Are Pre-Construction Condos Good Investments?

When it comes to real estate investment, the traditional wisdom has been that it’s always smarter to buy single family homes or office buildings because of the greater appreciation rate. Condos- especially pre-construction- were viewed as money pits for the unwary. In reality, condo pre-sales just may be the best real estate options around for independent investors.

A recent report from the Canada Mortgage and Housing Corporation (CMHC) shows that Toronto residents are catching on to this fact. The CMHC revealed that almost half of condo owners purchased a second unit for income purposes in 2015. A quarter hold two income properties, and ten percent reported owning three or more. Many of those were bought at the pre-construction stage. What makes people so eager to invest in this kind of condos?

The first thing that appeals to investors is a lower financial bar to entry for condos versus detached buildings. Consider this: the down payment on a property is about 20%, less if you plan to live in it. A condo selling for the average Greater Toronto Area price of $415,000 requires a deposit of $83K. Starting investors don’t often have that kind of money, at least not in one immediate chunk. Developers offer a more approachable path to those willing to buy pre-construction. A typical arrangement breaks that 20% deposit into installments paid over the construction period with a final payment at occupancy. With payments spaced out like this, inventors have more flexibility in saving for their units.

Pre-construction is also a good way to get more “bang for your buck”. Condo prices are soaring in the GTA, with prices 7.1% over the same time last year. Location is everything, and the average investor will quickly be priced out of desirable buildings. Luckily, developers offer steep discounts during pre-sales to secure better financing terms from their lenders. The benefit passes to investors who can buy units in a luxury building they might not otherwise be able to afford.

Appreciation for pre-construction condos is a major draw. Investors pay a discounted rate to begin with, and this rate is based on current property values. The sales price doesn’t change over the course of construction (though units sold later will certainly reflect an increase). By the time the building is ready for residents, everyone who bought in during preconstruction has already gained equity.

Once construction is finished and the first tenant moves in, the financial burden on an investor drops to little or nothing. Condo rents are soaring in the GTA, with a September average of nearly $1900 per month. Since vacancy rates are about 1.8%, a condo will likely be occupied at least eleven months out of the year. Numbers like these mean that landlords can expect most (if not all) of their mortgage and condo fees to be covered by rent. Essentially, pre-construction condos break even and even earn money with just the investment of that first 20% deposit. At this point, the investor is free to look for another project to add to their portfolio. This is one way regular people manage to build wealth through real estate investments.

The success of this process rests on choosing the right condo at the outset. Always be sure to research the area where you intend to invest, and look up the last few projects a developer finished to get a feel for how they operate. Alternately, you can take advantage of the experts at The Condo Store to find the best place for your investment. Message us anytime to learn more or