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What are the Advantages of Buying Pre-construction?

Why Buy Pre-Construction?

As Toronto condo prices continue to soar in value (currently 12% year over year), we are constantly asked, “should I buy pre-construction or resale“? What are the advantages of buying one versus the other? Speaking from personal experience, we have had great success investing in Toronto’s pre-construction condo market. In fact, over the last decade, we have partnered with hundreds of clients. We help them to achieve their financial goals with pre-construction in the Toronto real estate market.

What’s the typical profile of a pre-construction investor? Busy and hard-working professionals. These individuals own their principal residence. They have seen the Toronto real estate market continue to increase over the years. Meanwhile, RRSPs and other investments flatlined or showed erratic or anemic performance. This is why buying pre-construction is an excellent way for busy professionals to invest in a stable long-term investment vehicle that is relatively passive. It also serves as a way for first-time home buyers to get into the Toronto real estate market at a time where they may already be priced out. We have helped many first-time buyers get into the Toronto real estate market by leveraging the extended deposit structures and completion dates to save up over time. When it comes to buying or investing in pre-construction real estate, there are many advantages over buying resale or investing in different industries altogether.

5 Advantages of Buying Pre-Construction

There are many advantages to buying pre-construction. However, of these, here are the top five reasons you’ll want to consider making the investment.

1. An Extended Deposit Structure

When purchasing a new build condo, the deposits (between 15%- 20%) are typically spread out. This can extend over 18- to 24-months. Specifically, not having to put down 20% upfront allows investors and end users to save up. Or, in some cases, utilize a line of credit to even further spread out the payment deposits. During the 3- to 5-year time it takes for a build, other than paying the deposit structure, there is no mortgage obligation until closing. In fact, the mortgage kicks in only on closing. This means you own a pre-construction property but it will not show up on your credit bureau. And this allows you the flexibility of owning Toronto real estate without affecting your debt ratio or your ability to access debt from a lender during this period. For first-time buyers and investors alike, the extended deposit structure and time it takes from start to building completion allows purchasers to save up. Many of our first-time home buyers and investors see it as a forced saving/investment strategy. After all, it’s easier to save up when you know you have a condo to pay for.

2. Gentrifying is Your Best Bet

Buying pre-construction is like buying futures in the stock market. Essentially, you are buying at today’s prices with the belief that in the future, prices will rise. Historically, long-term prices of residential homes have always gone up. For this reason, you can improve your odds of appreciation by acquiring properties in highly gentrifying neighbourhoods. This is where major infrastructure or transit is scheduled to be built. Given that the property you are purchasing will not be available for 3-5 years, it makes sense to acquire a new home in an area that’s on the rise. These neighbourhoods will have a lower purchase entry point and higher potential to outperform the overall market.

3. Hands Off

While investing/owning is exciting and lucrative, owning real estate in Toronto can also be a very hands on experience. For this reason, many potential buyers and investors turn away from this opportunity. One of the greatest advantages to buying pre-construction is the first 3- to 5 years, during which the construction period is entirely passive. Once the building is complete, an investor can retain a qualified realtor to rent out their property. And, a realtor can even manage the property for a nominal monthly fee. With this in mind, any building maintenance issues in the first few years come under Tarion warranty. Specifically, all new construction homes in Ontario have full warranty up to 7 years. This type of warranty and protection to a resale purchaser may not be available or extend out as far a new build. As such, running a small condo investment portfolio would take minimal time or work hours.

You can read more about the Tarion warranty program: Tarion: If You’re Thinking About Buying Pre-Construction, You Need to Know About It

4. A More Civilized Process

Oftentimes, when purchasing resale, the most desirable condos sell in heated bidding wars. This is usually fraught with last minute decisions that are sometimes entirely based on emotion. In these types of scenarios, a competitive offer has to be a firm offer with no conditions to compete for a property. However, when buying pre-construction, you have what’s known as the 10-day cooling off period. During this time, you can review the purchase information with your lawyer, lender, realtor, and financial advisor. You’ll also want to use this time to do further due diligence on the builder and area. It is a far more measured process to evaluate an investment opportunity or future potential new home.

5. New is Better

When it comes to the resale condo market, renters and buyers get distracted by the new and shiny, and because of this, there is a willingness to pay a premium. However, with time, buildings become dated, maintenance fees start to rise and the Tarion Warranty program expires. At this point, the trajectory of a condo building’s appreciation begins to slow relative to the rest of the market. If you were to buy a condo today, in four years it ages and with this, gets closer to the end of its prime. Whereas if you purchase a new condo, in four years, you’ll have a brand new property. And, it’ll be in demand while hopefully having appreciated with or above the market during the construction period.

Buying Pre-Construction

In 2017, Toronto saw a record year in pre-construction condo sales. Moving into 2018, inventory constraints with no signs of abating continue to affect the resale market. More and more investors and home buyers are turning towards pre-construction as a safe, passive and lucrative way to acquire property in Toronto. Because not all opportunities are equal, it’s important to know your developer – some are far better than others! When looking to make a significant investment like buying pre-construction real estate in Toronto, you should have an expert realtor by your side. Partner with a real estate agent who has experience with pre-construction – one who will source out the right opportunities and guide you through the process. Having been through it many times both professionally and personally Fox Marin is always available for a consult.

Ready to invest in construction, but not sure where to start? First, read about the Top 12 Considerations Any Pre-Construction Buyer Should Know. Next, drop us a line – 416 322 5000. And from here? Leave the rest to us, knowing that you’re in good hands.

This article is written by Ralph Fox, Broker of Record and Managing Partner here at Fox Marin Associates. Ralph is a Torontonian native who recognized from an early age that the most successful people in life apply long-term thinking to their investments, relationships, and life goals. It’s this philosophy, along with his lifelong entrepreneurial drive and exceptional business instincts that help to establish Ralph as a top agent in the real estate market in downtown Toronto.