5 things to know when using a pre-con as an investment

October 19th, 2018 - by UrbanCondo Team

condo landscape

If you’ve always wanted to get into the real estate game, a new pre-construction condo might look like a pretty alluring investment.

As with most investments, there are some upfront costs to navigate and the entire process requires patience and delayed gratification.

If you’re new to purchasing pre-construction units or condo investment in general, there are a few specific things to know when it comes to using a pre-con as an investment. We’re going to look at a few of them below.

1. Research the builder

When you’re purchasing pre-con, you’re investing in the builder before you’re investing in the building. If the location is ideal but the developer is shady, you could be out of pocket for much more than the investment price.

Target developers who have solid track records and reputations for completing projects on time or without extraneous delay.

Try to find out what happened post-closing at any of the builder’s previous buildings. How have their maintenance fees levelled out over say, five years after a building was completed? Are there any red flags or negative trends apparent?

Even when investing in resale condos, the builder’s reputation matters.

2. The 10 day “cooling period”

Ontario law mandates a 10-day cooling period on all new condo purchases in the province.

After you buy a new condo from a developer, you have 10 calendar days to decide if you actually want to go through with the purchase or not. This helps you do some research if you’re not sure about the purchase -- you are unable to take 10 days to think with a resale condo.

This grace period means you are not penalized for changing your mind. It gives you time to have a lawyer look over your Agreement of Purchase & Sale, helping you understand all the fine print. Additionally, you’re still allowed to look at other options. If you find a better deal on another pre-construction building, bow out.

3. Interim occupancy vs Final closing

When a pre-construction condo building starts nearing completion, there are two phases it goes through, both impacting new owners.

During the first phase –interim occupancy– unit owners are allowed to move into the unit, but they do not technically own their property yet, as the building hasn’t been “closed.”

Occupancy for owners can be staggered as a few floors open up at a time. This avoids everyone rushing to move in the same day. Further, the building hasn’t been registered with the city yet.

The final closing usually happens within 6 months of the interim occupancy, and your builder’s reputation and experience can dictate how fast this happens.

Your mortgage will not begin until the building is closed. In essence, you’ll pay a certain “rent to the builder” that covers your condo fees (usually lower than after closing) until final closing.

Once the builder registers the condo corporation with the city, your mortgage will start and all closing costs will get calculated and paid.

 4. Closing costs, development fees and investment levies

Whenever you hear of pre-construction horror stories, they probably relate to pile-on closing costs that were forced upon the buyer before closing.

To avoid extra costs, you need to hire a real estate lawyer or do some proper research before signing ANYTHING.

Specialists would negotiate developmental and municipal fee caps, so that these things cannot go over a certain cost. Your Agreement of Purchase and Sale should have an explicit cap on closing and development costs.

For many Toronto condos, the development charges are pre-capped at $7,500 to $10,000 for one bedrooms, and up to $15,000 for two bedrooms and larger.

5. HST rebates for new condo investors

In Toronto, HST is already included in the purchase price of your new condo, but only if the people dwelling in the unit is either yourself or a member of your family. 

As an investor, meaning neither you nor a member of your family will be inhabiting the unit, there are different HST costs on final closing. At this point, you’ll be charged a second HST.

You can, however, get a 100% HST rebate if you file for it within one year, while providing the government with proof that you’ve rented out the unit to a tenant using a one-year lease agreement.