Is Buying a Pre Construction Condo in Toronto Worth It?
Despite a temporary pullback in prices experienced by the Toronto housing market in 2022, buying a Toronto pre-construction condo is still a fantastic strategy for generating long term wealth. We answer some of the top questions about pre-con and explain why it’s still worth it to buy a Toronto/GTA pre-construction condo.
What exactly is a pre-construction condominium?
A pre-construction condo is a condominium project that has not been built yet. To finance the project, developers sell units in the condo before construction has started based of off floor plans and renderings. They usually begin to break ground once the majority of units are sold. Typical time between purchase and occupancy of physical units is 2 to 5 years.
Is it worth buying pre-construction?
Buying pre-construction can be a fantastic investment and comes with a number of advantages including flexible down payment schedules, discounted prices versus current market, the ability to create leverage and greater freedom of choice.
Flexible down payment: You don't need to come up with the entire down payment upfront. Many developers have flexible deposit schedules which allows buyers to pay the down payment in stages over the course of several months or even years.
Discounted price: Pre-construction homes typically sell for a bit of a discount versus current market pricing for equivalent homes because you're buying something on speculation that doesn't physically exist yet. Provided you're buying from a reputable builder with a good track record, this discount is often worth the risk.
Leverage: Buyers only put down 20% (or less) as a down payment but benefit from gains on the entire value of the purchase. For example, let's say you purchase a pre-construction condominium for $350,000 with only $5000 due upfront. If the asset appreciates by 5% due to a sudden growth in real estate prices, you've effectively gained $17,500 in equity even though you only put down a small amount. With most other forms of investing, you only benefit from gains on the value of the principal amount invested.
Freedom of choice: Purchasing a home directly from the builder allows you the opportunity to pick the exact model, view, features, finishes and colours that you desire for your home. When you buy a re-sale home, you get what you get.
Buying a pre-construction condo in Toronto today is an opportunity to own a piece of the city of the future at today’s prices.
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Why do people prefer to invest in Toronto pre-construction condos?
Historically, pre-construction condos in Toronto have appreciated in value by 5% year-over-year. People have experienced success investing in the Toronto pre-construction market due to the city's continually high rate of population growth and demand for new homes coupled with a shortage of developable land which constrains available housing supply. Toronto's booming economy has become the home of innumerable financial services firms and tech companies which further drives demand for housing in the downtown core, which mainly consists of condos.
Can you lose money buying pre-construction?
Buying a pre-construction home in the right market is generally an excellent investment, but there are some important risks to consider before making a purchase including build quality, occupancy fees and closing costs.
Build Quality: there's always an element of risk in buying anything based on plans alone before it's physically constructed. It is important to make sure the developer/builder you're considering buying from have a strong track record of producing high-quality projects and satisfied clients. If you're local to the area, it never hurts to go see some of the developer's past projects in-person and check out the quality of the build/finishes yourself. If you're investing in an out-of-town project, check out reviews and testimonials online. Proceed with more caution when working with a novice developer.
Occupancy Period: there are two closing dates associated with pre-construction condominiums – the occupancy date and the registration date. The occupancy date is when your unit is ready for you to take possession however title is not officially transferred until registration. The period between these two dates is called the occupancy period, during which time builders charge a monthly fee that approximates the costs unit owners will incur after registration, including mortgage, taxes, common area maintenance and insurance. Occupancy period can be as quick as a few weeks but may be as long as 5-6 months in duration. Some builders allow owners to rent their units during the occupancy period which helps to cover these costs but it is important to refer back to the agreement of purchase and sale as each builder has a different policy regarding this topic.
Closing Costs: there are more closing costs to consider when buying a pre-construction condominium versus a re-sale unit. When buying re-sale, the only closing costs to consider are land transfer tax, common area maintenance and legal fees. For pre-construction, the list is more extensive and may include the following:
Development Levies: $4000-8000. When a new building is developed, the municipality requires the developer to contribute funds toward local parks, community projects, etc. These costs are passed on to buyers on closing day. The good news is, this charge can be mitigated. Before signing an agreement of purchase and sale, speak to your lawyer about getting these costs capped to avoid any unpleasant surprises upon closing.
Utility Hook Up: $1000-2000. Utility companies will charge a fee for connecting gas, hydro and water for the first time.
Tarion Enrollment Fee: $1000-1200. Participation in the new home warranty plan offered by Tarion is a requirement for new builds.
Reserve Fund: $500-1000. This cost typically represents 1-2 months' worth of maintenance fees and is intended to kick-start the reserve fund which is maintained by the condo board to cover unexpected repairs that may arise.
I know from personal experience that it’s critical to ask the builder for an estimate of the closing costs before signing the agreement of purchase and sale. Having clarity upfront about what the closing costs could look like will help to prevent any unpleasant surprises down the road. If your builder unable to provide an accurate estimate, ask them which charges are capped. Many builders will cap development levies but only for buyers who ask. Capping closing charges where possible is important because this will help prevent runaway costs.
This is the first pre-construction condo I ever purchased. It is located in the GTA.
How does an assignment sale work?
Assignment is when the original buyer of a property sells (or assigns) their interest in that property before physically taking possession. In other words, the original buyer assigns their contract with the builder to a new buyer who assumes the rights and obligations associated with that contract. Assignment sellers benefit by cashing in on any equity they've built without having to pay extensive closing costs. Assignment buyers benefit by acquiring a brand-new unit without having to wait 2-5 years before closing.
If interested in selling your new build on assignment, it is important to check the agreement of purchase and sale first as each developer has different rules regarding assignment. Some contracts allow free assignment while others charge a fee, and some forbid assignment altogether.
How much do you need to put down on a pre-construction condo in Toronto?
Buyers of pre-construction condos are required to put down 20%. Fortunately, builders often have a flexible deposit structure which allows purchasers to pay the down payment over an extended period of time (sometimes over a year), with only a small amount paid upfront.
Do you pay HST on a pre-construction condo?
If you are buying a pre-construction condo as your personal residence (or as a residence for an immediate family member), you will not need to pay additional HST because the HST rebate is already built into the purchase price. If you are buying a pre-construction condominium as an investment property, you will need to pay HST on closing, which typically amounts to $24,000. That said, investors can recoup the HST after closing by applying for the New Residential Rental Property Rebate (NRRPR). In order to qualify, investors must provide a lease agreement at least 12 months in duration, demonstrating that the property is rented to a tenant. Those planning on flipping the property are not eligible. If you sell the property after receiving the rebate but before the 12-month lease agreement has run its course, you will be required to pay the HST rebate back in full.
How much are pre-construction condos in Toronto?
The average price per square foot of a pre-construction condo in Toronto is $1050. This means you can expect to pay an average price of $630,000 for a new 600 square foot unit and $1.05M for a new 1000 square foot unit.
If you’re interested in buying pre-construction anywhere in Ontario, we have a great guide that maps out the simple steps needed to make the best purchase within your budget.
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