If you’re an investor looking for a condo unit, you’ve probably noticed a breadth of (sometimes confusing) options offered, in just about every corner of the city. These days, it seems that no matter where you turn, condos are aplenty!
Pictured above (left to right, top to bottom):
The Mercer, X Condos, Majestic Court, Waterclub, Emerald Park, Harbour Square, Eve, Uptown Markham, Ventus at Metrogate
With so many different choices – from buildings that are older, newer and soon-to-come, to high-rises, low-rises and everything in between – it begs the question: where does one begin in the painstaking quest to find an investment unit that best suits their needs?
Like anything else, there are many different schools of thought on this matter and if you speak to 100 different people, you’re likely to hear just as many different opinions.
We’ve spoken with a handful of seasoned investors and trusted real estate professionals, and while opinions differed amongst them, we’ve done our best to highlight their most critical ideas.
If there’s one thing that’s clear, it’s that there is no “right” answer to the great investment debate. Every investor is different, and as such, you’ll have to do your homework and figure out what works best for your personal circumstances and style.
While there are many factors to think about, for most, the major considerations will be investment type and budget, followed by location, size, and other issues.
This post is part of three-part series in which we’ll touch upon all of these issues. Today we begin with the first, and arguably the most important, two: investment type and budget.
Investment Type (Age)
There are several categories of investments that you can consider. These are:
A popular choice to-date has been purchasing a condo pre-construction or blueprint. History suggests that this is typically where you’ll find the best pricing, often purchased through a realtor with access to the sales centre (e.g. VIP sales event) prior to its public opening.
The advantages to buying pre-construction includes not only the lowest prices, but also the widest selection of suites, the opportunity to purchase something never-before-lived in and a longer period of time to save up your down payment (over the course of the builder’s deposit schedule).
Having said that, pre-construction units are not for everyone. There’s an element of risk involved with buying blueprint (e.g. project cancellation or changes). And depending on your outlook on the condo market, there may be more hesitation to commit at today's pricing than in years prior. For inexperienced buyers, the prospect of purchasing from a blueprint, without a physical space to see, touch and feel, can also be challenging.
Hints & Tips: Look for a condo expert with early access to projects to take advantage of the often lower pricing and wider selection of suites.
New condos (pre-registration)
This option refers to condos purchased from the time construction has begun up until the building has been registered (when title is transferred from the developer to each of the individual owners). Prices are typically higher during this period than in the pre-construction phase, and generally see a steady increase until registration.
The advantages and disadvantages to buying a new condo (pre-registration) are similar to those for pre-construction; although there’s often a narrower selection of available suites and higher price per square foot.
Other than buying from the builder, pre-registration units can sometimes be purchased from other buyers by way of assignment. Some of the experts we spoke with observed that once a building is near completion (or is under occupancy, not yet registered), there’s often a premium when purchasing through the builder when compared with buying units within the same building on assignment. However, assignment purchases have their own set of benefits and risks and should be discussed with an experienced professional.
Hints & Tips: When negotiating prices via assignment, remember that the seller will be saving on closing costs (such as land transfer tax).
Then, there’s the option to purchase a condo that’s already completed. Completed condos range widely in age, with some buildings in the GTA dating back to 1970s.
Within this category, there are also several options. You may decide to purchase an investment unit that’s already tenanted. The advantage of this is a turnkey operation; however, the risk involved in assuming an existing tenant is that you also assume any existing issues (e.g. late payments, etc.) that may be associated with that particular individual.
If you’re a little more hands-on, another option is to purchase a vacant unit. If the condo is in need of repair or update, this would give you an opportunity to complete any necessary renovations in order to make the unit more rentable. For investors who prefer to find and qualify tenants on their own, this could be an ideal scenario; however, there will of course be a period of vacancy that you’re willing to accept while renovating and/or searching for that perfect tenant.
The benefits to purchasing a completed condo include the ability to see the physical space that you’re buying into and garner some insight into how well the building is being maintained. If the building is a little older, you’ll also gain a better sense of how much the maintenance fees have been. It’s pretty much “what-you-see-is-what-you-get”. Our experts have suggested that the average price per square foot on completed units tends to be lower when compared with new projects within the same neighbourhood, so there may also be a price advantage associated with completed condos. In addition, buying a completed condo also allows you to receive some monthly cash flow from the investment almost immediately.
On the other hand, having to cough up the full down payment for your condo within a short span of time (typical resale closings occur within 30-90 days from the date of purchase) can be daunting for many investors. Maintenance fees in older buildings can also be higher given natural wear-and-tear, and you’ll want to be wary of any potential issues pending for the condo such as major repairs, structural issues and lawsuits that can heavily impact your carrying costs. Finally, if the completed condo isn’t new but located in an area where there are many new buildings cropping up, it may be more difficult to rent as many tenants prefer a never-before-lived-in space where available.
Hints & Tips: Maintenance fees not only contribute to your monthly carrying costs, but will also have an impact on the future resale value of your property. To minimize any unpleasant surprises, ask your lawyer to review the condo’s status certificate which will paint a formal picture of the of the condo corporation’s current financial and structural health.
Still trying to decide? While there’s a definite premium on rent rates for newly constructed condo units, some of our experts have suggested that in today’s market, such a premium doesn’t necessarily balance out the premiums paid on price. This likely varies within each local market, so it’s definitely worth comparing the numbers to see for yourself what makes the most sense. Whether you decide to purchase new or old will depend on your investment and management style (of the property and tenants), personal preferences and of course, budget.
Needless to say, your decision to purchase an investment unit will be defined and limited by your available budget. In addition to looking at the monthly cash flow impact of any condo investment, you should also consider:
All of the experts we spoke with were unanimous in their opinions that any condo investor should obtain a mortgage pre-approval prior to beginning their search in order to know with certainty what they can afford. Contrary to popular belief, the mortgage pre-approval is a typical requirement even when purchasing a unit directly from the developer, so this recommendation applies regardless of whether you decide to head down the pre-construction, new build or completed condo route.
To begin, it’s important to keep in mind the recent mortgage rule changes which will directly impact your decision to purchase an investment property. As of April 2010, non-owner-occupied units purchased for speculation in Canada require a minimum 20% down payment in order to qualify for a mortgage. And on March 18, 2011, a few more changes will come into effect. For further information on the upcoming mortgage rule changes, please click here.
Hints & Tips: Getting a mortgage pre-approval as suggested above will help you narrow down the impact of these changes.
While important, remember that the two factors discussed here – investment type and budget – are only part of the equation in determining which condo investment property is right for you. Tune in tomorrow for Part 2 of this series in which we’ll discuss some other important factors – location and size – to consider in purchasing a condo investment property.