Investing in a Pre-Construction Projects | Pre-Con Tours

Investing in pre-construction as a long-term investment strategy is a great way to generate a passive income. What makes investing in real estate one of the best investments you can make for yourself and your future is that you are in complete control of this investment?

Real estate is cyclical like any other investments. Property value will go up and down and as an investor you can benefit by being in the market. If the market is down, you can choose to hold onto your property and when the market is at its peak and you’re ready to sell, you can make a high return on your investment (ROI).

There are differences between investing in pre con real estate versus resale properties and other conventional investments and we’ll break down every question you have about purchasing a pre-construction property and how it can benefit you. Let’s start at the basics!

Like all markets, real estate is a cycle that goes up and down — but the main difference between investing in pre-construction condo and other investments is that you’re in complete control.

Whether you’re a seasoned investor, or a first-time buyer, buying a preconstruction condo poses some risks. A preconstruction agent can help you avoid unnecessary stress, hidden costs, and unreasonable contract terms. A preconstruction agent can also get you first access into developments, often saving you as much as 10% or more. Since our fee is already built into the sales price, it makes sense to take advantage of our guidance.

The Market

Toronto is an officially North America’s fastest-growing city. Canada's population growth between 2018 and 2019, at 1.4%, was the highest rate of growth among G7 nations. This increase (over 531,000 people) was overwhelmingly driven by pro-immigration policies. We need more available housing in Ontario, and fast. Besides the fact we have hundreds of cranes in the sky, we’re still building around half the amount of condos we need. A new report by Urbanation suggests the Greater Toronto Area could be facing a shortage of 200,000 rental apartments within a decade. Every year, GTA is around 21,000 units short. This shortage is exacerbated by the fact a very small portion of Toronto is zoned for high-rises still. As demand increases, so do sales and rental prices. This is the driving factor for many investors to choose condos as an investment. While Toronto is leading the condo appreciation, the suburbs are also benefitting from the trickle-down effect.

Should you engage a Realtor for Pre Construction? 

Since builders launch projects in many phases (VIP Agent Launch, Agent Launch, Public Launch), by the time the general public walks in the sales center door, you would get a limited pick of what’s left. 

A Realtor can get you a prime property plus additional perks like discount price for the parking spot, free assignment, closing costs capped, option to rent during occupancy, free window coverings etc. Realtors who have bought pre-construction can also help you choose the best floorplan within your budget. 

Realtors have access as well as information the general public doesn't. The sales reps at the sales centers for new condos are really looking out for the builder’s best interest, while an agent looks out for yours. 

There are many key factors that come into play when you invest in pre-construction condos:

• Leveraging

• Real estate appreciation

• Principal pay-down. Mortgage payments could be covered by renting the unit

• Passive Income. Steady income without selling your investment

• Long term financial security

Pre-Construction vs. Resale Condos

The obvious savings in the pre-construction market comes from buying a condo unit in a development that’s not built yet. But there’s so much more. When you buy a condo unit in the pre-construction phase you have more advantages including:

• First pricing, paying for the first and lowest price

• First appreciation, appreciation right from the beginning

• You choose units based on a first come first serve basis

• You get to choose the layout/floor plan, floor level and views that best fits your needs.

For investment purposes, choosing the best unit for you will maximize your return when you’re renting out your unit and when you ultimately sell it. In pre-construction, you get the lowest price available which means there’s no room for costly bidding wars. A common misconception about purchasing a pre-construction condo unit is that you won’t see a return right away. You actually get the highest capital appreciation and price growth directly after finalizing your purchase. If you’ve invested in an up-and-coming neighborhood, you are directly investing in an area where jobs will be created and people will be coming to live — which in turn, will generate more demand for the area.

Although you can still buy a resale condo and rent it out, resale condos don’t appreciate in value as much as pre-construction units and this is largely due to people wanting new as oppose to used, people will pay more for new, since they want modern finishes, the latest features and amenities, also the additional fees that come with managing an older home/unit. Additionally, maintenance fees are also higher with resale units because of the repairs that will be needed throughout the aging building.

Once the pre-construction condo unit is built and ready to lease it out, it will get more demand and higher rent compare to comparable resale rental units - like many other things brand new is always worth more than used-old.

Another advantage of purchasing a pre-construction unit is that you are buying a condo that will be paid back with future rental prices. When you buy a unit in resale, you’ll rent it out right away, which means that you’ll be covering your monthly carrying costs with today’s rental prices. In pre-construction, you pay today’s purchase market price, but you'll pay it back with future rental market prices. 

