TalkCondo Featured in Globe & Mail: Resale vs. New Condos Article
TalkCondo were recently interviewed by Angela Self for the Globe & Mail, one of the founders of Smart Cookies, a group of five women who specialize in personal finance (check them out at Smartcookies.com). The article centered around one of the most common questions we get: Should I buy a pre-construction condominium or one that is already built? (Read the entire article here)
It’s a difficult question to answer without more information. What is the purpose of the purchase (investment? end-use?), if it’s an investment, what is your long term strategy (in it for the flip? are you looking for a mid-term rental strategy? or are you looking more long term with a view to building a portfolio of condos?). It’s important to note that there is no one right answer for everyone.
Below are a few notes that we made for the interview that did not make the piece in the Globe & Mail but we feel are relevant and are arranged as a “Pros and Cons” for Pre-Construction vs. Resale investing.
PRE CONSTRUCTION
PRO:
1) Leveraged investing. Leveraged investing is one of the most important reasons for investing in pre-construction and how many investors have made huge amounts of money over the last five years. Back in February, we wrote an in-depth piece on How Pre-Construction Heavily Leverages Your Money and it remains true today. By putting down 15%-20% of the purchase price, your moneys are growing on the entire value of the condominium. You are essentially getting an interest free loan of 80% from the builder for the timeframe of construction.
2) Buying a new product. By and large, new condominiums are trendier, more upgraded and offer better amenities than their resale counterparts. This of course is an over-simplified version of the truth, however, as a few examples: DNA3, One Bloor and Bisha (among many many others) offer features, finishes and amenities that are simply not available in the resale market within their own neighbourhoods.
3) Assignment Market continues to grow. The ability to “assign” your unit prior to registration is a huge bonus for many investors. Assignment sales are still relatively young in the Toronto marketplace but are growing every year and are becoming a much more popular option for those looking to for a condominium to live in.
4) Excellent value. VALUE is the important word. Notice that I do not say “excellent price”. Value looks at what you are getting vs. what the price is. If the price is higher than the worth of what you are getting, it’s bad value; if the price is less than the worth of what you are getting, it’s good value. Considering you are purchasing a condominium that may close in 2015 or 2016 at 2011 prices with 2011 dollars, pre-construction condos offer incredible value when compared to other investment options.
CONS:
1) Non-Liquid Asset. Perhaps the biggest con is that you are purchasing into a non-liquid asset. You can assign your unit, but most successful assignments take place towards the end of the construction cycle. If your condominium is not completed for another 3 years and you need to get your money out, it’s difficult to do.
2) Nobody has a crystal ball. As with any investment, there is inherit risk with purchasing pre-construction condominiums. We do NOT know how much your condo will be worth in 5 years, however, all things remaining equal we can give you estimates based on our research of currently market trends and economic conditions. We can minimize this risk by purchasing from quality builders and in popular locations.
3) Representation. If you do not use a real estate agent who specializes in pre-construction condos, you can get burned. This point may end up sounding like a sales pitch, but it’s not. I have heard countless stories from buyers who have either a) walked directly into a condo sales site and purchased their own condo or b) used an agent who does not specialize in pre-construction condos to purchase their condo. NO, NO and NO. The sales staff on site at a condo development WORKS FOR THE DEVELOPER. Their job is to ensure that the pockets of the developers are lined with as much green as possible, unfortunately most “resale” real estate agents are not aware of how the system works either. You can get screwed a number of ways: omissions of key clauses from the agreement, hidden bonuses that are only available to certain agents among others. There is no cost to hiring a specialized agent to help you with your purchase so it’s important to work with someone who knows how the system works.
RESALE
PROS:
1) Tangible. You get your hands on something tangible. With pre-constuction you are purchasing the right to a condo in the future. You get to see, feel and taste the condominium as it currently stands.
2) Market Value. It is much easier to calculate market value for an existing condominium based on similar sales in the building or nearby developments. Not only that, but for an investor you can get a very good sense of what your rental income will be which makes it easier to calculate your cash flow based on the investment.
3) More Liquid than Pre-Construction. If in a years time you need to get your money out, it is much easier to sell an existing condominium than it is to sell an assignment that is 1 year into a 4 year pre-construction cycle. This is one of the major reasons that investors do consider resale over pre-construction.
CONS:
1) Rising maintenance fees. Older buildings require more maintenance which can increase maintenance fees. Those looking to invest for the long term need to be aware of this fact and budget for it.
2) Not as leveraged: Unlike pre-construction, you will be paying either: 100% of the purchase price or (the more likely option) taking out a mortgage or loan to purchase the condominium. If you are taking out a loan, your mortgage kicks in immediately and you are required to pay interest and principal payments immediately. When calculating total investment over the same space of time for a pre-construction condominium vs. a resale condominium, it’s important to calculate your interest payments in this too. You will quickly see that pre-construction investments offer a much more leveraged form of investing.
Overall the Toronto Real Estate market offers fantastic opportunities for investors whether they are looking at Pre-Construction or Resale options. If you ARE looking to invest in pre-constuction, it is important to work with agents who specialize in this field and are able to get you the best prices on new projects. Members of our “Insiders Club” get first access to the hottest projects in the city – to sign up, complete the form below!
