How Rental Rates Can Affect Your Pre-Construction Condo Investment

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During the onset of the COVID-19 pandemic, there were many uncertainties in the housing market and economy as a whole. Rental rates started to plummet, and condo sales began to decline due to a lack of competition.

However, based on a new Urbanation and CIBC Economics report, pre-construction investors whose newly constructed condo units came up for occupancy last year saw a higher appreciation of their property value than resale investors. Based on this report, the average pre-construction condo unit that sold for $415,175 three to five years ago was worth 40% more last year.—equating to an average of $595,614. While rental rates dropped by 13% last year because of the pandemic, pre-construction condo investors managed to bring in a positive cash flow or remain in a neutral position on their rental units compared to 80% of resale condo investors who saw a negative cash flow on their rental investments.

So, why is that?

Well, for many years, investors who have benefited from buying condos in the pre-construction phase had time for rental rates to grow and their property to appreciate before they even took occupancy.

In fact, many of the pre-construction condo units that closed in 2020 were sold more than three years ago before the rise in new condo prices in 2017. Because of this, pre-construction investors who bought condos three years ago purchased their property for a lot lower than current condo prices. This means that despite the fall in rental rates in 2020, pre-construction investors still saw a positive cash flow because the rental rates were still higher than their carrying costs. The same report noted that more than half of pre-construction condo investors were cash flow positive by up to $600 per month, while less than 15% were cash-flow negative by more than $400 a month.

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The 80% of resale investors that were cash-flow negative found themselves in that situation because they purchased an already-built condo unit at the current market value and had to lower their rental rate when the market dropped last year.

As the data shows, when you buy condo units in the pre-construction phase, you will not only see the value of your property increase over the three to five years it takes to build it, but you are also going to benefit from collecting future rent from your tenants. Once your property closes, the price of rent will likely increase, which means you are going to benefit from future rental rates and lower carrying costs because you purchased your unit years ago.

Pre-construction is a long-term investment, and condo investors need to envision future rental rates and higher appreciation when making this purchase. This constant appreciation in the condo market is what keeps investors buying. Even if there is a brief decline in the economy, as we saw from the pandemic, this report proves that despite the drop in rental rates, pre-construction investors still made more than their resale counterparts.

If you buy a pre-construction condo now, you can take advantage of future rental rates approximately three to five years down the line when the condo is built. Plus, tenants will gravitate more towards new, modern condo units than older buildings. Many new condo projects come with unique communal amenities, modern finishes and state-of-the-art smart technology, while older buildings do not have those same features.

As the economy starts to normalize again and we start to head towards more predictable market conditions, condo prices will only continue to increase at a similar rate as they did pre-pandemic. So, if you’re thinking about investing in a pre-construction condo, register with us today. One of our platinum agents will be happy to connect with you to give you more information about market stats and forecasts and can help you navigate through the process of investing in pre-construction project.