“I want to buy a pre-construction unit as an investment. What are the pros and cons?”
This is an awesome question!
Pre-construction can be a great option for an investment, and there are a few reasons why:
- You’re able to lock in a current market value price for a unit that will be worth more when it’s completed. For example, you may purchase a two bedroom in Queen West pre-construction today that would cost you $100,000 more if you bought it in two years.
- You’re creating a relatively low maintenance income stream on an asset that steadily increases in value.
- If you’re looking to buy in an underdeveloped or up and coming area, buying pre-construction could be a great opportunity to get into a growing community at the right price.
However, there are a few things that need to be considered:
- One of the biggest risks with pre-construction is the project not being built so it’s crucial to research the developer’s track record and any Tarion claims against them before jumping in. If the project folds you’ll get your deposit back but could be paying much higher prices to buy a similar unit if the market has gone up since you initially bought.
- The price per square foot for a pre-build is typically higher these days than buying a similar re-sale unit, especially in the condo market, so you may be paying more to get something brand new versus the same unit that’s only a few years old but is still easily rentable.
- You’ll need to submit a pre-approval letter to the builder when you purchase the property but you’ll also need to re-quality when the building is nearing completion. If mortgage regulations have tightened in the meantime, you may be left with a binding Purchase & Sale agreement but be unable to qualify for the mortgage.
- You likely won’t be making any interest on your deposit amount. If your property doesn’t get built for 3-5 years that’s interest you’ll lose.
- You’ll pay additional closing costs such as development charges, sewer & impost charges, HST on chattels, etc. Those charges could run you anywhere from $5,000 to $20,000.
- The extra costs as a landlord. You’ll be responsible for the cost of repairs and maintenance of the property. Ensure that you set a price that will allow you to cover your mortgage and maintenance as well as any unexpected issues (consider charging a fee for any repairs/damage above normal wear and tear).
- You’ll be taxed on any income you earn from leasing out your property, even if you rent it out to family member. Any positive cash flow you generate will have to be declared (you’ll be able to deduct your expenses too though!)
- You’ll pay more in HST. Re-sale properties have HST included in the purchase price and if the new build is your primary residence then you’re also exempt but as a landlord the rules are different: You’ll need to pay the HST for the rental property upfront, file your HST rental rebate application along with a copy of your lease agreement of at least 1 year and then wait to receive refund from the CRA.
- If you’re a first time home buyer, you won’t be eligible for the Land Transfer Tax Credit if you choose to rent out the property. The credit is only for those using the property as their principal residence.
In conclusion, there’s no “straight” answer to this, it depends on your budget, lifestyle and long term goals.
If you want to learn more about purchasing pre-construction as an investment or have questions about up and coming projects, set up an information session with us to make sure you have all the facts before you sign on the dotted line.
Ps. Did you miss the last post in this series? It provides an overview of buying pre-construction. You can click here to read it!