Investing

Buying a property as an investment to rent out is entirely different to buying a property to live in

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Important Tip:

Don’t buy rentals especially condos as if you are buying for yourself to occupy.  You likely never will.  Remember rental condos are just a tool or instrument to generate revenue.  If you look for that perfect one you will lose out on opportunities and likely spend more.  Tenants do not look for their forever home so you should not either.  Buy, based on the rent it can generate, condo fee and expenses, location and the most important ‘demand’.  Demand dictates vacancy. Vacancy is the killer of profit.

Buying a pre-construction condo

Condos in the GTA are a hot commodity. Media stories are everywhere announcing double-digit price appreciation. BUT, Buyer-beware, the price appreciation numbers are based on MLS resales – not from new Condo projects. This page will help you understand the subtleties of purchasing a pre-construction Condo (to be built), not a resales Condo (already built). There are usually 5 stages of Condo pricing for every new development, so obtaining realistic average numbers can be challenging.

High demand areas – close to transit, universities, major intersections or high population areas – always demand higher prices and generate faster sales. The housing economic mantra of supply-and-demand always applies, and location, location, location is always key in real estate.

Why do Developers sell during the pre-construction phase?

If Developers financed their own projects they would make a lot more profit. They do not because like any well-managed business they are risk adverse.

They sell units during the pre-construction phase to ensure access to construction loans and to gauge consumer acceptance of pricing, location and amenities. Construction loans are the most important at this phase. Lenders require about a 75-80% sold rate before they will advance money for construction soft and hard costs. Lenders also demand that Buyers are pre-mortgage approved so there is a good chance that Buyers will complete their purchase on closing.

The loan approval also provides the Developer with the surety that they can complete the municipal approval process and cover all the development fees while they are preparing the land for the build.

Things to know before making a decision to buy

1. Developers like you to register with them directly

They want to deal directly with you and not through your knowledgeable Real Estate Agent. Why?

The salesperson at the presentation centre works for the Developer and definitely not for you.

Their focus is to show you how great your potential unit will look and more important, to get the best deal possible for the Developer. Their mandate is to get the highest price possible for the unit, for parking and locker spaces, and to maximize the Developer’s fees that you will ultimately have to pay; or if you sign a contract that limits or charges you a hefty fee for the right to assign (sell your contract) before closing (more on that later).

Another important reason to hire a Real Estate Agent is that many of the good units are sold through special invitation before the building goes on sale to the general public, and an Agent can get you added extras e.g. discounts on parking and locker spaces, a longer deposit structure, free right to assign.

2. Purchase deposits

The normal amount is 15% of the purchase price until occupancy. On occupancy, you will need another 5% plus closing costs. The nice thing about pre-construction deposits is that they are spread out over a period of time. Usually you will put down $5,000 when signing the purchase agreement and the balance to make up 5% within 30 days. Using a $500,000 Condo purchase as an example, that would mean another $20,000 (5% less the $5,000 you already put down as a signing deposit) at the 30-day mark. Most Developers ask for another 5% at 90 days and at 180 days, however the payment timeline can vary by Developer. Then at 2, 3 or 4 years+ later, you will need another 5% on occupancy plus closing costs.

For example;

Purchase price $500,000, closing date 1 September 2020
1. 5% on signing

1 November 2017

= $5000

2.

balance to 5% within 30 days

1 December 2017

= $20,000

3.

5% within 90 days

1 February 2018

= $25,000

4.

5% within 360 days

1 November 2018

= $25,000

TOTAL PAID SO FAR IS 15%

$75,000

5.

5% on occupancy

15 September 2020

$25,000

TOTAL PAID SO FAR IS 20%

$100,000

6.

Balance on closing

$500,000 – $100,000

= $400,000

When buying pre-construction, the lucrative advantage of a 20% deposit is the power of leverage. For instance, if you purchase a $500,000 property with a 20% deposit, as construction of the Condo commences, assume the average rate of real estate continues to climb by 5% per year. By the time the Development has reached completion in 4 years, your Condo is now valued at $607,753. That’s a $107,753 equity head start, and your return on investment is approximately 132%!  Leverage allows you to magnify your return before you even move in.

