The traditional real estate investment has always been, it’s smarter to buy single family homes or purpose built commercial buildings because of the greater appreciation potential. Condos, specifically pre-construction were often viewed as a negative to any investors portfolio. In reality, condo pre-sales could be one of the best kept real estate investors secrete.
A recent report from the Canada Mortgage and Housing Corporation (CMHC) shows that Ontario residents are catching on to this fact. The CMHC revealed that almost 50% of condo owners purchased a second unit for income purposes from 2015/17. 25% hold two income properties, and 10% reported owning three or more with many purchase prior to breaking ground. Why are so many condo enthusiast eager to buy additional units?
Investing is a much lower cost of entry versus detached single family homes or commercial investments. Developers often offer a discounts to those willing to buy pre-construction. A typical arrangement breaks the traditional down payment of 20% into installments paid over the construction period with a final payment at closing. With payments spaced over the course of 1 to 2 years, entry inventors have more flexibility in saving for their units. With condo prices soaring all over the province, it appears to be the fastest growing segment in real estate in the last 5 years.
Appreciation for pre-construction condos is the major upside. Investors pay a discounted rate to begin with, and this rate is based on current property values. The sales price doesn’t change over the course of construction (however units subsequently sold later may certainly see an increase). By the time the building is ready for residents, everyone who bought during preconstruction has already gained equity.
Once construction is finished and the first tenant moves in, the financial burden on the investor drops to little or nothing. Since vacancy rates are very low, a condo will likely be occupied at least ten-eleven months out of the year. Numbers like these mean that landlords can expect most of their mortgage and condo fees to be covered. Essentially, pre-construction condos break even and potential earn cashflow with just the investment of that first 20% deposit. At this point, the investor is free to look for another project to add to their portfolio. This is one way to build wealth through real estate investments.
Always be sure to research the area where you intend to invest, and look up the last few projects a developer finished to get an idea how they operate and execute.
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