I'd like to talk a little about “pre-construction”, or new development investing, as I get a lot of enquiries about these projects. Now these are just my personal thoughts and may not be applicable to all, but the hope is that it gives a greater insight into these types of investments.
Let’s first examine the pros & cons of a new development.
It gives the prospective buyer time to save up for the down payment.
You get a brand new, unlived in, home with applicable warranties.
You can customize (to a limit) the interior – mostly colour choices.
Normally, new homes are more energy efficient and built to current building codes.
All builders are not equal, so quality, and after sales service may vary.
Your down payment bears very little interest over the time it’s with the developer, whereas if an investor rents out a resale, ready, unit, the money starts working for you immediately, ie. the rent pays for the monthly expenses.
Customization may be limited and upgrades, through the builder, very expensive.
Normally, less room for negotiations; and watch for added costs (see below for more on this).
Prices are not always lower. Check comparable, similar, resale homes. Sometimes, you can find almost new resales for less.
HST is applicable (first timers get rebates if they live there within 9 months of purchase – check with your accountant).
The Real Estate Market may be different by the time one gets possession. Mortgage approval has to be obtained at that time.
Completion date is very often delayed considerably. I've come across one instance where a project, after 18 months, was cancelled altogether. The Buyer lost out because he now couldn't purchase anything similar within a similar price range. He also got peanuts, by way of interest, on his down payment which was held for those 18 months.
Here’s some interesting information from a Canadian Real Estate Magazine that I got information from. However, some of these points are normally discussed by the lawyers who review the Purchase Agreements.
In Toronto, development charges have increased in recent years and developers often try to recoup the difference—and who better from than the unaware consumer.
Development charges are up to $10,000 from $2,500-5,000, so make sure they’re capped. You should also make sure other levies are capped too. If the city comes back when your unit is complete and the levies have gone up to $25,000 and you don’t have them capped at, say, $10,000 when you sign your agreement, you’re on the hook.”
Other fees written into purchase agreements can add up and those may not be too difficult to have removed or reduced.
There are other fees you can get removed, like a gas BBQ hook up fee and the hydro hook up fee, which could amount to $3,000-4,000, and your lawyer may be able to have it removed from the agreement.
Another expensive fee involves assignments, which, should the buyer choose to flip the unit before moving in, can cost them $5,000-10,000 that will go directly to the developer.
If you want to assign, you have to pay that to the developer, but there should actually be no fee, It’s their lawyers who put it in there, but all you’re doing is literally only changing the purchaser's name on the agreement. If you can’t get them to do it for nothing, it should be no more than $500-1000.
Today, Toronto’s condo market is replete with assignment flipping because the COVID-19 pandemic has caused purchasers to rethink where they want to live, and that has, without a doubt, pleased many developers.
Nowadays, with COVID, there are so many assignments on the market that developers who got people to spend $5,000-10,000 are milking it.
Between the occupation and condo registration dates, unit purchasers pay the developer their mortgage interest, maintenance fees and property taxes, and unless specified in their purchase agreement, they cannot legally lease their units.
If your agreement is six months or one year, you’re paying roughly $2,000 a month to the developer. When investors buy a preconstruction unit, it’s all about the cash flow, and if they don’t have that amendment in there allowing them to lease their unit, they cannot legally do it.
A first time buyer is entitled to the HST rebate only if the buyer moves into the property within 9 months of purchase and lives there for at least a year. If it's an investment property, and will be rented out, no HST rebate is given.
Many people lie and tell developers they will live in their units for at least a year, but it probably isn’t worth getting busted. It is adviseable to talk to an accountant about all matters pertaining to taxes.