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.