It’s no secret that the financial challenges our children facing today are far worse than what we were up against. With tuition rates at an all time high in Toronto, a majority of students today graduate with a degree in one hand and significant debt in the other. Even if they do beat the odds and manage to get into the workforce right out of school, getting into Toronto’s red hot housing market on their own won’t be an easy feat.
But what if I said the holy grail really does exist? What if you could help pay for your child’s tuition while simultaneously providing a roof over their head? Maybe you’d be able to spend a bit less time worrying and a bit more time soaking in those last few years before they up and leave the nest.
If you have the means to do so, investing in a Toronto pre-construction property while your child is in high school — or even better, grade school — is a great way to generate significant savings, while simultaneously getting them into the Toronto housing market. And, trust me it’s not as difficult as it sounds. If you own your home, it really is possible to get your money working for you. We show you how in this article, “How to Use Your Equity to Build A Comfy Retirement”.
RESPs AREN’T ENOUGH
We all do our best to provide for our children and when it comes to their education, it can really add up. The cost of tuition in Ontario currently averages out at about $7,500 a year — and that price can triple depending on the degree, not to mention all of the added expenses like housing, textbooks, and meals. Parents today have to start saving for their child’s education the minute they leave the delivery room, often opting for the traditional Registered Education Savings Plan.
RESPs are a fine way to save for your child’s education, but the returns are modest at best. If you’re looking at your RESPs and saying to yourself, “This isn’t going to be enough.” or, “Great, I’m saving as much as possible, but it’s barely earning any interest.” then the Toronto real estate market and pre-construction properties might just be the answer. The key benefit with this type of investment is it requires less money up front but the equity you build will build on the full value of the property.
HOW IT WORKS
Historically, the real estate market grows on average 5% per year — however in the last few years we have seen the condo market grow between 15% and 19%*. So the initial contribution (i.e the down payment) you make towards this property will generate greater returns compared to an RESP, because the equity earned each year is based on the full value of the asset, not the small down payment you’ve put into it.
Say you put $50,000 into your child’s RESP — which, by the way, is the maximum you can contribute annually. If the stock market goes up 10%, you’ve made $5,000 from your contribution.
Comparatively, if you were to put the same $50,000 down on a pre-construction property valued at $335,000 — if the market goes up 10%, you’ve actually made $33,500. Why? Because the equity earned is based on the full value of the asset, not just what you’ve put into it.
APPLYING THE IDEA
Now that we’ve demonstrated how easy it is to generate high returns, let’s implement this investment for your child. In order to take full advantage you’ll want to invest in a Toronto property that will take occupancy when your child turns 18. The reasoning is two-fold:
1- Presuming your child will be going to university when they’re 18 and will need housing.
2- They must be 18 years of age to own property and as a first-time home buyer they are eligible for a Land Transfer Tax refund.
Note: If you should choose to invest earlier, say when they are in grade-school, you would purchase the property yourself, sell it and then re-invest those funds into one or two new properties, one for your child’s future and one for your own retirement.
The typical build time in Toronto pre-construction is three to four years, so you’ll want to be prepared to put a deposit down on a property when they’re between the ages of 14 and 15. As the building takes occupancy three to four years later, it is registered with the city and it’s at this time that you will want to change the registered name with the building from yours to theirs, assuming they are now 18 years of age. Now on title, they are seen as a first-time buyer and become eligible for a full or partial refund on the Land Transfer Tax, which is applied at closing when the building registers with the city.
Download our comprehensive Guide to Investing in Pre-construction for all the details and timelines affiliated with this type of investment.
This is also when the mortgage for the property kicks in. Obviously, an 18 year old won’t qualify for a mortgage, so you’ll be required to co-sign with them. In order to ensure that the Land Transfer Tax refund and capital gains accrue to them and not you, your lawyers can assign 1% ownership to you and 99% to them. While the LTT refund will be based on the 99% ownership, you, as parents, can sign a trust declaration that you are only holding the 1% in trust for the child so that the capital gains would all go to them.
WHY IT WORKS
If you’re working with an agent who has Platinum Access to projects like we do, they’re able to source properties that have Platinum Pricing, meaning they are often priced below market value and have great profit potential. You can see some of Pierre’s client returns here.
The longer you hold a property, the better your return will be. Ideally, you want to hold a property for at least six years to make the most from your investment. In the example we’ve used with the $335,000 property: if your child holds it for eight years (4 year build time + 4 years in school) and the market grew the average 5% per year, the property will be worth at least $469,000. So now they’ve made $134,000 in just eight years.
PAYING THEIR DEBTS
While most students are going into debt by paying tuition and housing costs, your child is paying into a mortgage while the property they live in is generating profits to pay for their school. With you to thank for getting them started, your child will not only graduate with a degree but they will have a foot in the door of Toronto’s housing market. I believe they call that killing two birds with one stone.
TAX FREE PROFITS
When your child decides to sell this property, because it’s their personal residence, all profits earned are completely tax exempt. It is the number one means of getting ahead without giving most of your income away in taxes. They’re not paying rent, they’re paying themselves and the gains are 100% tax-free.
LOW RISK, HIGH RETURN
Even if your child is planning on going to university overseas, investing in pre-construction as a means of saving for your child’s education is a low risk, high reward investment plan. Your dollar will go much further when put towards real estate than towards an RESP.
The earlier you get into the market the better. As we mentioned, the longer you hold a property the better your return will be. If you invest in a pre-construction property and choose to rent it out instead, you are entitled to a full HST rebate on that property. Now you have a property generating equity and a tenant helping to pay your mortgage. The savings you can accrue from this approach will still provide you with money you can use towards your child’s education.
If you choose to invest while your child is still at a young age, the property must be put in your name and you won’t benefit from those first-time buyer tax breaks. You can however, still use the equity you earn from the investment property to be used as a Gifted Down Payment towards your child’s first property when they are ready to purchase (at this time they will receive the first-time buyer tax break). You are able to gift a down payment of as much or as little as you want and there are no tax implications. This is a great way to help your child get into the market and start building wealth for themselves.
THE PIERRE CARAPETIAN APPROACH TO PRE-CONSTRUCTION INVESTING
Pierre has built strategic alliances and partnerships with the most prominent builders and sales teams across the city. Through these partnerships he is given preferential access, choice of the best layouts and suites, and the best terms. He’s been able to track the success of these pre-construction buildings, watching them come into fruition from what were once parking lots. His experience selling these properties allows him to recognize which suites are the best, which will make the most money, which ones make the least money and which ones have the highest returns.
Pierre has a handful of investment properties in Toronto himself and he lives by the model if he wouldn’t personally invest in the property, he won’t recommend it to his clients. You can download our Free Guide to Investing in Pre-Construction here to learn how to properly invest in Pre-Construction real estate. With over 500 investment properties, Pierre’s clients have made millions by making smart real estate decisions. Now, it’s your turn. Download the guide.
*Based on average condo prices in C1, C2, C8, E1 from 2012 to 2017’s Q3.