Written by: Holly Stringer  

 

You need only look at the Toronto skyline to recognize the incredible boom that has been occurring in the construction of new condominiums. Everywhere you look, new projects are emerging and buildings are popping up right before our eyes. With this recent growth in the condo market, many buyers have been drawn to purchasing pre-construction condos, either as an investment or to live in themselves. Buying a condo before it has been built certainly carries many advantages, such as getting a great price and having the freedom to select your own finishes; however, there are still some important points to take into consideration to ensure that your investment will bring you the most value. To guarantee that you make the best investment possible, read on to learn the top 10 things you need to know when investing in pre-construction condos.

 

1. Location, Location, Location
Many buyers get excited about a new condo project because of the advertised prices, the excellent marketing, or because it is in a location they are familiar with.  However, does that mean it is a good investment?  Just  like when you are buying a home, the location of a condo building will have a strong  influence on its current value and resale value.  If you don’t want to live in the area, chances are neither does anyone else.  You must choose wisely.  Condo buyers, in particular, want to be near public transit, universities and colleges, convenient shopping, restaurants and nightlife.  Let location be your guide.

 

2. Builder’s Reputation - Is it a Quality Builder?
There are many excellent builders in the GTA, but some are better than others, so it pays to do your homework. Googling the builder is a good idea, but you should also enlist the help of a real estate agent who is familiar with the pre-construction market.  Reading comments online and speaking with an agent will go a long way towards helping you understand which builders are better to work with and produce better products.  This applies to low-rise home purchases too!

3. Cost Per Square Foot Instead of Purchase Price

You may be tempted by low advertised prices, but you need to know what you are getting for that price.  The easiest “rule of thumb” for buyers is to look at the cost per square foot.  A $199,000 condo may sound good, but if it is only a 305 square foot studio, that is over $650 per square foot.  You may be better off spending a little more and getting much more value.  Also, a larger unit will likely have better appreciation over time.

4. Investment vs. End Use
For what purpose are you buying the condo? Is it a pure investment (income property), or will you be living in it? Your purpose factors into the decision because you need to separate wants from needs in your purchase decision.  Oftentimes a buyer who is buying a condo as an investment will become emotionally attached to the details, for example, views and floor level.  If you only plan to rent your unit, then don’t make the mistake of paying too much when a less expensive unit will do.
 

5. Which Unit is Right For Me?

If you will be living in the unit and want to maximize your resale value, then the floor plan, exposure (the direction faced when looking outside), views, floor level and location within the building should be noted.

Floor plans are a large enough subject to warrant their own article, but in simple terms take a moment to visualize the layout and mentally walk through it. Are the kitchen, dining, bedroom and washroom conveniently positioned?  Are the shape of the room’s usable space? Is the balcony large enough for patio furniture? The more you visualize the better decisions you will make in choosing a floor plan.

When it comes to exposure and views, some people prefer facing the rising sun, others the setting sun. Be prepared to pay a premium for a clear view of the skyline or the ever popular CN Tower view. Conversely, units that have views blocked by other buildings tend to be lower in price. Often the price for the same unit increases with each floor as well. For example, an increase of $1,000 per floor is common . One notable exception is when a floor level clears an adjacent building. Such units can have a one floor price jump of $3,000 to $10,000 and then return to the $1,000 per floor above that.

You should also take into account what may be blocking your views in the future. If you are uncertain about these details speak with a real estate agent who can explore these possibilities with you.  It would be unfortunate to purchase a unit with a clear view only to find out it will be blocked by another building project.

Finally, where you are within the building can be an important consideration.  Being too close to amenities (pool, gym, party room, etc), directly above the parking entrance, near the garbage shoot or elevator may all be a noise concerns. Also, if your balcony overlooks a busy street it can be a negative for some people.

6. Parking & Lockers
Parking spaces are typically restricted for purchase to at least 1 bedroom + den, or 2 bedroom units by the builder. This is due in part because not everyone wants to buy one and also the digging and constructing of each additional parking level is costly. For example, if each parking level holds 100 vehicles and 305 parking spaces are sold, the builder must add an entire 4th level just for five additional spaces. If you don’t need a parking space, the jury is still out on whether it is a good investment to get one.  If you don’t have one it can potentially lower your resale value, but having one that you don’t use is very costly. As of this writing, parking spaces average from $45,000-$60,000 and can be rented for $250-$300 a month in downtown Toronto.

Storage lockers (lockable cages usually located in areas adjacent to parking), are recommended since there is often not enough storage space within the condo to store items. Lockers generally cost about 10% of the parking price ($4,500-$6,000).