3. Are Condo price increases sustainable?

The GTA needs approximately 40,000 new homes to house the 300,000 new people who move here each year, with approximately 100,000 in Toronto alone. That is expected to continue until 2025 at least. Developers are building between 17,000 and 25,000 new low-rise and high-rise homes each year. That imbalance is expected to continue for the foreseeable future, which is also the reason why rental stock now has a vacancy rate of less than 1%.

Based on that imbalance, prices will continue to rise regardless of the restrictions put in place by governments. Supply and demand will continue to control real estate prices throughout the GTA. 

4. Three key attributes to a successful Condo investment:

The developer, the location, the value

The Developer

Always buy from a reputable Developer. You need to know that the Developer will deliver on their promise. You need to know that after possession issues will be resolved quickly. A few ways to research good vs. not so good Developers is to:

Look at Tarion and see the complaints and problems with specific Developers.

BILD is the Building Industry and Land Develop Association. They honour the top developer each year as chosen by their peers;
Agents will also know from the scuttlebutt they hear in their daily work assisting Condo Buyers.

The Location, location, location

Location has a lot to do with future value of a building’s units. Walk score, transit score, neighbourhood demand, major intersections, government infrastructure investment, close to jobs and close to universities, supermarkets, pharmacies, shops, bars, restaurants, all provide insight into future value.

The value

Compare the one you are looking at to other projects in the area. Price per square foot, percentage sold for nearby projects, resale prices and the rental market in the area.

 

Knowledge is power!
Before you register with the Developer

15 things to give you power (and save you money) before going into the presentation centre or registering with the Developer

1. Find an Agent

Begin the process by engaging a real estate Agent to protect your interests throughout the process. The Developer will pay their commission, so there is no cost to you.

Let them register you as a potential Buyer and be sure to take them with you for every interaction with the Developer. Developer salespeople are much less aggressive when you have an Agent on your side and they will sometimes offer better deals when asked.

2. Sales and pricing periods

Condo Developers usually have five selling sales periods for pricing and discounts. Generally, from the first to the last, prices go up and discounts go down. Prices can rise from the first stage to the fifth by up to 20% depending on how fast the units are selling (in boutique Condos, all the units can sell out the first day so sometimes you have to be ready-aim-fire with your chequebook and be ready to sign). Timing can be everything in the Condo purchase arena.

  • Friends and family of the Developer. Far and away the best deals.
  • Platinum sales stage. Platinum level Condo Agents are invited to purchase for their clients. Platinum Agents are ones who have gained that status with particular Developers by having sold a large number of the Developer’s units in the past. These are the best deals after friends and family and will usually include specials on parking, lockers and upgrades.
  • VIP sales stage. VIP Agents, about 500 in the GTA, are invited to bring their clients and enjoy discounted prices and other incentives such as discounted or free parking and lockers.
  • All Agents sales stage. If there are any units left, all Agents will be invited to bring their clients to purchase the remaining units. At this stage, discounts will depend on what percentage of the building was sold in the first three stages.
  • Public sales. Anyone who previously registered directly with the Developer is invited and the media advertising campaign begins. However, almost, if not all, of the good units have already been sold.

3. Completion date

The Developer will tell you when they expect to complete the project but expect delays that can be anywhere from six months to a year. Allowable delays and penalties for delays are detailed in the Agreement of Purchase and Sale.

4. The Rescission Period

In Ontario, every pre-construction Condo Buyer has a cooling off period to reconsider and withdraw their purchase. During the 10-day cooling off period, also known as the “rescission period”, it is advised that you have an experienced real estate Lawyer review your Agreement of Purchase and Sale.

It is 10 calendar days (including weekends) from the signing of the Agreement of Purchase and Sale date. So if you sign the Agreement on the Monday 1st, then Monday is day 1, and the 10th day is Wednesday 10th. During this time you, your Agent and your Lawyer should carefully review all the documents and ensure there is nothing that you cannot live with and everything is according to what you were told verbally.

