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Beginning as a Real Estate Investor
Thinking about investing in real estate but not sure where to begin? If done correctly, it will provide you with a steady stream of income and help you build long-term wealth. However, in order to become a real estate expert, you will need to become familiar with real estate's many complicated terms.
Just like any other industry, real estate is full of niche terminology that only experienced investors know. Understanding this jargon will help you accurately navigate the real estate market and make decisions that best suit your unique circumstances.
Here is a breakdown of some of the most common terms you should know before starting your investment journey.
What You'll Learn...
- Platinum Agent
- Platinum Access
- Deposit Structure
- Free Assignment
- Development Charges and Levies
- Real Estate Investing
- Leverage
- Appreciation
- Cash Flow
- Passive Income
- Return on Investment
- Agreement Of Purchase & Sale
- 10-Day Cooling Off Period
- Pre-Approval Letter
- Interim Occupancy & Interim Occupancy Fees
- Right To Lease During Interim Occupancy
- Title Insurance
- Tarion
- Pre-Construction Mortgage Agents and Lawyers
- Final Closing and Closing Costs
1
Platinum Agent
Platinum Agents, such as our agents at GTA-Homes, specialize in the pre-construction industry. Thanks to their strong relationships with developers, they are the first to receive details on future developments. This means that you, as their client, get your first pick of units at the lowest possible price.
What's more, while Platinum Agents work for the buyer, they are paid by the developer, meaning their services are completely free to investors.
2
Platinum Access
Platinum Access is the first opportunity for investors to buy pre-construction units. When developers first start selling their product, they offer units to their family and friends. They then turn to Platinum Agents to sell the majority of their units during the period called “Platinum Access.”
During this phase, Platinum Agents can get you first access to brochures, floor plans, incentives, promotions, and the best prices. Once the bulk of the units are sold, the sales open to the general public, and this is where other sales agents come in. They will only have access to pre-construction units after the Platinum Access phase is over.
By this time, most units had sold, and prices had increased. Clients who buy with Platinum Agents benefit from lower prices, and by the time the sales open to the public, their units will have already increased in value.
3
Deposit Structure
A deposit structure outlines the deposit payments (aka downpayment) pre-construction buyers make to the developer while their unit is under construction. These payments typically range between 15% to 20% of the final purchase price and demonstrate the buyer's intention to buy the unit upon completion. Unlike resale buyers, who are required to pay their deposit upfront as a down payment, pre-construction buyers benefit from spreading their deposit payments over time. Plus, developers often offer promotions that reduce the deposit to just 5% or 10% down or extend your deposits for up to two years.
4
Free Assignment
A free assignment clause allows you to sell your pre-construction unit before it is built. As there is no physical unit to sell, you are selling the "assignment," the contract to buy the unit once it is completed. Adding this clause to your contract is vital so that you are covered in case you lose your job or have a different emergency in the long years between when you first buy your unit and your final closing.
5
Development Charges and Levies
Development charges and levies are fees paid to municipalities anytime a new residential, commercial, institutional, or industrial development is built.
These fees go toward creating new infrastructure to accommodate the increased number of people who will be living and/or working there. They cover water supply services, electrical power services, transit services, and more.
Developers pay these charges to municipalities upfront and then transfer the fee to buyers upon final closing. To ensure you are not overpaying, try to find a condo project with an incentive called “Capped Development Charges.” This means the amount you pay at the final closing is agreed on beforehand and cannot be increased.
The benefit of working with Platinum Agents is that they work for you which means they have your best interest in mind. They will ensure that your development charges are capped so you know what you can expect to pay at final closing.
Top Real Estate Terms to Know (Part 1)
Key Points
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6
Real Estate Investing
Real estate investing is one of the most reliable strategies to make your money grow. Investors profit by renting their property and selling it once it has appreciated.
People will always need a place to live, meaning that real estate will always hold its value, unlike stocks which can crash. Additionally, real estate is an excellent inflation buffer. As the cost of living increases, so does the price of rent.
7
Leverage
Leverage is an investment strategy that uses borrowed funds to increase an investment's returns. When you buy a property, you typically don't immediately pay the total price of the home. Instead, you put down a deposit and receive a mortgage for the remaining balance. While you have only paid 5-20% of the home's costs, the property will appreciate according to the total cost of the home, meaning that the bank is financing your equity growth.
8
Appreciation
Appreciation refers to the rise in price of an asset over time. This increase can be caused by a variety of factors, including an uptick in demand, a decrease in supply, or a shift in interest rates. Canadian real estate has been an appreciating asset for decades thanks to increasing immigration rates, keeping demand on the rise.
9
Cash Flow
Cash flow represents the amount of money you earn minus the amount you spend. If your income is greater than your expenses, your cash flow is positive. If the opposite is the case, your cash flow is negative.
As an investor, you can calculate your cash flow by subtracting your expenses, including your mortgage, taxes, and maintenance fees, from the rent your tenants pay and the money you earn by selling your property.
10
Passive Income
Passive income is a form of profit which, unlike a 9-5 job, you do not have to actively work for. These profit generating opportunities take effort, time and money to initially set up, but eventually provide stable payments that do not require a great deal of your attention. This makes passive income streams an excellent addition to your regular salary and a great way to save money. One of the most reliable forms of passive income is rental payments.
