Pros And Cons Of Investing In Pre-Construction Condos
Pre-construction investments stand out as a lucrative opportunity for passive investors seeking appreciation. This comprehensive guide delves into the pros and cons of pre-construction properties.
The Pros of A Pre-Construction Investment
Deferred Deposit Structures: Unlike traditional resale purchases, pre-construction allows you to spread your deposit over time. With a more flexible deposit structure, you retain financial flexibility and additional saving opportunities.
No Immediate Mortgage: Delay the commitment of a mortgage until the building is complete. This absence of immediate debt provides leverage for alternative investments during the construction phase.
Profit Potential through Appreciation: Early entry into a project during its multiple allocations can lead to substantial profits. Builders often increase unit prices with each allocation round, offering investors a chance to capitalize on the appreciation the builder drives upwards.
Multiple Exit Strategies And Assignments: Explore multiple exit strategies by selling your contract before closing through an assignment sale. Benefit from 3-4 years of appreciation without incurring closing costs and land transfer taxes. Important Note: I don’t advise my clients to exit via an assignment but I like the flexibility of having multiple exit strategies and only using it if the opportunity presents itself.
Leveraged ROI: In pre-construction, investors get another type of leverage I like to call, the builder leverage. This is because, during the time of investors making deposit payments, properties have the opportunity to appreciate. Example: If you purchase a pre-construction condo for $600,000; the deposit structure is so that you only put 5% ($30,000) in the first year. If the condo appreciates by 5% ($30,000) in the first year, that would represent a 100% return on investment in the first year because of the builder leverage.
No Rent Control: Post-November 2018 new-construction condos aren't subject to the same rent control regulations, providing flexibility in setting rents at market rates without government-mandated limitations.
Occupancy Period Cash Flow: During the occupancy period, which is the period after the unit is safe to live in, but before the building has been registered. You pay occupancy fees, made up of estimated maintenance, estimated taxes, and interest on the purchase prices’ balance. During this period, you won’t make a mortgage payment. Having the ability to rent out your unit during this period can make this period the highest cash-flowing period in your investment.
Interest During The Construction: Deposit payments are usually made to a lawyer’s trust account, which usually earns interest based on the rate set by the BOC. This presents another way of making money in pre-construction investing other than cash-flow and appreciation. The earned interest will show up on the statement of adjustments when closing on your property.
The Cons of a Pre-Construction Investment
Higher Initial Cost: Pre-construction properties often come with a higher price per square foot, reflecting developers' projections of future value upon completion.
Delayed Cash Flow: Investors won't experience cash flow until the unit is ready for occupancy, making pre-construction unsuitable for those seeking immediate returns.
Project Selection Complexity: For every promising project, numerous others may lack potential. Investors must carefully navigate project selection to avoid pitfalls.
In conclusion, pre-construction investments remain a viable option for patient, passive investors looking to capitalize on the long-term appreciation. Understanding the nuances of this investment strategy empowers investors to navigate the complexities and make informed decisions tailored to their financial goals.