This is also a good time to get a mortgage approval. You may have up to 30 days after the Agreement of Purchase and Sale is signed, to provide the Developer with your mortgage approval, but if you are unable to secure a lender, and you have surpassed the 10-day cooling off period, you may be unable to get your deposit back.

If for any reason, you decide not to move forward with the purchase, you can cancel the Agreement of Purchase and Sale during this Rescission period without penalty.

You do not have to tell the Developer you are OK with everything, on the 11th day, your Agreement is binding. If they haven’t already asked for them, they will expect post-dated cheques for the payment structure and the first cheque will be cashed. If you do want to cancel, your Agent or Lawyer will prepare the appropriate letter and ensure it is delivered to the Developer’s Lawyer on or before the 10th day.

5. Changes to your unit

Because approvals from the municipality have not been finalized, Developers may have to make changes to the building, including changes to the layout, size, balcony and/ or location of your unit. They may even have to change the size of the lobby or location of amenities. Their obligations and leeway to make changes are detailed in the purchase agreement and are pretty broad.

Embedded in your Agreement of Purchase and Sale are details about ‘Material Changes’.

These changes could be the relocation of the Penthouse Sports Club to the second floor of the building, or an increase in storeys. Your purchase price won’t be affected but the completion expectancy date may change.

6. Interim occupancy period

When you purchase a pre-construction condominium you will be given two different dates, the interim occupancy date and the closing date. Interim occupancy is unique to pre-construction condos, and the process may be foreign to some, especially first-time homebuyers.

Interim Occupancy

Interim occupancy is the period of time between the day you occupy your unit (move in) and the day you take ownership (close). Or look at it another way, the interim occupancy period is that time between the occupancy permit approval from the Municipality and registration of the Condo corporation with the city. Before it can be registered, all the municipal inspections have to be completed and any deficiencies fixed. Outstanding issues may take several months to be resolved before the Condo can be registered.

One of the reasons for interim occupancy is to allow the Developer to focus on the sold suites and some of the common elements before the building is registered.

Interim occupancy takes place as soon as the city deems the building is safe and ready for homeowners to move in. As soon as the Developer has approval for occupancy of your unit from the Municipality, they will advise you and expect you to move in within 30 days.

Typically interim occupancy can last between three to eighteen months, depending on the project. During this time the building is still under construction, but homeowners are required to occupy. Keep in mind that whether you choose to actually live in your suite at this time is up to you, however, all purchasers must pay a monthly fee during this time, otherwise known as interim occupancy costs. It is important to note that the occupancy fees are not credited to the final purchase price. They are equivalent to rent payments, as homeowners do not legally own their suites yet. Because of this, mortgages cannot be secured and renting your suite is usually not permitted. Also note that during this period you still do not actually have title to the unit but you do have to pay money to the Developer as if you do own it. Those costs are close to what you will be paying for a mortgage, plus Condo fees and taxes.

Final Closing

The final closing occurs once the Developer is ready to register the Condominium and transfer ownership to the individual unit purchasers. At this point interim occupancy ends, the building is registered and homeowners can secure a mortgage, rent or sell their suite. The Property Management Company will also take over at this time.

Developer responsibilities

During the interim occupancy period, the Developer has a number of regulations that must be adhered to. These include providing the services that the Condo Corporation will take over once the building is registered, such as garbage disposal and (where applicable), concierge as well as maintaining the property and suites to the same manner as the Condo Corporation (HVAC, fire alarms, etc.). To view the full list of the builder rights and responsibilities, check out section 80(6) of the Condo Act.

What is my Occupancy fee paying for?

The monthly fees charged by the Developer during interim occupancy include interest on the unpaid balance of your suite, contribution fees for common elements (not unlike maintenance fees) and estimated property taxes. For more details, refer to Section 80(4) of the Condo Act.

7. Developers estimate of Condo fees and taxes

During the pre-construction selling period, Developers will give you an estimate of what those costs might be. However, there are no guarantees, so consider the fee advertised as an approximation as the cost will change with the inflation rate along with other factors.

