Condo Investment Insights

There is no sense waiting until the end to tell you… BUY THEIR CONDOS. The closer we work with developers and the more opportunities we have to see pro formas for certain developments, the more obvious it becomes that you make more money investing in condos than developing them.

The typical high-rise development targets returns in the 10-15% range, meaning that a $100 million dollar project would yield returns of $10-$15 million. Seems like a good deal, right? Except when you account for all the steps that developer had to complete to achieve those returns:

WHAT THE DEVELOPER HAS TO DO: SELL NOW AND GET THEIR MONEY LATER

The developer needs to buy the land, possibly do an assembly, negotiate zoning with the city, design and market the building, sell at least 75% of the units, build the building, sell the remaining units, and finish the building before they receive a penny from the purchasers. Furthermore, they sell at 2018 prices but have to complete the building in 2022 after prices have risen.

Construction costs in the city have gone up dramatically over the last couple of years. Donald Trump starts a trade war with the Canada and price of materials increase? The developer eats that cost. The city increases their fees and levies? The developer has to absorb those as well, given that they are capped in purchase agreements. The fate of developers as described above however is totally reversed for the condo purchaser…

THE CONDO INVESTOR GETS TO BUY AT PRICES FROM 4 OR 5 YEARS AGO…

As a purchaser, you have the opportunity to buy at current prices with the exception of a 15%-25% deposit you pay when the building is complete. If I gave you the opportunity to buy a condo or house at 2014 prices today, you would take it in a heartbeat because of the staggering price increase that has occurred in the interim period. That is what investing in pre-construction is. The best part? Your risk is minimal because your deposits are in a lawyer’s trust accounts until the completion of the development.

Take a look at this chart with selected Brad J. Lamb projects in which Brad (the developer) would have been making 10-15% returns per unit. Consider gläs Condos at King and Spadina: he would have made somewhere between $29,000 to $45,000 per unit while the purchaser would have made over 5 times that amount, coming in somewhere around $250,000. It seems too good to be true, but it’s not. It’s simply smart investing.

With evidence from countless similar examples, any developer would admit to their purchasers making more money than they do.

So why do they sell so early?

Simply put, the banks won’t finance the construction without the units being sold to qualified purchasers. One of the reasons we’ve never had a major correction in the condo market is because the developers sell out their buildings before construction. This means that there is never significant resale inventory coming into the market that needs to clear out.

Unlike in the stock market where the “smart money” is never the individual investor, the insider or platinum VIP investors in the pre-construction condo market have an opportunity to generate higher returns with much less risk than the developers that sell it to them.