7. Maintenance Fees
Maintenance fees are often a sore topic for many buyers of both pre-construction as well as resale condos. Maintenance fees can cover various utilities for your unit, such as electricity, gas, central air-conditioning, etc. Moreover, maintenance fees also cover each owner’s proportional share of the common elements expenses, such as security, amenities, landscaping, snow removal and a reserve fund for future maintenance and repair of the building.

What most buyers don’t know is that builders generally only set up a basic maintenance fee, as they are trying to keep the costs as low as possible to make the building more attractive. Once the building is occupied and the ownership transfers from the builder to the condominium corporation, the new board of directors often adjust the services being supplied. This means that you will usually see a rise in maintenance fees within the 2nd or 3rd year . Therefore, it is a good idea to budget for the fees to be higher than what is advertised. Then if they do, you will be prepared, and if they don’t, you will be pleasantly surprised.

8. Haggle the Details During the Rescission Period
According to Ontario law, new home purchases have a 10 day cooling period.  During this time you can cancel the deal, get your deposit back, and simply walk away. This is the best time to negotiate the closing costs. In every Agreement of Purchase and Sale (your contract to buy the condo), the builder includes fees that will be part of your closing costs. Some of these fees are negotiable, but you will generally need a lawyer to negotiate on your behalf.  Most reputable real estate lawyers will do this for you without charge as long as you use their firm to close the deal.  An example would be levies, which are taxes or fees the builder may pay. Since you are paying a fixed price for your unit, the builder wants to recover any additional charges they may incur later during construction.  Your lawyer can negotiate to put a cap on these fees. There are numerous other costs that may also be negotiable, so it is best to have your lawyer review your contract and explain it to you.  Also, a good real estate agent can also shed light on these charges.

9. Assign, Rent or Sell?
If you purchased a condo as an investment, then you need to know what your horizon, or exit strategy, is for ending that investment. Many builders have assignment clauses that allow you to transfer ownership to another person before you complete (close) your purchase.  Assignments are a bit complicated and will generally require both a real estate agent and a lawyer for both the assignor and the assignee.

Renting is another good option, but for how long?  Current experience suggests that 2-5 years is the prime window for renting, unless it is an exceptional location and building.  After this period, the building may start to incur additional costs and the resale values may start to flatten out.  You also need to be aware if there is an HST consideration.  Builders not only include HST in their prices, but also include a HST rebate, filed on behalf of the purchaser, based on the assumption the unit will be owner occupied. If you decided to rent, then the builder must charge you the HST rebate on closing and you can then file for the rebate directly.  This can be a very confusing subject for many buyers. Your tax accountant is the best resource to clarify this.

This leads to selling.  Many times investors who have purchased directly from the builder at the best price possible want to sell right after closing to get their capital gain. On top of the tax implication of whether the condo unit is a primary or secondary dwelling, there will usually be a large number of units in the same building that come to the market at that time, so competition will be greater. This may result in a lower sale price for your unit.  It is often best to wait at least 1-2 years to sell your unit in order to maximize your return.  During this term, you can either live in the unit yourself or rent it out; whichever is most appropriate for your situation.

10. What About the Upgrades?
The builder will offer you a few colour schemes that are included in the purchase price.  Usually within a year of the occupancy date, a meeting will be set up at their design centre for you to choose which scheme you prefer. This is also a time when you will be presented with various upgrades, such as higher grade finishes, different fixtures, and window treatments. Sometimes these upgrades are a good value since the cost to do it later can be considerably higher, but often you can have the work done by a qualified contractor for less. You must use common sense here. If you are comfortable with hiring and managing a contractor then that may be the better option for you; however, you need to account for your time as well.  Many people do not realize that upgrading yourself can be a time-consuming and involved process.  Also consider the fact that the builder will warranty their upgrades. You must take all of these points into consideration when deciding whether to upgrade your unit yourself or through the builder.

Regarding return on investment, smaller upgrades the builder offers, such as faucet sets, or the next level of backsplash or bathroom tile, generally do not pay for themselves. In the resale market buyers may notice the difference but are unwilling to pay more because of it.  Window coverings can be an exception to this if they are high quality blinds or draperies. Incidentally, though you may have paid thousands more for a unit 5 floors higher, in resale it will be valued the same as the unit 5 floors below. How well you’ve maintained your unit and how clean you keep it will garner a better price relative to competing units when you sell.

If you’ve made it this far, you’re probably thinking that there is way more to take into consideration when buying a pre-construction condo than you originally thought. But don’t feel overwhelmed. A good realtor, who is familiar with the condo market, will be able to walk you through the process and will provide you with invaluable advice gained through their own experience with particular builders and similar investments. Having a general idea of the top 10 considerations to take when buying pre-construction, plus the help of an experienced realtor, will ensure that your condo investment will bring you the highest resale value and put more money in your pocket.

 

 

 

Phone number: 416-992-7972

Email: info@teamamador.ca

Website: www.teamamador.ca