Low Condo fees can be enticing when comparing Condo projects to one another, but prepare for fees to increase because the actual costs can be at least three years away, so all Developers can do is guess what taxes will be three+ years hence.

No one can be sure of what maintenance fees might be until maintenance actually starts costing money. At best, they are guesses based on past history. You can expect them both to be at least 10-20% higher than the Developer has estimated.

8. Closing costs

Once registered, the Buyer can close and take title to their unit. At closing you will have to pay all the extras which include the following charges:

  • Land Transfer Tax
  • Title Insurance
  • All the Developers charges including Law Society Fees, deposit cheques,
    administration fees, status certificate fees, utility hook-up fees, legal fees and any other development charges (these fees are limited according to the amount in the purchase agreement)
  • An estimated tax amount for the first two years of municipal and school taxes. It will take a year or two before you receive your first tax bill and the amount you prepaid will be credited against that bill.
  • You will often be asked to contribute two months’ worth of maintenance fees to the reserve fund as well
  • Balance of the 20% deposit
  • If you are planning on living in the unit, you will be credited for the HST

Different Developers have different requirements as to what you have to pay on closing so it is best to have your real estate Agent figure out and advise you how much will be required beforehand so there are no surprises.

9. HST

A newly built Condo unit is subject to HST. The HST is usually included in the purchase price and your Agent will double check for you. If you (or an immediate family member) will be moving into the unit, you will receive a rebate of the HST on closing. If you will be using the unit as a rental you will have to pay the HST on closing and then apply to CRA for a rebate (usually takes about 6 to 8 weeks to get it back). It is best to detail your intentions to your Lawyer beforehand and obtain their opinion on how the HST will be applied, depending on your intended use.

Condo buyers are often entitled to a “Delayed Occupancy Claim” of $150/ day up to $7,500, with the majority of these Buyers getting close to $7,500 back.

There are two programs in place: the New Homes Rebate (NHR) and the New Residential Rental Property (NRRR) investor rebate. With respect to the NHR, the HST is claimed by the Builder for the primary place of residence. When it come to the NRRR, the Buyers pay HST on closing and then can claim it back provided they lease the condo for 1 year and file within two years.

When assigning a condo, the HST must be paid on on the profit on closing plus the assignee has to take over all the responsibility of the HST as outlined in the original contract.

New condos, new houses, and newly substantially renovated houses sold before occupancy are all subject to HST (properties that are resale properties are not). The Seller should collect and submit HST, while the Buyer can get a rebate of up to $24,000. Sometimes the Seller fails to submit, and Buyers fail to apply for a rebate, due mainly because they, and often their Lawyers are unaware of their responsibilities.


You should always consult an HST tax expert before proceeding.  Mark Purdy is an expert in HST and rebates, and can be contacted at 905-544-5464 or [email protected].

10. Watch the hype

If it sounds too good to be true it probably is. Remember the fiasco with the Trump tower? While many of those Buyers are still going through the court system, there are some who have had their claims denied on the basis that the hype was “marketing speak” and caveat emptor – let the Buyer beware. Talk with your Realtor to see what promises are in writing and what is just hype.

11. Assignments

Sometimes things happen in life and you cannot complete the sale. In such cases, the purchase agreement can be assigned to a new Buyer. You are not selling the unit though – you are assigning the right to purchase the unit on closing to a new Buyer. The new Buyer will give you all your deposit money back plus a premium for the right to transfer the purchase agreement to them.

Unfortunately, most assignment opportunities cannot be offered on MLS so there are other ways that Agents share information with other Agents for assignments. Because the commissions are based on the full sale price of the assignment, (includes the original purchase price (less HST) plus the premium charged to the new Buyer), it pays Agents to go the extra mile to find Buyers.

Depending on the demand for your building, your unit can be an easy sell with a big premium or if there is little demand for your building, it may take longer to find a Buyer and the premium may be significantly less or none at all.

