The Power of Pre-Construction Condo Investing: Buy in 4 Years, at Today’s Price

June 27, 2016 - 4 minutes read
 

By Ryan coyle. Co-Founder, CONNECT asset management

We often reminisce about how inexpensive things were just a few short years ago. And while it may be too late to buy a (half-decent) car for $500, or a cup of coffee for a quarter, investors have a time-traveling tool available to them. Seriously. And today we are going to break it down for you. Welcome to the world of pre-construction condos.

Pre-construction condos are a straight-forward concept. Condo developers need capital to construct a building. You have capital. They sell you a condo at today’s prices, and hand over the key in 3-4 years, when the condo is completed.

In order to understand how good a deal this is, it often helps to run some concrete numbers. And that’s exactly what we’re about to do.

Pre-Construction Condo Investing: The Numbers

So, let’s get down to it. Condos in Toronto saw a 4.1% appreciation over the last year. ThisĀ appreciation will be good to use for projecting future appreciation in Toronto, although it is conservative. We say this because the skyrocketing price of single family homes in the GTA continues to push more people towards condo living. But I digress.

Now, imagine you buy a $400,000 condo today that won’t be complete until 4 years from now.

Let’s do the math. We’ll take the purchase price ($400,000) and track the appreciation on it (4.1% per year) over 4 years.

Year 1 Value: $400,000

  • – $400,000 * 0.041 = $16,400
  • – $16,400 + $400,000 = $416,400 = Year 1 value. Now, we rinse and repeat.

Year 2 Value: $416,400

  • – $416,400 * 0.041 = $17,072.40 + $416,400

Year 3 Value: $433,472.40

  • – $433,472.40 * 0.041 = $17,772.37 + $433,472.40

Year 4 Value: $451,244.77

  • – $451,244.77 * 0.041 = $18501.04 + $451,244.77

End of year 4 value = $469,745.81

So in 4 years time, you will have paid a minimum of 20% of $400,000, for a property that is now worth just under $470,000. Not bad! With only $80,000 down (20%) you will see an ROI of 88%. This is an extremely conservative number given condos in the downtown core and neighbourhoods we strategically invest in see MUCH higher returns.

Pre-Construction Condo Investing: Additional Benefits

The perks of buying a pre-construction condo don’t end there. Investing with a condo builder early will give you a lot more than just a low price.

As you’re one of the first people on board, you’ll have first pick at which unit you want. If you’re able to choose a condo unit that is more competitive, you’ll have an easier time finding good tenants and charging higher rent prices.

If you’re a first-time buyer or money is tight, another benefit of pre-construction condos is the option to split your deposit payment. Instead of dropping the full 20% deposit amount, you typically have the option to pay a lesser amount, save up for an extra few months, then pay the remaining amount. This can typically be broken down into 4, 5% payments over the course of a year. But conditions on this can vary.

If that’s not enough to get you excited, the cherry on top is the free upgrades builders sometimes throw in for their early buyers. Stainless steel appliances? Sure. Granite counter tops? Why not!

As you can see, there are a lot of perks to purchasing pre-construction condos. Whether it’s the early appreciation, the upgrades, or the split deposit payments, investing early always pays off. Although it takes some patience to wait for your building to be built, when it is finally built, you’ll be thankful you waited.

Ryan Coyle, CoFounder CONNECT asset management

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