Incentives, when it comes to condo sales, are all about marketing. They're offered by builders and developers to real estate agents and their clients to make a unit purchase (or make bulk purchasing) more attractive.
Incentives: a thing that encourages someone to do (or buy) something.
If you're a condo investor, incentives can be tricky. Some are absolutely necessary - if they're not offered, negotiate for them! And others are less necessary, and don't impact the investment value. I've boiled down the key incentives that I always want for my investors - and myself.
But first, the nitty-gritty: understanding the investment itself. Pre-construction condos are a very specific investment type that require thorough and careful financial evaluation in order to make a smart purchase. Not every project is a good place to put your money. And a bad project with good incentives probably still isn't a good place to put your money.
The basic premise of pre-construction condo investment is leverage. We buy an unbuilt condo, and we set up a mortgage to pay it down over time. But, ultimately, we only actually pay for the deposit. The rest, if we've done our calculations correctly, is paid for by a tenant who lives in the unit. They pay for 80% of our investment and over time, we reap the equity.
Things like fees and out-of-pocket expenses eat into our investment funds. If you have $50,000 saved, that could be a 20% down payment of a $250,000 condo.
If out-of-pocket fees and costs (for example, development levies) are $10,000, then the savings we can use for the investment are actually only $40,000... which now means we can only afford a purchase of $200,000. Less equity, less reward. So a $10,000 out-of-pocket cost has the investment ramifications of about five times its amount. It's a big deal.
Good investment incentives cut and limit your fees, which is great for two reasons: first, you won't be saddled with surprise costs that would change your calculations - your investment will cost as much as it should, and you can count on that number.
Second, it means you can take that fee money and put it into the deposit, meaning you’ll have more buying power for actual price of the condo (and ultimately, more equity). More choice = better choice! Still with me?
Next, I've outlined some common incentives and which ones are super important (or not).
Development Levy Caps
Builders pay development levies when a city issues them their building permit. This funds all of the infrastructure that the municipality has to provide to support that development - roads, transit, water, fire and police facilities, even libraries and parks. This is how municipalities support growth; infrastructure costs of building aren’t saddled by the current residents and businesses.
Developers tack this infrastructure cost onto the price tag of their building. Each unit now carries a development charge, which add up to the entire development charge paid to the city.
The catch is that there's no limit. And the number is constantly changing - in 2015, a bylaw in Toronto added a $1,000-per-unit charge to cover the cost of the Scarborough subway extension. On top of all of the other costs.
You can't defer or mortgage these costs, and so they eat into your purchasing power - by as much as $20,000. Ensuring that development charges are capped - or covered by the developer! - is a mandatory incentive for me. It's less of an incentive and more of a guarantee that I won't be saddled with a massive cost once the development is built.
Important note: sometimes, development levies are worded differently. The contract might say that present charges are capped, but future charges aren’t. That can still drive your cost up.
Free assignment is the freedom to sell your pre-construction unit before the condo is finished.
It is essentially the ability to sign away the right to the condo. Free assignment was almost unheard of five years ago - the price could be up to five grand to re-assign your unit.
In the last few years, that price has come way down, but as a common incentive - most developers offer the incentive of free or cheap (about $500) assignment.
Assignment is your exit strategy. If the worst happens, then you don't want to be paying to offload the condo. So free assignment is key, but it's also common.
Rent before Occupancy
This is an incentive that end-users don't need or care about, but it's crucial for investors. With pre-construction condos, there’s a period called interim occupancy. When the building isn’t completely finished - maybe the lobby isn’t done, the landscaping is non-existent, or the elevators aren’t running - but you'll be allowed to move into your unit, and pay "phantom rent". Since investors won't be occupying, they'll still have to pay for carrying costs without being able to rent it out. Taxes, hydro, interest… And it can last for months. Often just one or two, but sometimes up to a year.
Builders don’t like allowing buyers to rent out their units before occupancy for self-protection. If the buyer can’t pay their last instalment, or anything else goes wrong, then they’re stuck with a unit that has a tenant in it. With Ontario's tenant laws, it can be very difficult to evict a tenant.
If you can get approval to rent before occupancy, go for it. It means you can start covering those carrying costs sooner, and not have to pay those interim costs for long.
Discounted Purchase Price
Everybody knows what a discount is. Sometimes developers offer ten or twenty thousand dollars off the purchase price as an incentive. Sounds great - you’re saving twenty thousand dollars, right?
But since out-of pocket costs have an impact on your investment of five times their amount (see above!), a discounted purchase price isn't as great as an incentive as it sounds. Think about it this way: if you knock $10,000 of the purchase price, that’s only taking $2,000 off your deposit. Because the rest gets paid by the tenant through the mortgage.
If you look at something like maintenance fees which, at $300 per month, will cost you $3,600 a year. Out-of-pocket. So an incentive like capped or paid-for-a-year maintenance fees are actually more beneficial to investors than a discounted purchase price.
These are tough. Many feature incentives require individual analysis. Something like bonus square footage from outdoor space, or specific unit or floor plan choice are very, very important. But be warned: blueprints always look great on paper. Once a potential tenant walks into the space, they'll be able to see that the couch is actually in the kitchen, and the layout is awkward. Whoops! They're going to rent someone else's unit.
Other features, like marble countertops, hardwood throughout or rainfall showerheads are less important to your tenants - and will likely not impact your rental price.
That’s a case-by-case issue. Which is where my value is. Investors need to be able to go over the numbers, and the bottom line is that making a good investment comes from sound financial planning. I make sure I negotiate the best investment incentives with developers, because that's what is valuable for my clients and for myself.