With the country amidst a housing shortage, it can be an uncertain time for those looking to buy a home. The average price of homes has skyrocketed within the last ten years, and Canadians are worried if they'll be able to afford a home one day. However, investing in real estate can and has always been one of the safest investments you make.
When looking to buy a condominium, every buyer and investor alike has been faced with the difficult decision of choosing between a pre-construction condo or a resale condo. Although we can't tell you what to choose, we can inform you of the pros and cons of the two. That way, when it's time for you to purchase a condo, you will be well prepared and confident in your final decision.
Buying a condo is an excellent investment opportunity for novice and experienced investors. There are many advantages to investing in a condo, and you can rest assured that real estate trends will always project upwards. The real estate market can be volatile; it's supposed to go up and down, and this is where you're in complete control. When the market is down which eventually does go down, this is the time to invest or you can choose to hold onto your property, and when the market is at its peak, you can sell and make a high return on your investment (ROI). This is the best thing about investing in real estate, it's that it's tangible, you hold it, and you have control of when to buy or sell.
You may ask yourself: What is the difference between pre-construction and resale?
There is no one answer, but we have compiled and broken down the key differences between the two.
- Difference by Definition
- Closing Dates
- Renting Options
- Location Matters
Difference by Definition
Understanding what pre-construction and resale mean is essential when deciding between the two options.
By definition, pre-construction means the condo has yet to be constructed – it is not a tangible asset that can be lived in or rented right away. Pre-construction also means that you’re the first purchaser buying at the lowest price, making the first and highest profit. When you invest in pre-construction, you are investing for the future, which means you are looking toward future appreciation, future rental rates, future growth and more. Additionally, when you purchase pre-construction, you buy the unit from the developer. Buying new pre-construction allows investors to avoid the process of visiting individual resale condos in person and conducting back-and-forth cumbersome offers.
On the other hand, when you purchase a resale condo, you purchase it from the owner. This unit has already been lived in, and, the original owner that purchased it in the pre-construction phase has already made the highest appreciation from their investment. When buying a resale condo, your transaction is through the representation of a licensed real estate agent and requires a professional property inspection. Additionally, you can anticipate negotiating or participating in bidding wars with resale.
When looking at the main differences between the two, new versus used for anything is always more valuable as people want brand new goods as opposed to used. So, not only will you receive a brand-new unit when you buy pre-construction, but you are also purchasing at the lowest price while receiving higher rent and making the highest return on your investment.
The Closing Date
The Closing Date is a phase during the purchasing process when you are given ownership and the title to your new home. Whether you purchase a pre-construction or a resale condo, the closing dates remain; it's just a matter of when.
When you purchase a pre-construction condominium, your closing date occurs years down the line and consists of two phases: The Interim Occupancy phase and the Final Closing phase. Because these phases occur a few years after you sign your Agreement of Purchase and Sale, it gives you time to save money and acquire a mortgage – which is required once you reach the Final Closing Phase.
When you buy resale, you can reach your Closing Date in as little as a few weeks and must pay the down payment immediately. Not only that, but you must also acquire your mortgage right away – this can be difficult for those who are not financially prepared.
Investors who need more time acquiring a down payment and a mortgage might choose pre-construction over a resale. Developers may also offer an extended deposit structure as an incentive that allows the down payment to be paid over several years. Usually, when you buy a condo unit in the pre-construction phase, you will typically put down 15% within 15 to 18 months of signing the Agreement of Purchase and Sale and the final 5% at occupancy, giving you more time to prepare financially. However, with extended deposit structures, developers will extend your payment schedule to allow you to pay off your deposit within 18 to 24 months after signing the agreement. This gives you more time to save money and slowly pay off your deposit.
As with any investment, you face risks – in pre-con, you can face delays or cancellations, which can result in wasted time. The good news is that you can avoid these adversaries by doing your due diligence in finding a trusted and esteemed developer. Additionally, by working with a Platinum Agent specializing in pre-construction, you can rest assured that they will help you find the right unit by a reputable developer.
For many homebuyers, the objective of investing in real estate is to attain a passive income. However, the ability to rent your condo is not the same between pre-construction and resale.
As mentioned before, you won't be able to rent your property until you reach the Interim Occupancy phase. Before that, you cannot rent your property as it is neither a tangible asset nor deemed safe to live in by the municipality. However, once you reach Interim Occupancy, you can lease your property before Final Closing as long as the developer gives permission and you have the '"Right to Lease During Occupancy" clause in your Agreement of Purchase and Sale.
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. Pre-construction properties require you to estimate your rental income off-price forecasts several years later. The upside is that your condo will continue appreciating during this waiting period until construction is complete.
With resale, the condo can be available to the investor within a matter of months – after signing the Agreement of Purchase and Sale. Unlike pre-con, those who buy resale properties can base their prices on the current rental rates in their market. This option benefits investors prepared to start renting and making a passive income immediately.
The location of your property is important all across the board. Researching your property's location is extremely important whether you consider pre-con or resale. But once again, the two options differ significantly.
Purchasing a pre-construction condo requires much more research. New builds are generally placed in areas that are not fully developed or in developed regions that will continue to grow over time. Choosing a location in an upcoming neighbourhood allows you to purchase your condo at a more affordable price, where you will see significant appreciation as the community flourishes. The goal is to invest in a neighbourhood that is set to grow in housing, employment and population.
In resale, you are giving up many years in which you could see your property increase in value. The reason is that the neighbourhood you are investing in is already established, and there will not be a significant change in growth over the next couple of years. However, it allows you to choose a neighbourhood with a desirable reputation.
When deciding between a pre-construction condo or resale, you also have to consider the additional costs associated with each.
With pre-construction, you may avoid high maintenance fees, which can be more expensive in resale condos because the amenities and common elements are older. However, with pre-construction, you are required to pay final closing costs; these can include land transfer tax, property tax, and levies, including development charges, park levies and the remainder of your down payment.
With resale condos, closing costs will always be less than pre-construction closing costs but additional fees come with managing older units. Plus, maintenance fees are higher with resale units because of the repairs needed throughout the aging building. For this reason, resale condos don't appreciate as much compared to pre-construction units as people want new instead of used. Ultimately, you may pay more for repairs and renovations as renters desire modern finishes and the latest features and amenities.
The Future is Bright for Investors
At the Federal and Provincial levels of government, the future of the real estate market is to continue growing upwards. Although we used to see real estate develop horizontally, initiatives from the Places to Grow Act focus on vertical development within the Greater Golden Horseshoe. This means the focus has shifted from building low-rise houses to mixed-used condominiums. In other words, condos are the future. Plus, with the rise of immigration and population growth, and affordability issues condominiums are better set up to house the increasing population in areas surrounded by transit and employment.
Investing in the pre-construction market puts you ahead of the game by allowing you to purchase a unit for the lowest rate possible with a high return on investment. Of course, like any investment, it has its risks, but the rewards are what make it worth investing.
If you want to learn more about investing in a condo, register with us today!