In my years as a real estate agent, I’ve heard every reason under the sun why people don’t like pre-construction.
From long waits to developer changes to investment questions, most of the reasons I’ve heard actually aren’t as much of a problem as you might think.
Here are the most common reasons I’ve heard, and my answer to those concerns.
My money is tied up for years, earning no returns! Wouldn’t stocks be better?
There are two pieces to this problem. First: this is a real, important concern. Pre-construction condos can take years to complete, and they often aren’t finished on time.
That being said, it doesn’t matter as much as you think it does.
Real estate functions entirely differently than stock investment, and so comparing is apples to oranges. In real estate, you borrow money from the bank to fund the investment. You do not pay for the full investment, the way you would with a stock, bond, or almost every other type of investment.
What that means is that you earn returns on an investment you only own about one-fifth of. You earn 5 times the returns than what you put down. This is in comparison to a stock, which you must buy outright at 100% and then earn returns on the whole unit.
That’s part one. Part two is that you actually put down very little money at the outset of buying pre-construction. You have less money tied up for less time than you think.
The timeline goes like this:
Initial signing, day 0: $5,000
Instalment one, day 30: 5%, $10,000
Instalment two, day 60: 5%, $15,000
Instalment three, day 90: 5%, $15,000
Final instalment and occupancy, day 1370: 5%, $15,000
While this varies by developer and project, deposit schedules are extremely common and you will, most likely, have one if you buy a pre-construction condo.
So yes, you put down money that isn’t getting to the hard work for you. But you’re not putting down a lot.
Condos take too long to build, what do I do in the interim?
I get it. Condos can take a long time - years - to build, and that can be frustrating in the short term.
It’s important to remember that your unit is earning returns even when it doesn’t exist. Sound strange? When you lock in a price of $300,000 with your developer and put in your 90-day $45,000 deposit, you’ve put in a deposit on an investment that will grow in value as it’s being built. If you wait three years, a conservative estimate is that it would be worth 5-10% more than what you purchased it for (if you purchased it for market value - that’s a whole other story!)
After three years, that’s actually a $30,000 appreciation on a $45,000 investment - or almost 20% per year!
Still, I’m not an advocate of buying pre-construction just for the resale value. There are other fees, costs, and hidden things that chip away at that small return that is, make no mistake, not guaranteed. So what do you instead?
You rent it out as soon as you can. Start covering those costs immediately, and you slowly own more of an appreciating asset while never putting more down than your initial investment.
Pre-construction fuels oversupply, which hurts the housing market long-term.
This is also a very real concern, but it’s misguided.
Condo sales significantly outpaced supply in 2016, according to Altus group, an independent real estate consulting firm based in Toronto.
In the first four months of 2016, 3,892 units were added to the market, and 6,229 units were sold.
As of April, there were less than 20,000 new condos available for sale across the entire GTA.
The problem that never happened with oversupply, which was the biggest real estate concern from 2012-2014, was a reduction in investability and the dearth of affordable housing in the GTA in general.****
With affordable housing at an all-time low, many Torontonians are turning to condos. This is reflected in the growing market for 2- and 3-bedroom condos, and the increased real estate action in the suburbs. Lots of Torontonians are looking for affordable housing, and so they’re buying condos or moving out of the city.
Condos also haven’t lost their potential for investment. This is a big deal. Even with concerns about overheating in the housing market, the steep price of real estate has forced many Torontonians to rent. More than fifty percent, in fact.
With this many renters, condo owners are choosing to rent out their units rather than offloading them. Since more owners aren’t selling, oversupply isn’t a concern.
Developers have a too much leeway to make changes I don’t want to my unit.
This definitely happens. Developers, like everyone in the business of business, exist to make money for their shareholders. They want to build a reasonable product efficiently and cost-effectively. Sometimes, that means some of your amenities, features, or even square footage might change during the construction process.
There’s not much you can do when this happens. That’s why you have to take extra care and do a lot of research when you’re picking a developer.
When you invest in a condo, you’re putting down a lot of money. You need to find out as much as possible before you do that - because, at the end of the day, its your money and your investment.
It’s something that I help my clients with a lot. I’ve been in the industry in Toronto for a long time, and during then I’ve seen both amazing, reputable, quality-focused developers… and some not so much.
Because of that, I recommend thoroughly researching both your builders and their projects. Then, and only then, should you start making decisions on price. The cost of your investment doesn’t matter if it’s not a good investment - choose your builders wisely!
If I can get the same thing - namely, a resale condo - for the same price, but without waiting three years, then shouldn’t I do that?
If you can get the exact same unit, for the same price, go for it!
But the thing about pre-construction condos is that the same unit is much cheaper when you buy in advance. Just like anything else. Developers want - and need - to sell units before the building has even begun construction in order to get funding for it. To incentivize buyers, they sell their earliest units for dirt cheap, and then increase the price as units sell.
Getting in first - on the ground floor - means you get the exact same product for much, much cheaper. You just have to wait (and in the meantime, your unit appreciates with the market).
Once your condo is built, you have to compete with your neighbours who are also renting their units for tenants. If you got your condo cheaper than them, that means you can rent for a cheaper fee. You’re more competitive, less likely to have vacancies, and have steadier income.
And that, my friends, is why pre-construction condos are the greatest.
If you have any questions, add them to the comments or meet me for a coffee! I’m always available, and I’d love to hear from you.