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Investing in Pre-Construction Condos: What to Look For

Whether you’re considering investing in a condo as an end-user or for rental/resale profits, buying a pre-construction unit is an ideal way to maximize the return on your investment. Getting in on the investment early means you can choose from the best units (higher floors, better views, best layouts). Plus, the earlier you make your purchase, the better the price and incentives you’ll be offered.

What are the factors that make a pre-construction condo a good investment? Read on for tips on what to look for:

LOCATION

Proximity to public transit is a proven factor in determining increasing density and wealth in any given neighbourhood. Plus, if you intend to occupy the unit yourself, you’ll have better access to transit and potentially shorter commute times to work, school, around the city, etc. Additionally, with Metrolinx’s $50-billion transportation infrastructure project, more and more of Toronto will have easier access to public transit. The first wave of the project is currently underway via the Eglinton Crosstown, which will be a 19km corridor between Keele and Laird Street, and will be right outside Empire Midtown’s door.

Look for signs of growth potential. Social diversity, art and culture, and underused commercial/industrial spaces are just a few predictors of a soon-to-be gentrified neighbourhood. Learn more about how to spot an undervalued area in this post!

Research rental rates in the planned construction area. If you plan to cover your ownership costs by renting your unit to tenants, you’ll need to know how much positive cash flow will come in to offset your expenses. The Canada Mortgage and Housing Corporation publishes annual rental market reports for regions throughout Canada, and you can download the 2015 Greater Toronto Area (GTA) report here. The good news for landlords: Toronto rents remain at record levels after 5+ years of steady growth.

Get to know new condo competition in the area. Everyone knows Toronto’s condo construction industry is booming. That’s why it’s important to be a trendsetter and buy a pre-construction condo in an up-and-coming area. You’ll also want to make sure that your unit’s view won’t be obstructed by a new building. Do you spot any zoning amendment notices or cranes in the area?

Research historic sales in the planned construction area. This handy interactive map, which covers Toronto’s real estate prices from 2008 to 2014 by individual neighbourhood, is a useful resource.

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PRICE

Investing in a pre-construction unit that is less than $600 per square foot is your best bet. Average Toronto condo size has decreased significantly over the last 10 years; therefore, a per-square-foot comparison of costs is the most accurate value metric. The average price of a Toronto-area condo was over $550 in 2014 – up from about $200-300 per square foot in 2005. Staying under $600 is a challenge, but keeping investment costs low will pay off in the long run. For example, the pre-construction Empire Midtown becomes a much more affordable option when compared against Yonge & Eglinton, with prices nearly $100 less per square foot.

BRAND

Consider the quality and reputation of the builder. Toronto’s real estate market is running hot, and this type of atmosphere can attract inexperienced builders that want a piece of the action. Their projects might look good on paper, but the final product may lack quality and design, impacting your pre-construction investment negatively. Look for a local developer and check out their past projects to ascertain their experience, accountability, and community development. Particularly when buying pre-construction condos, it’s important to trust the developer since you cannot yet see and enter the unit yourself.

SIZE/AMENITIES

Buck the trend: consider a two-bedroom unit. Most investors look for one bedroom + den units, as they do offer great value and can potentially be occupied as an almost-two-bedroom. However, these units are the most common kind on the marketplace, so supply is plentiful and demand is lower. As average condo size shrinks in Toronto, fewer two-bedroom units are being built. You can take advantage by buying the units that will be in short supply and in high demand. Two-bedroom suites can offer exponentially greater returns for renting.

Keep amenities simple. While often nice to have, greater and more complex amenities mean higher condo fees, which impacts both your negative cash flow (money going out of your investment) as well as the potential returns you can expect from rental income.Night-Streetview-BANNER

THE ECONOMY & CONSUMER DEMAND

The fluctuations of the market economy and its ties to consumer demand are hard to predict, but there are ways you can protect yourself against risk by staying informed about the following factors:

Monitor mortgage rates. The Bank of Canada sets rates eight times per year. Private lending institutions don’t necessarily mimic the government’s rates, but they do take the BoC’s rates as a guide for setting their own mortgage rates. When rates are low, the cost of borrowing decreases, of course. But beware: extremely low interest rates are a sign of concern by big institutions that the economy is weakening, meaning potential buyers or tenants may be less interested in your property. The advantage of buying a pre-construction unit when interest rates are low is that you can secure the rate (via a Fixed Rate Mortgage) for the duration of your loan.

Factor closing costs into your overall cash flow. Closing costs apply once your purchase is finalized, and can include legal fees, a land transfer tax, HST, inspection fees, and more. The state of the economy and the current political situation can affect taxes, so be prepared for potential fluctuations based on your geographic location and government policies.

Keep an eye on the economy. The overall health of a region’s economy can be measured by many factors, including consumer spending, housing vacancy rates, population density and growth, and employment levels. Subscribe to news alerts and email newsletters from a cross-section of business journalists and major media outlets at the local, national, and international level. Diversify your news sources (from small and independent sources to large, corporate-owned outlets) to make sure you are getting a clear picture from all angles and interest levels. Since buying a pre-construction unit means you’ll have a longer wait time to completion (and occupancy), monitoring longer-term developments in your local market area is paramount to making the most of your investment.

RETURN ON INVESTMENT

The days of the quick flip are long gone. Investors who are buying pre-construction units should think longer term when calculating their investment returns. Fortunately, a medium-term or long-term investment carries lower risk, as these investments endure over potential market fluctuations (a longer-term investment can weather a brief downturn in the economy better than a short-term one in which the investor is anxious to collect her returns as quickly as possible). Be flexible, be patient, and be prepared. The longer you hold your property, the more you’re likely to maximize your returns.

FINANCING

You’ll need a minimum 20% down payment as an investor. However, if you intend to occupy the condo yourself, you may qualify for mortgage insurance, thereby reducing your down payment, potentially to 10% or even 5%. And don’t forget about the closing costs (See above). Check out this post on investment loans to learn more about your financing options for pre-construction condos.