Be aware that if the new Buyer is not able to close, you are still responsible for the costs associated with interim occupancy, mortgage and closing costs. You did get some of the money back from the assignment, but will still be responsible to buy the unit after cancelling the assignment.

Some Developers do not allow assignments and some charge a hefty fee so always check your purchase documents to know where you stand and what you can and cannot do. You may also want to have your Agent negotiate a reduced assignment fee before you sign your purchase agreement.

12. Your Condo mortgage

You may decide to obtain a pre-approval from your bank or mortgage broker. However, the best they can offer is a rate-guarantee for 90 to 180 days. When purchasing a Condo, Developers have their own preferred mortgage partner tied to the building. If you arrange your mortgage through that partner, you will have a guaranteed rate until closing. If rates should decrease at closing, you will be offered the new rate. Using the preferred partner also saves a lot of time and effort because they already know the building and have estimated the risk. You can always choose your own mortgage when it gets close to the closing date if you wish to.

13. Should you decide to rent your Condo

While reviewing your purchase agreement, be sure it does not deny you the right to rent your unit. Vacancy rates in the GTA are at about 1% and 4% is a balanced market, so there is a very high demand for rental units and that demand will continue for quite a while.

If you decide to rent you will be able to cover your costs and make a small profit and the renter will be contributing to your equity build-up (as your mortgage reduces).

New condos now have rent control restrictions so you cannot increase the rent every year by whatever the market will bear. However, once your Tenant has moved out you can charge any new Tenant whatever you wish, in most cases you can only increase the rent by the Ontario Government guideline amount for that year – for 2019 that amount is 1.8%.

Rent control only applies to existing Tenants who live in a property that was constructed before 16 November 2018. Any property constructed after 16 November 2018 is not subject to rent control, which means that your Tenant can move in, and you can increase the rent after the initial tenancy period has expired, to whatever you want to.

14. Buy from a reputable Developer

If the Developer of the Condo building where you want to buy a unit is on his 10th or 20th building, you can feel pretty secure that they will not go bankrupt. If they are building their first Condo – be careful. You do not want to go through the hassle of having your deposits tied up for a number of years or even worse – lost forever. Let your Agent do the legwork to ensure the Developer has a history of successes.

15. Pre-construction Condo vs. an existing already built Condo

With an existing Condo you have more control over the completion date. A pre-construction condo, on the other hand, has lots of things that can happen to delay completion. An experienced Developer can be accurate within about 2 years. A not so experienced Developer could be off by 3 to 5 years. Usually the extra time is worth the wait in demand and resale value, however it is always best to do your research.

16. Prepare For Closing Costs

Closing costs may include:

  • Land Transfer Taxes (LTT)
  • Development Levies (these can be capped, speak with your Agent for more information)
  • Education fees
  • Utility Connection fees
  •  HST on appliances
  • Reserve Fund Contribution
  • Park levies
  • Lawyer fees

These costs can add approximately 1.5 to 4% to your purchase price.

9 Tips For Buying Profitable Investment Condos In Toronto

1. Understand your goals

The type of product you invest in will depend on your goals as an investor. Are you investing for equity gains or are you looking for an investment that generates cash flow?

Cash Flow

Toronto’s lucrative condo market and rising interest rates have raised carrying costs, making it more challenging to find cash-flow positive properties.

There are however, strategic ways to improve your margins, such as a higher downpayment or purchasing the right product.

  • Type of property to invest in: Resale
Equity Gains

If it is equity gains you are after, you will need to think long-term. Toronto condos are a great option as prices in the core have been stable and rising substantially. The trick is to find the right product and the right neighbourhood so that you can achieve higher equity gains.

  • Type of property to invest in: Resale or pre-construction

2. Know your budget and closing costs

Ensure you know how much cash you will need and how much mortgage you can afford to carry. This will influence the types of properties to evaluate when investing. If this is your principal residence you are allowed to purchase with as little as 5 percent down. However, as an investor purchasing a secondary property you must have at least 20 percent down.

