Making the Smart Decision When Investing in Pre-Construction Condos Vs Resale Condos

There are so many options when it comes to investing in real estate but one of the questions we get asked the most is, “Should I invest in Toronto pre-construction condos versus re-sale condos?”

The real estate market is always in flux and this can make investing exciting but it can also make it extremely difficult for investors. The market can change week to week as much as it can change year-over-year.  As both a Toronto pre-construction real estate agent and a re-sale agent I can help you prepare for every type of curveball the market sends our way.

As experts in our field, we’re constantly tracking the active market and are adjusting our strategies in order to earn our clients the best returns possible. By monitoring trends and pricing in all areas and on all products, we are finding the best investment opportunities based on the market at the time.

Over the past few years we’ve been strong advocates for investing in Toronto’s pre-construction condo market but as pre-construction prices creep up beyond their resale counterparts due to increased land, labour, and material costs — not all pre-construction developments in Toronto make for good investmentsThis doesn’t mean there aren’t great pre-construction investments in Toronto, there definitely are, it simply means that it’s not the only option when it comes to making a good ROI when investing in Toronto real estate.

Browse: Pierre’s Preferred Pre-Construction Investment Condo Projects in Toronto

There are a number of advantages to investing in the resale condo market, let’s cover our top reasons why you should consider resale investment opportunities in the Toronto market.

First off, let’s address a couple of myths.

MYTH #1
Buying a Toronto Pre-Construction Condo is Cheaper than a Resale

It wasn’t long ago that your pre-construction condo investment was almost always priced below resale counterparts, which is why the pre-construction condo vs resale condo market earned such a good reputation among investors. But today, with a growing number of pre-construction investment condos being builtespecially in Torontothe cost to build is more expensive. It’s a simple case of supply and demand.

Babak Eslahjoub of Core Architects said to The Globe and Mail that “construction costs are going up as a result of the demand being quite high; we’re the victim of our own success.” The price of land, material and labour have all increased for developers and they, too, need to make a profit from their investment and need to price projects accordingly.

It’s important that your Realtor is always looking for the best investment opportunities—whether that’s resale or pre-construction—with the best profit margins and this will vary depending on the area and the state of the market.

Related: Why $1000psf is Toronto’s New Real Estate Norm

MYTH #2
Investing in a Pre-Construction Condo Guarantees a Higher ROI

As we mentioned above, in the past, pre-construction investment condos have almost always been priced below their resale counterparts but as of late, these pre-sale condo prices have become, in many instance, too aggressive and many are unjustifiable in the current market. There are many pre-construction opportunities that are priced high because they’re iconic and/or one-of-a-kind. We call these “status” condos, which is like buying a luxury brand name dimply for the bragging rights. These do not make good investments.

If you’re over paying for the product you lose the inherent advantage that pre-construction offers: equity gained during the holding period.  Your real estate broker should be your advisor in navigating the good investments from the bad. 

Check Out: Real Returns From My Clients’ Pre-Construction Condo Investment Portfolios

MYTH #3
The Best Pre-Construction Deals Always Sell Out in a Day

Consumers are getting fooled by the hype around any hot new projects in a great location and are quick to pull the trigger by putting their money into them. Some new construction condo developments are actually charging more per square foot than resale is trading for in the same area. The lack of education for some investors could lead them to overpaying.

As builders continue to command high prices the trend will continue as there are always going to be buyers that will pay the price. This is specifically true for end-users who intend to live in the building long-term. This is why it’s so important to work with a real estate agent that you know is looking out for your best interests and who will tell you whether they believe in the project or not. Frankly, I won’t sell anything I wouldn’t buy myself.

WHO CAN INVEST IN RESALE

If you meet these three major qualifications you’re likely a good candidate for resale investing.

  • You have a 20%+ down payment ready to go.
  • You can qualify for a mortgage today.
  • You don’t mind being a landlord for an extended period of time.

FINDING THE RIGHT INVESTMENT FOR YOU

There are a number of factors that come to play when deciding which investment is for you. If you meet the above qualifications resale might just be the right one.