11
Return on Investment
Return on investment or ROI, is a popular method for determining how profitable an investment is. ROI is also shown as a percentage or ratio and is calculated by dividing your net returns by the cost of the investment and multiplying that number by 100.
ROIs are a great way to compare different investments and investment strategies. However, they do not take into account the passage of time and, therefore do not include all the opportunity costs of an investment as a result.
Top Real Estate Terms to Know (Part 2)
Key Points
12
Agreement Of Purchase & Sale (APS)
An Agreement of Purchase and Sale, or APS, is a legal contract between the buyer and the seller used to sell a property. It outlines the terms and conditions of the sale and lists each party's obligations.
13
10-Day Cooling Off Period
The 10-Day Cooling Off Period refers to the ten days you receive as a pre-construction buyer to decide if you are satisfied with your purchase. This period starts when you sign the Agreement of Purchase and Sale allows you to review your contract with your lawyer. During this time, your unit is kept on hold for you, and you can cancel at any time without penalty.
14
Pre-Approval Letter
A pre-approval letter is a document from your lender that states the exact amount that they are willing to lend you toward buying a property. This amount is based on a variety of verified financial documents, including an employment letter, pay stubs, bank statements, and more. You will also need to fill out a mortgage application and do a credit check.
Getting pre-approved shows sellers that you are a serious buyer and gives you a budget to work within.
15
Interim Occupancy & Interim Occupancy Fees
Interim Occupancy is a stage in the pre-construction buying process in which the City has designated that your unit is safe to live in, but the building hasn't been completed and officially registered. This means that you are legally allowed to move in, but the developer can't give you the title to your unit yet.
This process allows you to start using your property as soon as it is ready rather than waiting for all the other units and common areas to be completed. Suites on lower floors are usually built earlier, giving them an earlier occupancy date.
Interim Occupancy typically lasts between two months to two years. During this time, you will have to pay Interim Occupancy Fees, regardless of whether or not you move into the home.
These payments will be roughly equivalent to your future monthly carrying cost and are calculated based on an estimate of taxes, maintenance fees, and a monthly interest on the total sum you still owe for the home.
16
Right To Lease During Interim Occupancy
Before you can lease your unit during the interim occupancy phase, you will need to receive permission from your developer. This is called the right to lease during interim occupancy. Depending on the terms of your Agreement of Purchase and Sale, this consent may need to be given in writing.
17
Title Insurance
Title insurance protects buyers and lenders from financial loss caused by an issue with the title of a home. Every time you purchase a property, its title, a legal document that confirms you own the property, gets transferred to you.
This title should be "clear," meaning that you are the new undisputed owner, and there are no unpaid loans secured against the property. Title insurance can protect you if this isn't the case. It can cover back taxes associated with the home, liens, conflicting wills, title fraud, and more. You can buy title insurance through an insurance agent, a title insurance company, or your lawyer. It is usually a one-time fee that covers all past issues.
18
Tarion
Tarion is a not-for-profit consumer protection organization created by the Ontario government to protect new home buyers and owners. In Ontario, all pre-construction homes must come with a warranty from the builder by law. Tarion makes sure all home buyers receive the coverage they are entitled to under their builder's warranty.
They teach new home buyers and owners about their rights, investigate warranty claims, and resolve warranty disputes. The Tarion New Home Warranty provides financial protection before you take possession and protects you against construction issues after you take possession for up to seven years.
19
Pre-Construction Mortgage Agents and Lawyers
Pre-Construction mortgage agents can help you get a mortgage approval that will last until your pre-construction unit is completed. Most mortgage approvals only last between 60-120 days, which is unfortunately too short for pre-construction purchases as developments take several years to be built, and developers require you to be pre-approved until final closing.
Your pre-construction agent or broker can provide you with a Mortgage Pre-Approval (MPA) or Comfort Letter, depending on the requirements of the developer.
A Mortgage Pre-Approval is a full approval that remains in effect until your occupancy date, while a Comfort Letter is a document from your bank that verifies you will be able to cover the total purchase price and any additional details your developer requires.
A pre-construction lawyer focuses on pre-construction law and can defend your interests during one of the biggest purchases of your investment career. They will handle negotiations, ensure your contract abides by the law, explain its terms, and make adjustments as needed.
If you are buying a pre-construction unit, it is vital to get an attorney who knows the ins and outs of the pre-construction market, as it is vastly different from the resale market. Make sure they are well-versed in the Condominium Act, understand the 10-day Cooling Off period, and can help you receive capped development charges and levies.
20
Final Closing and Closing Costs
The Final Closing phase occurs after the Interim Occupancy stage, once the city has completed its final inspection and the building has been officially registered. Your lawyer will contact you shortly before your final closing date to go over your “Statement of Adjustment,” which outlines the Closing Costs you will have to pay before the property gets transferred to you.
These fees are usually 8 to 10% of the purchase price and can include recalculations on property tax payments and condominium fees. Your "Statement of Adjustment" will additionally include a "Trust Ledger," which specifics how the money will move developer's account on the closing day and how much money you will need for the closing process.
Closing Costs are typically paid using a bank draft or certified check that encompasses all remaining fees, including maintenance fees, reserve fund, property taxes, development charges and levies, buyer's legal fees, land transfer taxes, and miscellaneous costs.
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