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Why Pre-Construction Condos Are The Best Investment
Investing in a Pre-Construction Condominium Unit
Investing in pre-construction condominiums is one of the surest ways to grow your money. When you invest in a pre-construction condominium unit, your investment increases in value from the first day you purchase the condo unit and will continue to appreciate until you decide to sell your unit.
This 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, it's suppose to go up and down - it will go up and down and this is where you're in complete control. 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 so many different reasons why investing in the pre-construction market, is the best financial decision you can make. In this article, we’ll go through the difference between investing in real estate versus 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!
Pre-Construction Condos vs. Other Investments
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.
In the stock market, any business in your portfolio can go bankrupt, causing you to lose all your money, but when you own condo, your portfolio isn’t going anywhere. If the market’s down, you can choose not to sell, and when the market is up you can sell to maximize your profits.
Purchasing a pre-construction condo requires more initial capital than investing in stocks, mutual funds or even Real Estate Investments Trusts (REITs), but when you purchase a tangible investment property, you get leverage over your money. This enables you to buy a more valuable investment vehicle and get a higher ROI (Return On Investment).
Another advantage to putting your money in pre-construction compared to other investment opportunities is that you can leverage limited funds for better returns. Investing in stocks or mutual funds only gives you a return based on the actual money you put down, but in real estate, you make the return on the entire value of your purchase, despite only paying an initial portion up front.
The difference between investment into condo versus investment into conventional financial products such as mutual funds, stocks, and RRSPs is that you have more leverage over your condo investments. In other words, the return on your mutual funds and stocks would depend almost completely on your principal, but real estate investments appreciate based on your property’s total value.
- Investment: $100K
- Investment: $100K
- Mortgage: $400K
- Condo Price: $500K
One of our favourite sayings is that you don’t make money when you sell your condo, you make it when you buy! That’s because you start making capital appreciation from the moment you finalize your purchase.
This is only the beginning of how you can make money. There are many key factors that come into play when you invest in pre-construction condos. Further into this article, you will learn more about each of these factors:
- Real estate appreciation
- Principal. Mortgage payments covered by your tenant
- Passive Income. Steady income without selling your investment
- Income that naturally keeps pace with inflation
- Long term financial security
- Tax benefits
- You are your own decision maker — you’ve got control!
Pre-Construction vs. Resale
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, but this couldn’t be more wrong! You get the highest capital appreciation and price growth directly after finalizing your purchase. If you’ve invested in an up-and-coming neighbourhood, 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 do to people wanting new as oppose to used, people will pay more for new, they want modern finishes, 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. Over the past ten years, rental rates have risen at an average annual rate of 4% and we expect that trend to continue. So while you’ve bought a unit for today’s prices you can charge rent based on the market 6-10 years from now, further increasing your positive cash flow.
The Advantages of Buying a Pre-Construction Condo
Leveraging - Make More With Less
We’ve all heard that real estate is the safest investment in the world, but it’s also the most profitable. With stocks and other investments, your growth is based on the total amount you actually invest, but 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
When you invest in the stock market, you’ll typically need to pay 100% of the value upfront, but thanks to leverage, that’s not the case in real estate investment.
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. Make sense?
This is the beauty of leverage. Even though you’ve only paid a down payment of 20% 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. You may be asking about the mortgage, but that’s where the next step comes in...
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.
The chart on the right gives an example of how to calculate the monthly rent a tenant should pay based on all of your expenses.
$Rent Per Year
(Monthly Rent $2800)
Steady Income Without Selling Your Investment - Passive Income Month After Month
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 of 20% to 35%, year after year, in four different ways:
- Capital Appreciation: roughly 4 to 7% annually
- Principle: Tenant pays down your mortgage
- Passive Income: Net Cash Flow: roughly 1-2% annually
Income That Naturally Keeps Pace With Inflation
Another major benefit to investing in real estate is that it’s protected against inflation. Rental prices will stay protected against dips in the market, and you can also strategically raise rents to keep pace with inflation. Remember, the value of your condo will increase with inflation too!
When you invest in real estate, you don’t have to sell your investment to make income!
Long Term Financial Security
We recommend that our clients buy pre-construction condos as early as possible to get the best unit and price possible and then wait for it to be built — which usually takes 5 to 7 years. Once the building is complete, you should lease it out for 5 to 7 years to reap the maximum ROI. We advise that you sell your unit once it’s 5 - 7 years old, because even though the condo will still appreciate in value, its appreciation rate tends to slow down at the 8 - 10 year mark.
The best part is that only 50% of capital gains are taxable in Canada!!!
Investing in real estate also comes with a lot of tax advantages. You can deduct a lot of costs from your taxes, including mortgage interest, property taxes, and unit depreciation. You can even use excess “losses” to reduce your other taxes. As a taxpayer, you’re allowed to claim the wear and tear of the property to defer your rental income. One of our favourite advantages to real estate investment is that once you do sell, you will only be taxed on 50% of the capital gains you earned on your property.
That means 50% of the capital gains gets taxed subject to the marginal tax rate for the respective tax brackets you are in BEFORE you add in the 50% capital gain.
You Are Your Own Decision Maker — You’ve Got Control!
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.
Real estate is a great investment because of its ability to generate significant income without having to sell your investment. Not only can real estate provide good income, but it's income that naturally keeps pace with inflation — more on that later!
Your Annual ROI can total in between 20% to 25% of your initial investment thanks to deposit structures and leveraging.
Future of Housing and Real Estate
Due to the Greenbelt and Places to Grow initiatives from back in 2005, the future of housing and real estate development in the GTA region will undoubtedly continue to focus on vertical, upward expansion. This marks a stark contrast to the development patterns over the past decades, where developers focused on erecting low rise buildings and 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 and thus, condos. Merely two years after the initiatives were laid out, sales of high rise buildings took over that of low rise buildings, marking the beginning of the heated condo market.
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.
So… Are you ready to make the best investment of your life? Click below to learn how you can start Building Your Future.
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