We’ve all heard that real estate is the safest investment in the world, but it’s also the most profitable. With real estate, you pay the down payment and your money grows based on the overall value of the property. This means you make percentage gains on a higher amount than you’ve actually invested, earning you more money!

Leverage refers to the borrowed capital you use to pay for your condo unit. When you buy a condo unit, you typically won’t have all of the money available for the purchase. This is why you get a mortgage from the bank.

Typically, you’ll pay 20% as a down payment and the bank will pay the remaining 80% — but the home will appreciate at 100% of its value. This means that the bank effectively finances your growing equity. Most mortgages are structured so that you’ll pay the bank back over the course of 25 years. It’s even better in the pre-construction market because you pay your down payment in stages instead of all at once. The stages often occur in 5% installments at 30 days, 60 days, and 90 days after signing with the final 5% being paid at occupancy. This gives you better flexibility and control over your finances - This leverage is the key to why condo investing can earn high returns on investments.

Real Estate Appreciation

Investments usually appreciate in value by percentage. If a $100 investment increases by 10%, it’s now worth $110, earning you $10. If a $1000 investment increases by 10%, it’s now worth $1100, earning you $100. Even though you’ve only paid a down payment of 10% on a condo unit’s value, it will still appreciate based on 100% of its worth. This means that if the value of your condo unit has risen by 10%, your return on investment will actually be 50% of what you’ve actually 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. In addition to essentially paying for your investment, you can strategically charge rent to create positive monthly cash flow.

This is especially advantageous when you’re investing in the pre-construction market because you have plenty of time to find a tenant for your unit. If you buy a resale condo unit, you’ll have to begin paying its 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.

Passive Income Opportunities

Putting your money into real estate is not a short term investment, and this is even truer in the pre-construction market. Investing in the stock market can give you solid immediate returns, but nothing can compete with the long term growth that you get when investing in real estate. Rental pricing will remain steady despite major shifts in the economy, so your rent will get paid despite any outside market fluctuations.

It’s best to calculate the monthly rent you’ll charge based on your mortgage payments and monthly carrying costs. This way, the tenant will pay down your mortgage, including interest and principal on your mortgage. You can also cover your monthly carrying costs and more, which results in positive cash flow month after month.

The best way to make a high Return On Investment (ROI) in the pre-construction market is by renting out your new unit once it’s complete. By renting out your unit, you can create Passive Income year after year.

Leverage

Typically, you’ll pay 20% as a down payment and the bank will pay the remaining 80% — but the home will appreciate at 100% of its value. This means that the bank effectively finances your growing equity. Most mortgages are structured so that you’ll pay the bank back over the course of 25 years. It’s even better in the pre-construction market because you pay your down payment in stages instead of all at once. The stages often occur in 5% installments at 30 days, 60 days, and 90 days after signing with the final 5% being paid at occupancy. This gives you better flexibility and control over your finances - This leverage is the key to why condo investing can earn high returns on investments.

Long Term Financial Security

It is generally recommended to buy pre-construction condos as early as possible in the process to secure the best unit and price available. Once the building is complete, you could lease it out to reap the maximum ROI.

Do Your Research

A single real estate investment can be worth much more than many investors’ entire stock portfolios. But before you invest in the pre-construction market, you should always do your own research. You can always contact us to get all the investment information you need. Talk to us so you can make an informed decision, because being well-informed will lead to better decisions and will ultimately give you the best and highest return on your investment.

Once the project is complete, you can lease out your new condo unit to cover your carrying costs, while also making a tidy profit. Leasing out your condo unit will create positive cash flow month after month while tenants pay down your mortgage. By strategically purchasing and renting out condos in sought-after urban locations, you can build your equity for long term returns.

Vertical Expansion is the Future

Even with the Greenbelt debacle, the future of housing and real estate development in the GTA region will continue to focus on increased population dentisity and vertical expansion. This marks a stark contrast to the development patterns over the past decades, where developers focused single family detached homes across vast areas of relatively cheap land. What this entails, both for urban landscape as well as future residents and homebuyers, is an inevitable increase in urban densification.

Investing in the pre-construction market will allow you to purchase a unit for the lowest rate possible which will ultimately help you receive a high return on investment when you decide that it is time to sell. Pre-Construction condos are one of the quickest ways to increase your cash flow while creating a nest egg for your future.