until your condo is ready

It’s a widespread misconception that if you buy a condo when it’s still in the planning phases, you’ll be old before you even walk through the front door. While this is sometimes true, it isn’t always the case, especially if you do your homework and buy from a trustworthy builder with a proven track record.

While delays might occur due to factors beyond the builder’s control (such as labor strikes or bad weather), top-rated condo developers will always make it a priority to keep to the construction schedule as closely as possible. Before signing on the dotted line for your new condo, make sure to verify the builder’s history on Tarion’s builder directory.

It’s also important to add that if you’re a long-term investor and not looking to flip your pre-construction unit. Then a long build timeline can actually be quite the advantage. With most pre-construction condos requesting their final 5% deposit at occupancy you can take advantage of a lower down payment during build. We also recommend you buy pre-construction condos for their equity gains rather than their cash-flow potential as many will run negative. While your loss in cash flow is considered a right-off a longer build time can often mean a shorter rental period.

  • You will need to make an initial deposit of at least 20%

For a Canadian buying a pre-construction condo apartment from a builder, a typical deposit is 20% of the purchase price (international buyers typically pay 35 percent). Now, if you’re purchasing a $500,000 suite, 20% is a considerable sum of money, especially when paid all at once. Fortunately, excellent, and reputable contractors do not need a one-time payment. Payments are generally spaced out over a period of time, in some cases up to years.

  • If the property developer fails, you will lose the money you invested

While the risk is modest, developers have already declared bankruptcy. As a result, the Ontario government has regulated the Tarion Warranty Corporation to ensure that all new home buyers are protected. If a project is terminated, the vendor is obliged under Condominium Act to refund all monies paid by the purchaser, plus interest calculated in accordance with the Condominium Act.

If the deposit monies are no longer in trust, then the purchaser has an alternative protection being the third-party backstop of Tarion and/or an insurance company. The purchaser can turn to Tarion for payment of the deposit or portion that has not yet been returned, up to $20,000. It is also possible that anything over $20,000 is protected by a third party major insurance company which has issued a deposit protection policy for the money.

  • You will not have any idea at all on what you will get

If you buy a condo from a well-known developer during the pre-construction period, there’s no reason to be concerned that it won’t live up to your expectations. Take your time exploring the sales center’s presentation room, paying great attention to the floorplans, finishes, and amenity renderings, and don’t be afraid to ask questions. You may also go to other buildings by the same developer to see what they’re like and get a sense of the style and mood to see if it’s something you’d enjoy. Purchasing a suite from a reputable builder with years of expertise and previous projects guarantees that the unit and building amenities will meet your expectations – should they be reasonable.

  • You will get a surprise bill at the time of closing

When considering if pre-construction condos are a good investment it’s easy to ignore the entire cost of ownership, but it’s important to factor in all costs when seeking to buy a condo, which is more than simply the deposit and mortgage payments. Maintenance fees, property taxes, utilities, and other expenses must all be factored into the budget. Then there are closing expenses, which are an important factor to consider when purchasing a condo under construction. Land transfer taxes, meters, legal expenses, warranty fees, development levies, and administration fees are all included in the closing costs.

Development levies, in particular, have recently sparked debate in the media. To help support civic infrastructure, condo developers are required to pay specific development levies to governments. Developers frequently offer monetary donations to assist create public community centers and parks in exchange for authorized height or density increases. It’s crucial to find out how a developer handles these costs if you’re buying from them. Are they already included in the purchase price, or will they be added later?

A good builder will not try to hide any closing charges from you and will endeavor to include any additional fees in the suite’s pricing so that they may be factored into your mortgage payments. When comparing costs, keep this in mind. If one developer’s suite appears to be more expensive than the others, it doesn’t always imply you’re overpaying. It might indicate that all expenditures (including development taxes) are included in the purchase price, ensuring that there are no unpleasant surprises at closing. Be wary of developers that try to attract you with low rates; you could wind up writing a large check at closing.

It never hurts to do your homework and have a lawyer WHO REGULARLY DOES PRE-CONSTRUCTION AGREEMENTS look over the Purchase and Sale Agreement, Disclosure Statement, and Tarion Addendum (if there is one). This will help you to get the most out of what you invest in pre-construction condos. When you work with our team we’ll recommend someone great.

  • Property developers are not concerned about the buyers

While there are some developers who are only interested in making quick money on condo buildings, the assumption that all developers have the same aims is false. Many developers truly care about the end-user and their reputation.

