Why Should I Work With A Pre-Conatruction Condo Agent
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Working with a real estate broker who understands pre-construction condos and the pre-con market is the number one step any buyer can take. This is true even for a seasoned investor, but especially true for a first time home buyer. You need to have someone in your corner that represents your best interests.
Did you know the developer pays any and all realtor fees associated with your pre-construction condo purchase? It doesn’t cost you anything – $0.00 – to have a professional in your corner. Working with a seasoned broker who has financial expertise can ensure you don’t get caught in a bad purchase with a bad development that’s not going to make you any money.
A seasoned pre-construction broker will know about assignment clauses, deposit structures, levy caps – all critical elements that go far beyond picking finishes and signing on the dotted line.
If you’re thinking about pre-construction but don’t know where to start or how it can work for you, let us help.
Condo Deposit - Where can I get the Money?
Many first-time pre-construction buyers face a similar challenge – saving up the deposit that is required to make a purchase. Although you don’t need the money all at once, you will need between 10% and 20% of the purchase price, that is usually spread out over 5% increments.
Some of the best ways to get your deposit money are through:
- A Line of credit: securing a line of credit will give you the freedom to purchase while making small monthly payments at a relatively low interest rate.
- The bank of mom and dad: asking mom and dad for help is sometimes an option. How about a graduation present of helping you purchase your first condo? Perhaps even a wedding gift.
- Savings: have you been saving for a big purchase? No other investment pays back more than an investment in real estate.
- Poor performing stocks: if you’re sick of watching your stocks do nothing maybe it’s time to reallocate some of those funds into an investment that will show you a substantial return in just a couple of years.
- Leverage your current home equity: if you’re already living in your personally-owned home, it’s worth looking into using some of that built-up equity towards expanding your real estate portfolio.
- A combination of options: think a few of these can work? Look into all of them and combine efforts!
Savings + bank of mom and dad = pre-con deposit.
How do I know what Building to Buy In?
Another challenge facing today’s saturated pre-construction condo market is sorting through the success-factors that make a good project. As a buyer, it’s hard to know what to watch out for, and the numerous things that make a good project a worthwhile investment.
- Work with an agent that can crunch the numbers: look for a pre-construction broker who has a solid financial background who can project your profitability and forecast your return on investment.
- Know the developer history: developer reputation has become a critical factor in projecting the success of a project, and therefore, your profit. Some developers have a tarnished history of bad buildings, project cancellations or poor timelines for project completion dates.
A good broker will have relationships with good developers and know who the bad ones are in order to steer you in the right direction. - Neighbourhood Trends: knowledge of Toronto neighbourhoods is a must when examining the return on pre-construction condo investments. Trends predict success rates and profitability. They also determine if the current selling rate is worth your dollars, or if the pre-construction project is already selling above predicted future market rates.
My Pre-Construction Condo is Complete - Now What?
Once your suite is near completion, it’s time to decide what to do next. There are numerous options to review and getting the advice of your broker can help you make a confident decision.
- Move in as primary residence: if you’ve purchased the condo with the intent of moving it, it’s now time to confirm your mortgage and proceed like any principal residence. If it’s your first purchase, your realtor should be able to outline the rebates you qualify for ($$$).
- Become a landlord: if this is an invest and hold purchase, you have the option of becoming a landlord. There are many benefits to this option – the biggest one being your tenants paying off your mortgage while your equity and value increase month-by-month.
- Sell it: if selling the unit for a profit without securing a mortgage is your #1 strategy, you’ll want your Real Estate broker to educate you on assignment sales and the upside to selling before occupancy. By doing so, you’ll free up the cash to be made, recoup your deposit and be able to move on to the next opportunity.
Be sure to work with an agent that has proven experience with assignment sales. They are overwhelming to most, but those who know how they work can create a winning strategy for you and show an exceptional return on your deposit investment.
THE CONDO MARKET IN TORONTO IN 2020
Recent demand for condo rentals in Toronto has been exceptionally high. Vacancy rates are low, rent is on the rise, and competition between buyers is intense. In response, many investors have been purchasing units as rental properties.
For forward-looking investors, the condo market is just as attractive for its stability. The average long-term appreciation rate of real estate in Toronto is a respectable 5-6 per cent. While past performance isn’t always an accurate predictor of future performance, it’s fair to say that purchasing property in the city has historically been a good investment.
In terms of growth potential, the GTA’s population is expected to increase to 2.8 million by 2041. The number of people living and working in Toronto grows every day, and these new residents require housing. For investors, that means a larger pool of potential tenants in a market where demand is already high.
DOING THE MATH ON YOUR CONDO INVESTMENT
Of course, it’s important to assess each investment opportunity individually. Running the numbers is crucial and one of the most important considerations is cash flow.
In the most simplified terms, your cash flow is the revenue you’ll generate from your condo, minus your expenses. If you receive more than enough money to cover costs like taxes, condo fees, and ongoing maintenance, you’ll have positive cash flow. A condo that doesn’t provide positive cash flow isn’t necessarily a bad investment, but knowing the difference will help you make an informed purchase decision.
Start by determining the potential revenue you expect to receive from rent. Many factors will determine the sum you should charge tenants—from the rents in comparable buildings in the neighborhood to the features and amenities your unit offers, and the condo fees associated with the building.
You’ll also need to estimate expenses. In addition to regularly-occurring costs, you should factor in those that may come up from time to time. Special assessments—which are typically levied when a building repair can’t be covered by a condo board’s reserve fund—are one example.
If you plan to buy with cash, you can find the rate of return on a property by determining its capitalization rate (cap rate). To calculate it, you would divide your net operating income—the revenue from the property minus its operating expenses—by your purchase price. In general, higher cap rates are better. Four per cent is considered a decent rate in Toronto.
Your cap rate won’t accurately reflect your return if you obtain mortgage financing. Return on investment (ROI) is a similar metric that takes financing into account, but you’ll have to factor in your monthly mortgage payments to find it.
WHAT TO LOOK FOR IN A CONDO IN 2020
Before you get into the financials, you should know what a good investment condo looks like. First and foremost, if you’re buying a condo purely as a rental property, you need to consider your target market. For example, if you determine that your ideal market is luxury buyers, look out for high-end finishes and upscale building amenities.
Location is another important factor. Is the building you’re looking at in a Toronto desirable neighborhood? Does it offer easy access to transit? Are there shopping districts and other conveniences nearby? Answering these questions can help you make a smart investment.
Size also matters, since smaller units tend to rent for more per square foot. On the other hand, larger condos are increasingly hard to find, and many Toronto families are looking for them. Your real estate agent can help you identify an appropriate target market and find properties that align with it.
THE BOTTOM LINE
Is buying a condo a good investment? For Torontonians who invest wisely, it certainly can be. There’s no one-size-fits-all approach—it all depends on your goals, your financial situation, and your target buyers. Are you ready to learn whether buying an investment condo is right for you?
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