Pre-construction vs Resale Condos: Four Common Investor Missteps to Avoid

Whether you are a new or seasoned investor, finding a property worth your investment can take a great deal of time and research. Among many factors to weigh, deciding between resale or pre-construction can be challenging.

Toronto real estate guru and founder of truecondos.com, Andrew la Fleur, recently posted a podcast discussing just that; resale vs pre-construction condos for investment purposes.

In the podcast, Andrew talks about the “why” behind pre-construction condo investing and answers many of the most common objections to investing in pre-construction condos such as, “Isn’t it better to buy resale and get income right away?” and “Aren’t houses a better investment than condos?”.

I want rental income right away

It is extremely hard to find positive cash flow properties in the resale market today. If it was easy, then everyone would be doing it; but that’s not the case.

There are three issues here; firstly, you are paying a massive premium when you are buying resale. Remember, the person you are buying it from paid much less in pre-construction than the price that you are paying them today. You are paying a massive premium over what price you could have bought that unit for.

Secondly, there are a lot of inflationary pressures. Buying a cash flowing asset, like a pre-construction condo, is a fantastic inflation hedge. Prices are going up in the market constantly; every year prices keep going up due to these inflationary pressures; including rental rates. When you purchase pre-construction at a certain price, the value of that asset goes up over time before it is built, as does the amount of rent that that property can generate.

For example, if you purchased a condo in 2010 or 2011 and you rent it out today, a few years later, the rent that you can get today on that condo is much higher than the rent you could have got 4-5 years ago. The price that you paid for that unit 4-5 years ago for that unit is much cheaper than the price you would pay for that today. So, when you are buying something pre-construction, by the time that it is finished, you are in a very good cash flowing position (in most cases) because rental rates have increased significantly over time. Also, you are in a very good equity position because the value of that asset, the price of that asset, has also gone up tremendously over time.

Finally, on wanting rental income right away, there is nothing wrong with wanting rent right away, but with that rental income comes management, comes taxes to pay, and comes time and effort to spend on getting that income. When you are buying pre-construction, you don’t have to do anything; your money is in the market, you’re taking advantage of that inflation hedge and equity is growing, and you won’t have to think about it for a number of years.

I don’t want to pay closing costs

You still pay the closing costs. Keep in mind, someone already paid the closing costs and they are, no doubt, accounting for them in the price of the resale unit. People will not sell at a loss, unless forced to. 95% of the time when someone is selling they are accounting for all those costs and trying to make a profit.

Closing costs are constantly going up; this is another inflationary pressure. Closing costs are essentially taxes imposed by different layers of government on real estate transactions, and particular on new properties that are being built. You might think you are avoiding these closing costs, but you will pay them eventually; these costs will be passed along to you in the resale market.

I want to be able to see what I am getting in-person

You may think you need to see it, touch it, feel it before making your decision, but why? You should have an investor’s mentality first and foremost; you are never going to live there. This is purely a financial decision, a logical decision.

Part of the pre-construction investing game is the existence of risk and reward. Pre-construction might not be for everyone, if you need to see it and touch it, it’s probably not for you.

Isn’t resale cheaper?

Most of the time, yes it is because the average resale property is old. When you are talking about a commodity like condos, something that is newer is going to cost more. However, older product will cost you more to maintain and will generate a lower retain income, and it will have a higher depreciation rate. Just goes to the old adage ‘you get what you pay for.’

“The goal of every condo investor should be to find the diamonds in the rough, and if you can do that you are set and you will do very well with your investments.” – Andrew la FluerCheck out the full 30 minute podcast here: Why Invest in Pre-construction Condos (fast-forward to 20:45 to listen to the four objections, debunked).

Visit us at the sales centre in East Village to find out how a pre-construction investment property at INK could be right for you. We have numerous resources and third-party studies analyzing how each unit will cash flow, and we can help you find the right fit for your investment portfolio.

Questions? Call us at 403.452.9268.

Erin @ Battistella