Are Pre-Construction Condos a Good Investment?
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Buying
Condo sales are skyrocketing in Canada’s biggest cities. This rush to buy won’t surprise seasoned real estate investors, who know that condominiums can be one of the best strategies to grow your money. But investing in pre-construction condos does come with pitfalls. To help maximise your investment dollar and create a long-term plan for your money, it’s best to learn the best strategies that make pre-construction condos a good investment.
Why Pre-Construction Condos Are the Best Investment
When you buy a condo unit in the pre-construction phase you have the advantage of paying the lowest possible price, per square foot, for that condo unit. That’s because developers keep the pricing in the pre-construction phase lower in order to entice buyers to invest in the building. It’s a sales tactic to help generate multiple sales in a short-period of time. However, as more and more of the units are sold off, the builder will start to reduce the incentive and prices start to increase.
Another advantage of buying in the pre-construction phase is that the unbuilt condo’s value will increase over time — the same period of time that the unit is being built. For instance, if you bought a pre-construction condo unit for $450,000 in 2019 that same unit may be worth $495,000 in 2020 and even more in 2021. While the value of the condo may have increased during the time it was built, your purchase price would not.
Additional advantages include:
- Opportunity to choose the unit you want (based on first-come first-serve basis)
- Opportunity to choose the layout/floor plan, floor level and views that best fits your needs and budget
- Avoid bidding wars (in most circumstances)
As investment opportunities, pre-construction condos generally: cost less, require no maintenance, and, if you play your cards right, free you from the burden of mortgage payments entirely.
Compared to other investment opportunities, pre-built allows you to use the power of leverage — you take a relatively small amount of your own funds, to purchase the ownership rights of an asset with a much higher value.
Finally, pre-construction condos, like other forms of housing, face less negative impact during economic downturns. Construction will continue and, once built, the asset will retain its value despite the ups and downs of economic cycles.
Pre-Construction vs. Resale
Putting money in condos is generally a good investment, but there are several key reasons why pre-construction condos can help you realise a higher return-on-investment (ROI) than purchasing a resale condo.
One of the biggest advantages of pre-sale condos is their ability to capture property price increases. This appreciation in value starts from the first day you pay a deposit, since the value of the land and the property starts even before construction is started.
Once the pre-construction condo unit is built and ready to lease it out or put on the market to sell, it will typically command higher rents and sale prices when compared to resale condos. The unit is new, in pristine condition and with the most up-to-date features and amenities — making it attractive to both renters and buyers. Plus, the bump in value is because most buyers (and virtually all renters) find it hard to visualise a pre-build condo, but once they see the unit built and ready to use it becomes much easier for them to imagine living in the condo.
Another attractive feature with pre-construction condos is that their maintenance — or strata — fees are usually much lower than resale condo fees, which already take into consideration the current and future upkeep and repairs of an ageing building.
Then there’s the financing. Paying for pre-construction condos is different than buying a single-family house or resale condo. In Ontario, the pre-construction market requires you to pay 20% as a down payment on an investment property; however, unlike a resale condo, you don’t have to pay this down payment in one lump sum. Buying a pre-construction condo gives you the freedom to pay your down payment over the course of the first year of ownership, which means you have more time to come up with the down payment. This is appealing to investors who know the value and power of leverage. The less money you need to tie up, the more you have to invest.
Benefits of Real Estate Investments Using Pre-Construction Units
Leveraging to Make More With Less
The primary benefit of investing in a pre-construction condo is the ability to realise a higher ROI with less capital.
Unlike other property purchases, the down payment on a pre-construction condo is completed in stages rather than all at once, allowing for greater freedom and flexibility in the way you budget your funds. Plus, in Canada, investors are only required to put 20% down on the purchase of any property investment, meaning to own an asset worth $1,000 you only need to invest $200 of your own money.
Preferential Tax Treatment with Capital Gains Tax
When it comes time to sell your pre-construction condo — either as an assignment sale, or after it’s built — you will need to pay tax on the profit. While nobody likes to pay tax, the advantage of a new-build investment is that the tax charged is capital gains tax, where only half of your profit will be taxed and only at your marginal tax rate.
Real Estate Appreciation
Appreciation on investments is usually expressed as a percentage. So, if you invested $100 and that investment increased in value by 10%, it’s now worth $110, earning you $10 — for a 10% increase in value.
In real estate investments, you can use value appreciation and leverage to maximise your returns. That’s because even though you only paid a down payment of 20% on a condo unit’s value, the rising appreciation on that condo is based on 100% of its market value. To help illustrate, let’s assume you purchased a condo unit worth $100 with $20 (your 20% down payment). If the condo were to increase in value by 10%, it would then be worth $110, but your investment didn’t earn 10%, it earned 50%. You only invested $20 in an asset that is now valued at $110 — giving you an 18% return on the money you invested.
Mortgage Payments Covered by Your Tenant
One of the biggest advantages to investing in condos is the ability to rent them out and have your tenants pay down your mortgage. This strategy is especially advantageous when you’re investing in the pre-construction market because you have the opportunity to purchase a condo at a price when rents are lower, wait for the unit to be built and then rent out the unit at a higher rental rates (after rents rise during the years the building was constructed).
During that time, you don’t have to pay a mortgage down. right away, and if you don’t have a tenant, that will come directly out of your pocket. With pre-construction, you don’t begin paying the mortgage until after the building is complete, giving you a large buffer for renting out your unit.
The chart on the right gives an example of how to calculate the monthly rent a tenant should pay based on all of your expenses.
Income That Keeps Pace With Inflation
Another major benefit to investing in real estate is that it’s protected against inflation. Rental prices can decrease, but typically this only happens during exceptional times. Instead, most years see a steady increase in rental rates — an increase that typically keeps up with the rate of inflation.
Final Thoughts
There are many benefits when it comes to purchasing either pre-construction condos, or resale condos. Finding the right choice for you can be tricky, but with the help of a real estate agent that’s experienced and knowledgeable, you can find the best strategy and the best opportunities in today’s market.
