Did you know that each year Toronto welcomes 100,000 to 150,000 immigrants? Did you know that we need about 50,000 new homes each year to welcome the new comers who also need shelter and a place to call home? Did you know that we need about 100,000 new construction projects in the Greater Toronto Area to simply satisfy the demand for newcomers? Did you know that the lack of supply and huge demand in housing is constantly driving up the rentals market in the GTA?
These are just a few facts for you to think about when planning your next real estate investment opportunity. Investing in pre-construction condo projects has been one of the more lucrative investments to many real estate investors in the GTA over the last couple of decades. In this post, I would like to examine questions“why”, “what” and the “how to” so you are able to make an educated decision with confidence in your next pre-construction condo of choice:
Why a pre-construction condo?
1.Great long term return on investment
Managing condominiums is a passive form of investing. This allows you to purchase and make significant profit on brand new condos (buy at a discount and sell at a premium). Make sure you pick the pre-construction projects that will help maximize your returns. Condos are more affordable and have been holding their value better during the market and economic downturns.
Condo Fees in new buildings are usually quite low.That is partly because the fees are estimated years in advance before the condo is built, and partly because they developers rarely know the actual costs of running the building.
3. Build up your equity
You don’t need a mortgage during the construction process, while you are building your equity. For example, to purchase a condominium at $600,000, you simply need to invest $120,000 (20%). It means that for every dollar that you put towards the new condominium, the developer is putting in $8. You essentially have an 80% interest free loan from the developer for the duration of construction period.
What to consider before buying a pre-construction condo
From the day you purchase your unit and the date you take possession, a good amount of time will pass. In fact, expect to wait 2 to 4 years until your condo is completed with a good chance of further delays. If you need to sell the deed to your property before your condo has been completed for any reason, you may have the option of doing so on assignment, given the developer’s approval.
2. Condo fees
Maintenance fees for brand new units typically start out lower than those you would pay on a resale condo. That being said, there’s a good chance that the fees will increase during your first couple of years of ownership
Deposits on pre-construction units range from 15-20% although this could be as low as 5% as special incentive in some cases. Here is what your payment structure would most likely look like:
• At signing: anywhere from $3,000 to $20,000+
• The remainder of 5% downpayment: to be paid within 30 days
• A further 5%: due somewhere between 90-120 days
• Another 5%: between 270-365 days • The final 5% on the interim occupancy date
You must pay HST on new units. Fortunately, in most cases, you will receive a full or partial rebate. The rules and requirements differ depending on whether you and/or one of your immediate relatives will be theend user of the unit, or whether you’ll be renting it out. Be sure you get all of the facts before making a purchase by talking to your real estate lawyer and accountant.
Getting early access to a new development may have big benefits including lower prices, developer incentives and more choice of floor plans. Remaining inventory can also come with some additional advantages including an extended deposit period, cash back on final closing, waived assignment fees, or free parking.
Spectacular views can be a major selling point for buyers. The unit you choose should offer more than a breathtaking view. Unless a unit is directly facing the lake or a park, keep in mind your view could be obstructed by a future development.
How To Purchase?
Your realtor’s expertise starts from the time she/he assists you with the right project, location, price point, floor plan, exposure and view and the right terms and conditions all aligned with your ultimate investment strategy.
2. Floor plans
When you find the right development, your realtor will assist you in finding the best available floor plans. You will look at factors such as square footage and its potential profitability while matching your preferences.
3. Sign your agreement
Once you’ve found the ideal unit, it’s time to sign your agreement and seal the deal. Make sure you have all the required documents with you at the time of signing.
4. Cooling-off period
In Ontario, you have 10 calendar days to reconsider the purchase of a new condo known as a cooling off period. During this period, get your real estate lawyer to review your agreement.If you change your mind for any reason during the 10-day cooling off period, you can back out of the contract and have your first deposit returned without any deduction or penalty.
Obtaining mortgage pre-approval is one of the crucial steps to condo ownership. Since your pre-construction development won’t be registered yet, this process will be different than the purchase of a resale unit.
Around a year before your unit is completed, you will have the chance to choose the finishes that match your tastes and design preferences.
7. Interim occupancy
When the condo is built and ready to be moved into, there is a period of ‘interim occupancy’,where you can take possession and/or move into the unit. You may be able to rent out your unit subject to the developer’s approval. During this period, you do not yet own the condo; you simply pay the builder an amount roughly equal to what their mortgage payment + condo fees + taxes will equal. No land transfer nor mortgage have yet taken place.
8. Condo Registration
Once a building has passed all the city inspections and gone through all the processes to become a legal entity, the condominium is officially registered. During this registration period, condo ownership is transferred to you and mortgages come into effect. You officially become the owner. It usually happens 4-8 months after people begin to move in after the interim occupancy period.
9. Builder Closing Costs
When the unit is officially registered and you close on the purchase, you’ll be responsible for all sorts of closing costs that don’t apply to resale units. These ‘builder adjustments’ apply to all new construction projects and include development and education costs, HST on appliances and utility connections fees. If you’re looking at taking over someone else’s contract via an assignment, make sure to check if the original purchaser capped the amount of these costs when they originally negotiated the unit.
10. Reserve Fund
When you buy pre-construction condo, you’ll need to contribute 2 months condo fees to the condo’s reserve fund (the emergency fund). This usually happens at the time of closing.
Unlike re-sale condominiums, new condos are subject to HST. If you’re an end-user living in the unit yourself, you’ll likely qualify for an HST rebate and most builder prices assume you are, and so this rebate is already factored in. If you’re an investor, there is a different rebate and you’re only eligible if you rent the condo out for at least a year and prove it. If not, you may have to pay thousands of dollars in HST upon closing. Make sure to get legal advice about whether you qualify for the HST rebate before you buy a condo.
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With love & gratitude