The Myths of Pre-construction

Last week we explored pre-existing condos and their advantages and disadvantages. I did state that we were going to talk about pre-construction condos this week but I changed my mind. Before we examine pre-construction condominiums let’s talk about some of the myths surrounding pre-construction condos.  

As you know Toronto is leader in North American for high rise construction. If you live in Toronto it will be difficult to commute anywhere without coming across a pre-construction sales office. So the question is if you are interested in becoming a real estate investor why haven't you dropped in? Most would say they feel “safer” if the condo was built before they buy. We explored that option last week and saw many disadvantages for waiting the main one being cost. You will save yourself a lot of money if you buy pre-construction. So let’s expel some of the myths surrounding buying pre-construction.

I’m sure you’ve heard at least one horror story about someone buying a pre-construction condo and the condo never was built. Now lets us closely examine that statement. The condo was never built? A more accurate statement would be that the building completion was delayed. Condominiums are multi-million dollar structures and delays are very costly to developers. It is in the developer’s best interest to complete the condo on time. To be more precise, it is the developer’s best interest to complete the condo ahead of schedule. Furthermore, all developers sell pre-construction condominiums. The vast majority of the existing condos in Toronto and the GTA were sold as pre-construction. Pre-construction buyers are always rewarded because the property value always goes up as soon as the construction is complete.  

These are the facts about pre-construction: 

1.       They are always built but sometimes they are delayed.

2.       Selling pre-construction benefits the buyer and the seller.

3.       It’s very costly for developers if there are delays.

4.       Pre-construction condominiums always go up in value.

I hope I was able to dispel some of the myths about pre-construction. These were just a couple of the most common ones. If you have any questions about this topic please leave a comment or visit my website at www.mytorontocondos.ca. Next week will return to our regularly scheduled topic Pre-Construction Condos. 

Pre-existing vs Pre-construction which one is better?

The Toronto condominium market is hot. In fact, Toronto leads all other cities in North America for high-rise construction . This sets the stage for prime investment opportunities.  The condominium investor should be informed about their options beforehand. Some available options include buying pre-existing condo  (standing inventory) or buying a pre-construction condo. This week, we will explore the standing inventory world of condominium investing. But before we do, let’s talk about why Toronto is your premier destination for condominium investing. 

 Toronto is changing and growing. At the current immigration rate Ontario’s population  is expected to grow to 14.4 million in the next 25 years. Although some people do move to smaller cities, generally the majority tend to migrate to the bigger metropolitans. In addition, Statistics Canada  just released the 2011 census which shows the traditional family unit with children has been surpassed by the families without children in Toronto. The new Toronto family shies away from flower gardens and driveways in exchange for landscapers and underground parking. Some predict Toronto’s condo market will eventually crash, but that’s not what the experts are saying. Toronto needs to build condominiums to accommodate the expected population growth.

Those are my reasons for advocating buying in Toronto and hopefully you thought they were to. You don’t have to take my word. Look at all the foreign investors buying in Toronto and that too should persuade you. I’ve said my piece about Toronto. Now let’s look at the condos and in particular standing inventory.

What is standing inventory? Standing Inventory are condominiums that have been built and are available to purchase or lease. The advantage of buying standing inventory is you can immediately find a tenant and start making a return on your investment. This is also a huge advantage over buying pre-construction since there is no waiting period for the condominium to be built and you can see and feel exactly what you are buying. If you’re the type of investor who has little to no patience then this is probably the ideal option for you. You will get to see the unit, inspect it and finally purchase the unit.

Everything that goes up must come down so there are a couple disadvantages of buying standing inventory as well. Since standing inventory condominiums are marketed on the MLS (multiple listing service), anyone can purchase it. There might be multiple offers on the unit you want to purchase. Sometimes when in competition the condominium could sell above the asking price. No one wants to pay more than they have to. Normally, the buyer with the emotional attachment will pay more than the investor and so they should (they are buying for personal use). Perhaps you’re bidding against a young couple who have never owned a home before. They’re much more eager to get this unit since it will be their residence. Do you think you can compete in a bidding war against someone who has already decided what color blinds they will put in the living room? Or even worse, has been pre-approved for $ 50,000 above asking price? If you answered yes to any of the preceding questions then maybe condominium investing isn’t for you.  If you’re treating your investment like a business you want to keep your expenses down so you can maximize your profits. These are some of the drawbacks of buying standing inventory. When they said you might have to go to “war” may have been the sign that this might not be the ideal investment for you.

Below is detailed breakdown of Capitalization rate on a 1 Bedroom 1 bathroom condo that is valued at $340, 000. This should be useful since it is the formula they use to calculate when you will make your money back on an income property.

                               

Rent – Taxes – Condo Fees = NOI              $1,725 - $167 - $408 = $1150

Annual income                                              $1,150 x 12 = $13,800

Cap Rate =                                                     $13,800/$340,000 = 4%

                               

After all that calculating we arrive at a cap rate of 4% and the average is 3% . Depending on where your condo is located and how much you charge for rent will determine your annual income.

To summarize Toronto is the ideal place to invest in a condo. The advantages of buying standing inventory are that you know what you’re buying which might be the right fit if your that type of investor. On the downside you might have to pay more for the unit if there is a bidding war.

I touched briefly on the topics discussed. If you are interested about this topic or have more questions please visit my website www.mytorontocondos.ca for more info.

Make sure you read next week’s blog were I will talk about the exciting world of pre-construction condos. You don’t want to miss it.

Why buy a condominium instead of house for a real estate investment?

Investing in real estate is considered to be by many to be a wise decision. But there are so many options out there to consider. REIT’s, commercial, retail store with office/residential upstairs, a house either single family, duplex, triplex, multiplex, buying land, condominium office, a residential condominium and the list goes on.

In this week’s blog we will compare investing in a residential condominium as opposed to buying a house for a real estate investment.

So, you are thinking about becoming a real estate investor in Toronto? Normally, a new investor is beginning their first investment with a smaller budget of capital. Therefore, you will probably have one of two options, houses or residential condominiums. While both options have their benefits this week, I will discuss the benefits of investing in a residential condominium.

The biggest benefit of investing in residential condominiums is that they are relatively inexpensive. The average price of a condominium in Toronto is $342,212 (TREB). Toronto homes on average are selling for $479,095. So the difference between owning a house or a condominium is $136,000.  The bank will require 30% to 35% down payment on your investment property.  Putting 30% down on the average price equals spending an extra $41,000 on a house. Investing in a condominium will leave more money in your pocket.  Now who doesn’t like more money?

An additional benefit of investing in condominiums is they are generally newer.  New condominiums are condominiums that have been built within the last 5 years while old condominiums have usually been built within the last 15 years.  In comparison old houses can range from 30 – 110 years old.  As properties get older they wear down. Condominium maintenance fees look after this for you. Home owners on the other hand are entirely responsible for all maintenance of their properties.  For example you may find out that the foundation on your property is not level. To fix this will cost many thousands of dollars.

In summary, condominiums are less expensive than houses. You will save money on down payment and the maintenance of your investment. The fewer expenses the more profit to be made. People invest in real estate to make money not to lose money.

This is only a brief summary of some of the advantages of condominium investment in Toronto.  Visit my website at mytorontocondos.ca  for more information.