Pre-construction condos and homes can not only be a great way to plan for your future, they also present opportunities to earn passive income.
From an investment perspective, whether you’re considering this as an end user or to earn extra money, pre-construction condos and homes can offer a lot of advantages over residential resale. This said, there are always risks and some factors that you MUST consider before you decide which route is best for you.
Now, let’s take a look at some of the pro’s and con’s of pre-construction condos and homes. Hopefully this will help you understand it better to decide if it’s the right fit for your plans.
To kick things off, let’s start with some of the pro’s of pre-construction condos and homes.
This is one of the only ways you can own an asset for 20% or less (without any CMHM fees). This is a very big strategy for many real estate investors as you have the opportunity to own an assist and it’s appreciation but only put a small portion of the total value down. By doing this, your carrying costs are quite low compared to your potential for a big gain.
Lots of investors like this strategy as they will but in early, hold onto it for a few years while it’s being built, then assign the purchase (selling it before it’s completed) and pocket the increased price. For example, if you bought a pre-construction condo or home for $500,000 and put $100,000 down, the market went up 20%/yr over 3 years, then you can expect it to be worth around $600,000 or more by the time it’s done.
When you cash out, you’ll pull out your original investment as well as a $100,000 gain less fees and taxes. This strategy sends to work well in markets that are on the rise like the GTA and Southern Ontario which saw considerable increases in property, closer to 25-30%, from early 2021 to early 2022.
Even if you plan to keep the property to rent or live in, you can still make the most of the gains you’re seeing on the increased value before moving in. When the property is done, you can get it re-appraised to use some of the equity for other investments, for example.
Moving along to my next point. Pre-construction condos and homes allow you to have time to save up for a downpayment. In the current market, the average home is selling for $1,000,000+. Based on 20% down, this is a $200,000 down payment.
When you consider pre-construction condos and homes over residential resale, you pay the down payment throughout the course of construction instead of all at one. This can help you budget over a period of time.
Most projects still require 20% but over 3-4 years, this may be 5%/yr. This can be very attractive to buyers who don’t have the down payment already.
One of the other big upsides to pre-construction condos and homes is the facts that you’re getting a brand new unit or house. This means you have new appliances, fixtures, features and so much more. It will be enjoyed by you in the very best shape it will ever be in. Some people just love this about pre-construction.
A couple of other things that go along with a brand new build is low maintenance. Fees are typically lower than older buildings if you’re moving into a condo. The same can be said about wear and tear within your unit or house.
By the same token, pre-construction condos and homes also come with a warranty so even if there are any deficiencies and anything breaks, it’s ok. It’s under warranty offered by Tarion or another similar program. This means anything that breaks will be fixed at no added cost, as long as it’s within the warranty period. This gives new owners peace of mind.
Another upswing is a better buying experience. Why? Because you don’t have to face a bidding war with other buyers. That means you also don’t have to worry about prices escalating beyond reach.
With pre-construction, there are allocations for various units or houses offered to various brokerages, should you go that route or within the sales centre. Keep in mind that when you’re buying a property, there is always a lot of paperwork and decisions required that will test your patience, but with pre-construction, you’ll experience ease with how the sale actually takes place.
There is no chance for a bidding war and escalation of that price.
Now that you’re full aware of the positives of pre-construction condos and homes, let’s take a closer look at some of the potential pitfalls.
One of the big one’s is potential delays. As we saw with covid, there were a lot of issues with delays due to labour shortages and materials taking longer to reach their destinations. If you’re hoping to move into a pre-construction condo or home by a particular date or if you want to pull your money out, this could present some challenges for you.
Back in 2018, I bought two pre-construction properties including a condo in Langley as well as a suited single family home in Edmonton. I planned to sell the condo on assignment when it was completed and keep the Edmonton property to tenant.
Due to covid, the condo was delayed for over a year and I only made half of the return I expected to. The house in Edmonton was only a few months delayed, but four years later, I’m finding that it hasn’t appreciated as much as I would’ve expected it to, likely because I paid a premium for the property.
At the time, this was an easier solution for me. If I could go back and do it all over again however, I would’ve invested a little more time in due diligence to see what other condos in Langley and suited houses in Edmonton were selling for. Even if I had to incur the time to fly to Edmonton, if I could’ve bought the same type of house for $100,000-$200,000 less than what I did, I could be seeing much higher passive appreciation now.
Keep in mind – even the very best developers still tend to complete projects late – but this may be a few months to upwards of 8-9 months late rather than years late.
Another notable point is what kind of pre-construction you’re looking at. More often than note, townhouses and detached homes tend to be completed on time or closer to being on time compared to condos. With high rise condos, there can be some complications that push things over schedule.
When it comes to finance, with pre-construction, you are at the mercy of the developers payment schedule. As noted previously, a benefit is staggering out these payments but the downside is that it doesn’t change the total percentage owing.
With residential resale, you can opt to put less than 20% down, if you’re willing to accept the CMHC fee to insure the purchase and as long as it’s under $1,000,000. With pre-construction condos and homes, this is not an option.
One thing you may not have thought about when it comes to pre-construction is tax. Yes, pre-construction is subject to HST!
If you plan to keep the unit or house for at least 12 months, you may be eligible for an HST rebate – but if you plan to sell it on assignment, then you wouldn’t be able to take advantage of this tax break.
Should you be looking at condos, be prepared for maintenance fee increases as time passes. For most condos, this could be a 10-30% increase after the first two-three years of owning it. That can be considerable.
Last but not least, let’s talk about closing costs. There are always closing costs when it comes to real estate. When it comes to pre-construction condos and homes however, a good estimate is 1-4% of the total purchase price compared to 1-2% for residential resale.
This can be largely attributed to additional costs associated with levies and development charges that get put on a project. For example, hooking up utilities, parkland levies etc.
If you start running the numbers and have a change of heart, you have a ten day cooling off period to negotiate fees/charges or change your mind altogether. Your lawyer may be able to lower, cap or remove some fees. This helps to ensure there are no increased fees to face at closing that you’re not prepared for.
Keep in mind that pre-construction is not less expensive than residential resale. You’re paying a premium to buy something that is brand new. But this said, you can also look at selling at a higher price than an older building or property, should you decide to do so. As noted above, this is not always the case but it is common.
If you’re in the market for a pre-construction condo or home, be on the look out for incentives. These can be presented as cash-back incentives, upgrades etc., where you can save money on the purchase. But you need to know how to access these incentives – that’s where working with a REALTOR® helps!
Thinking a pre-construction condo or home may be right for you? Let’s chat! I can be reached at 647.896.6584, by email at info@serenaholmesrealtor.com or by filling out this simple contact form. For plenty of other great tips, make sure we’re connected on social and you’ve subscribed to my YouTube channel.
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