Top 5 Reasons to Buy Pre-Construction
Top 5 Reasons to Buy Pre-Construction
In Toronto’s ever-changing real estate market, investing in a pre-construction condo still remains a lucrative long-term opportunity. When you look beyond the quick wins of flipping property, holding the property for the long haul and having a tenant pay off your mortgage can create passive income for you well into your retirement years. Or, if you are a first-time buyer and are hesitant to get into the market now with interest rates on the rise, buying now to move in 3-5 years from now when mortgage rates normalize is also a great option.
1) Pass the current market cycle: With inflation at an all time high in Canada, the Bank of Canada has elected to increase interest rates to help control the rising rate of inflation. This has driven home prices down between 20-30% in some markets as buyers’ affordability have reduced considerably. Construction typically takes 3-5 years for condos and 18-24 months for freeholds. Buying pre-construction gives buyers a chance to bypass the current market cycle in hopes that interest rates normalizes.
Here are the top 5 reasons to invest in pre-construction properties:
2) Time to save: As interest rates continue to rise, buyers’ affordability have gone down. Pre-construction gives buyers the time required to save more towards a down payment. Typically, buyers would like to pay 20% down payment to purchase a house, this enables them to bypass Canadian Mortgage and Housing Corporation (CMHC) default mortgage insurance and also help reduce monthly payments. In resale, that 20% will need to be paid immediately on closing. With pre-construction, developers have an attractive deposit structure that enables you to pay up to 20% of the down payment over two to three years. This gives buyers time to save in the next few years. Some developers also have more incentives where buyers are only required to pay a 5-10% deposit.
3) Enjoy potential appreciation: Another great incentive of buying pre-construction is the potential appreciation of your asset over time with less down payment. Market trends suggest that home values continue to grow, and even in the current market downturn, the market is still up year-over-year. However, the difference between buying resale vs. pre construction when it comes to your return on investment is vastly different. Let’s say you buy a 2-bedroom condo in Toronto today for $800,000. You will need a $160,000 down payment and a mortgage for $640,000. Let’s assume in two years that condo is worth $1 million. Your return on investment would be 25% ($1,000,000 – 800,000)/800,000 = 25%.
But what if you bought the same unit in preconstruction? Since pre construction is slightly more expensive than resale. Let’s say the same preconstruction unit today is $900,000 and in two years it’s worth $1 million. But the builder has an incentive of 10% deposit within the first two years. So you’ll need $90,000. The return on your investment is actually 111% as your initial investment of $90,000 has gotten you a return of $100,000.
4) Everything is new and under warranty: Another great thing about pre-construction is that everything in the house/condo is brand new and subject to Tarion Warranty. Which means you are entitled to the 1/2/7 Tarion warranty program. Which means you will have peace of mind of major repairs for at least 7 years.
5) No bidding wars or unconditional offers – If you are tired of losing out on homes due to multiple bids situations and offering unconditional offers, then pre-construction could be for you. Buyer remorse has been prevalent the last few years as buyers thought they were happy with the price they offered, only to feel like they overpaid a few days’ later. Or as soon as they got the keys they noticed there was a small leak in the foundation because they couldn’t put an inspection clause. With pre construction there are no bidding wars. Whatever the listed price is, is the actual purchase price. And in Ontario when purchasing a condo you are entitled to a 10-day cooling off period in which you can take time to make sure you are happy with your purchase. In freehold purchases, you can also put conditions or finance as well.
If you want to find out more about purchasing a pre-construction home in Ontario, Justo is here to help. Get in touch with our team of experts today!