5% vs. 20% Downpayment

Different products have different downpayment structures:

  • Type of property to invest in with < 20 percent downpayment: resale
  • Type of property to invest in with 20 percent + downpayment: resale or pre-construction
Closing Expenses

Beyond your downpayment, you will also need to account for closing expenses.

These include Land Transfer Taxes and, on pre-construction condos specifically,

HST (capped at $24,000). First-time buyers are also eligible for a partial Land Transfer Tax rebate.

When investing in a pre-construction condo, you will need to pay HST on the registration date (approximately four years after purchase) to a maximum of $24,000. With a one year lease in place though, this amount is fully refundable as you are able to file for a full HST rebate.

3. Understanding price per square foot averages in the neighbourhood

Paying attention to the price per square foot is a great indicator of an investment’s profit potential. Look for properties that have a low price per square foot compared to a comparable unit trading in that same neighbourhood. This will also help you determine if the best deal is pre-construction or resale.

“If the average resale condo in King West is trading for $900 per square foot and the current pre-construction deal is selling for $1,100 per square foot, you’re likely going to generate higher returns investing in resale,” says a leading city expert.

4. Know how to spot a good deal

Beyond the price per square foot, there are many other factors to consider when spotting a profitable investment condo. Some of these include:

  • Does the builder have a good reputation?
  • Does the location or floorplan allow you to rent for a premium?
  • Is there future infrastructure development coming to the area?

5. Purchase investments where you can charge a premium in rent

There are key factors to look for as you search that will help guide you to a profitable investment property.

Rental prices favour condos along major transit/ subway lines. You can also typically charge about the same rent for a two-bed, two-bath, 750-square-foot condo as you would a two-bed, two-bath 800-square-foot condo if they are in the same building. That 750-square-foot condo, however, will cost less to purchase, so you actually will improve your margins and lower your carrying costs.

6. Buy in gentrifying neighbourhoods

When it comes to equity gains, the biggest wins to be had are in pre-construction properties in up-and-coming neighbourhoods. If you can invest in areas when prices are low, you will reap the benefits in years to come as the area becomes more desirable.

Leslieville is a great example of how gentrification impacts property values. Condo prices there have increased 50 percent since 2014.*  Investment opportunities in up-and-coming neighbourhoods where rental inventory is low will also allow you to charge a premium in rent.

7. When purchasing, think long-term

When it comes to investing, it is always wise to think long-term. The longer you hold your investment, the more equity you amass. As your investment’s market value goes up and your mortgage goes down, you are able to leverage that equity into other investment condos.

8. Understand the tax implications

Knowing how your investment will affect your taxes — and the amount you owe — can make all the difference when purchasing property.

Capital Gains

When you sell your investment property, you are required to pay Capital Gains Tax.

This means that 50 percent of your net profit will become taxable income. You are entitled to deduct expenses incurred during the investment from these gains (like interest on a loan and cash-flow losses).

HST

As mentioned earlier, when investing in a pre-construction condo you will need to pay HST to a maximum of $24,000 when the building registers with the city (typically four years after your initial purchase). Your Lawyer can file for a full HST rebate, refunded approximately four to six weeks later, provided you have a one year lease in place.

If you do not rent out your property for the minimum one year, you are not eligible for the HST rebate.

9. Ensure you are playing by the rules

Ensure you play by the rules when investing. This includes understanding the rules regarding short-term rentals (eg. Airbnb) in the building to flipping condos and the financial consequences that come with it.

If you sell your investment too quickly you run the risk of being taxed as a trader rather than as an investor, which means you can be taxed on 100 percent of your profits as it is seen as business income. It is best to get legal and property advice from your Lawyer and/or Accountant regarding tax implications as a flipper.

When it comes to spotting profitable investment opportunities in Toronto, just remember: it is not about buying something, it is about buying the right thing. or instrument to generate revenue. If you look for that perfect one you will lose out on opportunities and likely spend more. Tenants do not look for their forever home so you should not either. Buy, based on the rent it can generate, condo fee and expenses, location and the most important ‘demand’. Demand dictates vacancy. Vacancy is the killer of profit.

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