Important tips to ensure pre-construction condos are a good investment

Are you thinking about buying a condo before it’s built and are unsure if pre-construction condos are a good investment? The good news is that condominiums are a wise investment whether you want to live in them or just want to rent them out. Getting in on the ground floor of a new building is an exciting proposition, especially when you have a say in the developer and location. It’s important to remember that not all buildings are created equal, location, the developer the building itself and of course, the price are all important factors.

So, what should a buyer look out for when investing in a pre-construction condo? Here are some effective tips that you can keep in mind when you are buying pre-construction condos.

  • Find a property developer before you buy

When you only invest in renowned builders, investing in a pre-construction condo becomes fundamentally less hazardous. Choose a developer who has a proven track record of following through on their development plans on time and on budget.

Begin by looking at the developer’s post-closing track record. It’s important to remember that this isn’t merely a pre-construction condo investment. It is, nevertheless, critical if you want to ensure that you obtain the best resale condo value. Consideration of the builder is an important consideration to make before proceeding with any real estate transaction. If you wish to resell condominiums as a company, this is also true.

Or really – just call us to help you invest and we’ll take care of all that homework!

  • Understand the cooling-off period of 10 days

There is a cooling-off period when it comes to signed contracts for condos before they are built. All new condominium purchases in Ontario are required by law to have a 10-day cooling-off period. It provides you with a competitive advantage in the Pre-Construction market that you don’t have in the Resale market.

When buying a condo from a developer, you have ten calendar days from the date of signing to determine whether or not you want the unit. There are no responsibilities, fines, or “gotchas” during the 10-day grace period.

I recommend taking advantage of the 10-day cooling-off period. The real estate market in Toronto is quickly expanding, with buildings selling out on average within 3-6 months of their first sale – and many within days of launch. Builders typically raise pre-construction condo pricing on a regular basis and modify incentives when sales to the general public begin.

The 10-day cooling period gives you the opportunity to lock in the pricing and incentives. It also assures that the builder cannot sell or modify the price of your condo apartment to anybody else. During your ten-day cooling period, I propose doing two things. The first is to have a lawyer go over your builder’s Purchase and Sale Agreement.

Second, consider alternative possibilities. Take a peek at a similar pre-construction condo building. To be sure you’re receiving a decent deal, compare pricing and incentives. Again, if you work with us we usually have done this before you even sign the papers, but the added 10 days is still a nice bonus.

  • Understand the Difference Between Interim Occupancy and Closing

Interim Occupancy occurs when you receive the keys and are able to move into your apartment, but you do not yet own it. There are two ‘closing’ dates for condominiums:

A) What Is Condo Interim Occupancy?

The first is Interim Occupancy, which occurs when you get the keys to your apartment. Owners’ occupancy is staggered, generally, a couple of floors every week, so that not everyone moves in on the same day.

The structure is still unregistered at this time. If you acquired from a reputable builder, registration and final closure typically takes place within 6 months of temporary occupancy. Condo developers such as Tridel are known for acting fast and effectively to have their projects registered.

B) How Much Do Interim Occupancy Fees Cost?

Interim Occupancy Fees are the fees you pay to the builder to use the apartment temporarily. Because you won’t have the title to your property until it’s registered, your mortgage won’t start until then. This is referred described as “rent to the builder” or “phantom rent” by some, although it’s simply:

C) Your Condo Maintenance Fees on a Monthly Basis

The interest payment on the 80 percent borrowed for the purchase is the first installment of your condo fees (assuming 20 percent down). The builder calculates your interest payment using the Bank of Canada key rate, and you pay the builder directly.

Your monthly carry expenses will be cheaper during interim occupancy than they will be following registration. This is due to the fact that you have yet to begin making principal payments on your mortgage.

Maintenance costs for the building’s basic care, as well as any amenities, are included in other condo fees. Although these condo costs are shared among all residents, the amount you must pay is reduced.

D) What Do You Mean When You Say “Final Closing”?

When the builder registers the Condo Corporation with the city, the transaction is complete. This is when your bank pays the builder the remaining 80% balance, your mortgage begins, and you receive your unit’s title.

Final adjustments and closing expenses will be computed and paid at this time. Legal expenses and land transfer tax are examples of this. Plus, any other closing expenses specified in your Purchase and Sale Agreement.

Making a Pre-construction Condo a Good Investment – Understanding Leverage & Using a Line of Credit

In some cases, you may be able to use a line of credit to leverage your investment even further for a really spectacular return on investment. This concept is one of my favourite tools for building my client’s wealth at an exponential rate. It’s so good we’ve written an entire series on leveraging the equity in your home to invest in Toronto pre-construction condos. Make sure you give it a read.

READ: leveraging the equity in your home to invest in Toronto pre-construction condos


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