I say might because I always recommend that if you’re thinking of investing that you book a call with me to discuss your unique situation and goals. The market is always changing and my recommendations will always change with it.

It’s important to find a property that is priced well and in the right location with good market growth potential. This means it matters what you’re buying as much as for what price. I’ll discuss your options at hand and recommend a strategy that will maximize your return whether that’s a pre-construction investment condo or a re-sale investment condo.

WHY RESALE IS A GOOD INVESTMENT

As it stands right now in the market, you may be able to make money faster in resale as the market adjusts. The key is finding the right price; ideally for properties that are equal or less than the pre-construction pricing in the same area. If you can buy a fairly new resale condo with a good floor plan, from a reputable builder, in an area where pre-construction is being built — that new build next door will float your resale investment price up when it comes time to sell.

Let’s say you find a 700sqft resale property that is going for $850 per square foot compared to the same sized pre-construction property that’s selling for $950 per square foot.

resale compared to pre-construction financials

While you won’t get the same price per square foot as a brand new building when it comes time to sell, if you’ve bought in a reputable building that still sells very well, we can maximize your sale price and achieve a similar price per foot through things like staging. So not only have you purchased for less, but you get to boost your resale value because of the new buildings in the area — not to mention the extra income you’ve earned from renting it out for six years rather than just two.

FINANCING YOUR RESALE CONDO

The difference with resale is that you’ll need to have your financing and deposit monies (20% down) ready on closing, which would be in two to four months rather than pre-construction’s typical 15% down in the first year, followed by the remaining 5% three to four years later. But, if financing isn’t a road block, you have the opportunity to start building equity and earning rental income from your investment right away. Meanwhile, your tenant begins to pay down your mortgage today.

Related: How To Use the Equity in Your Home to Invest in Real Estate

WHO CAN INVEST IN PRE-CONSTRUCTION CONDOS

Below are factors that indicate if you are a good candidate for a pre-construction condo investment.

  • You have a 15% down payment available or you already have equity in a property
  • You can save enough over three years to qualify for a mortgage
  • You’re willing to be a landlord when the building takes occupancy

WHEN PRE-CONSTRUCTION IS A GOOD INVESTMENT

When it comes to making a good investment in the Toronto pre-construction market, there are certain factors that contribute to higher returns. This is where working with a real estate agent who’s well versed in pre-construction is invaluable.

When it comes to finding a good quality pre-construction investment, their ability to know which builders are reputable and which layouts will rent (and later sell) for a premium are huge in choosing a good investment.

Having the foresight and ability to recognize which neighbourhoods are expected to take off over the next few years can help you to find opportunities that may even have profit built in on signing. If a new condo is being added to an area where inventory is low and is expected to remain low, those deals hold promise as they’re likely to be priced lower than those in areas with lots of inventory but will likely see quick market growth in the years to come.

Related: From East to West Toronto – Neighbourhoods to Watch in 2019

PAYING DOWN YOUR MORTGAGE PRINCIPAL

One of the major benefits of purchasing real estate investments, both new construction and resale, is that your tenant begins to pay down your mortgage principal today. Rents in Toronto are continuing to climb and, as of 2019, new condos are exempt from rent control. Couple this with equity gains and you have yourself a healthy investment!

HOLDING YOUR INVESTMENT CONDO

Remember, real estate is a long-term investment. If your goal is equity gains — whether resale or pre-construction — expect to hold your property for at least six or seven years. This will protect your investment and allow enough time to generate a healthy return — especially in Toronto’s high performing condo market. New build condos will boost resale values of their neighbouring buildings, provided you buy the right product.

Related: Flipping Pre-Construction Condos in Toronto – What You Need To Know

A lot more to this conversation and a lot of moving parts to consider. This is why we always recommend speaking to a Realtor who is well versed in the Toronto market and who regularly invests their own money in real estate. 

If you’d like to discuss investment opportunities tailored to your unique situation, book a call today.