How do I buy a pre-construction home in Ontario?
As of late 2022, home sales in Toronto were down almost 50% versus the prior year. When real estate sales slow down, one of the best opportunities in the market is often overlooked: pre-construction homes. We’ll tell you exactly how to buy a pre-construction home in Ontario, and answer some of the most commonly asked questions about buying pre-con. We’ve been the the process many times and aim to equip you with the knowledge you need to make the best pre-con investment possible.
How do I buy a pre-construction home in Ontario?
Find a realtor who specializes in pre-construction homes. Although buying a pre-construction home or condo can be significantly more profitable than buying on the resale market, the process is also different and more complex. Having an experienced realtor on your side to help identify the best projects and guide you through the process is a tremendous advantage. A realtor with platinum status has access to the best projects and gets the first look at newly launched projects. Their clients not only get their more selection and first pick of their preferred unit but also tend to pay a lower price because pre-construction homes tend to increase in price with each subsequent phase of development.
Define what type of property you’re looking for. Are you looking for a condo, townhome or detached home? How many bedrooms and bathrooms? What type of amenities are important to you? Create a profile of the type of property that best suits your needs to help streamline your search.
Pick a short list of areas that you're open to buying in. There are hundreds of pre-construction projects underway in Ontario at any given time. Identifying your preferred cities and neighbourhoods will help to concentrate your search and narrow the number of pre-construction projects to choose from.
Figure out when you need to close on the property. Pre-construction projects take varying amounts of time to complete. If you need to move into your new home within the next year, your pre-construction options may be limited. If you have more flexibility on move-in date or plan to rent the property and are open to exploring projects that are 2-4 years out from completion, this broadens the scope of available projects you can explore.
Determine your budget based on move-in date and deposit structure. Your budget for purchasing a pre-construction home is typically larger than your budget for a resale. This is because although you're buying based on today's prices, you don't need to come up with the entire 20% down payment right away. Most pre-construction projects offer flexible deposit structures which gives buyers the opportunity to pay the deposit in smaller installments over the course of the project, creating more time to save up the deposit. Let's assume you have $50,000 saved up today and want to put it toward the purchase of a home. The 20% down payment requirement in Canada means that your $50k can be leveraged to buy a $250,000 home. Let's say however that you are flexible on timing and don't need to move into the home for another 3 years. If you can put away $10k per year for the next 3 years that would mean you can amass a deposit of $80,000, which can buy a $400,000 home. In this example, buying pre-construction instead of resale would increase your home budget by $150k (or 60%).
Pick a short list of projects. Once you've clarified the criteria in items 2-5, work with your realtor to develop a list of projects that meet your requirements. Then, take some time to review the renderings and building plans for each development to get a feel for the architectural style and understand what features and amenities the development offers. Review the different models offered for sale to see how each one lines up with your required criteria.
Run the numbers. Do you plan to live in the unit or rent it out? If you're buying the home as a residence, running the numbers is really just a matter of ensuring you're comfortable with the monthly payments and making sure they fit within your budget. If you're buying a property as an investment the key question you want to ask before moving forward with the purchase is, "is the property cash flow positive?" The answer entails understanding what monthly rental income and tax benefits you expect the property will generate and then subtracting out any costs associated with operating the property to arrive at your net income or monthly cash flow. Positive cash flow means that the property puts money in your pocket each month after all expenses are paid while negative cash flow indicates that the property costs you money over and above the income it generates. Although positive cash flow is always preferable, keep in mind that cash flow alone doesn't tell the entire story because it doesn't consider the benefits of capital appreciation and mortgage pay down. Those who bought a pre-construction home in Canada in 2019 and 2020 saw their investments increase by 25 to 50% (depending on the local market) by the time construction was complete.
Invest in your amazing pre-con property. If the numbers make sense, the property fits your profile and you love the area, it’s time to invest in your amazing new home and make your dream a reality!
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Is buying pre-construction cheaper?
A pre-construction home generally costs less than its equivalent on the re-sale market. Pre-construction buyers receive a discount because they are agreeing to purchase home that has not been built yet. If you’re able to wait 2-3 years before moving in, buying a pre-con is a great way to save money on a property purchase. Another benefit of having a long period of time before your home closes is that it gives you time to build up a down payment. Deposits for pre-construction homes are paid in progressive stages until the property is move-in ready, so you don’t need to have the entire down payment available immediately.
Buying pre-construction is one of several fantastic strategies to help first-time buyers afford a home sooner. You can find our popular article here that shares proven strategies to afford a home in an expensive market.
Is it a good time to buy pre-construction in Toronto?
Yes, it is a fantastic time to buy a pre-construction condo in Toronto. After a 46% pullback in Toronto home sales from the February 2022 peak resulting in an 18% drop in average home prices, now is an excellent time to “buy the dip” and score a discount on a pre-construction home. Toronto is a flourishing global metropolis with outstanding long term growth potential, and the current temporary slowdown offers buyers an opportunity to take advantage of reduced pricing before the next inevitable spike. When assets with high intrinsic value go on sale, these are rare wealth building opportunities that only come around a few times in a lifetime.
Do new build homes lose value?
Unlike many depreciating assets that lose value as soon as you buy them, pre-construction homes in Canada hold their value just as well as re-sale homes. In fact, new builds are often in higher demand because they’re less lived in which means less wear and tear, there are no essential upgrades or renovations required and the style and design are up-to-date. It’s also important to note that because the selling price of a pre-construction home is generally lower than it’s equivalent on the re-sale market, they tend to appreciate in value more quickly than their re-sale counterpart once construction is complete.
How much deposit do you need for a new build?
Buyers of new builds in Canada will need to put a 20% down payment if they are residents, and 35% down is the requirement for non-resident buyers (20% to the builder + 15% non-resident tax). Fortunately, most builders offer a flexible deposit structure which allows buyers to pay the deposit over the course of the construction project, which is often more digestible than paying the entire down payment all at once. A common arrangement is $2500-10,000 upfront, several increments of 2.5-5% and then 5% on closing.
For first time buyers, the Government of Canada has released a First-Time Home Buyer’s Incentive Program through which they provide a 5% or 10% down payment toward the purchase of a first-time Buyer’s newly constructed or re-sale home. For example, on a $500,000 the government would cover $50k for a successful applicant which lowers the amount they need to finance which reduces their debt obligation and monthly payment. This program is available to first-time buyers with incomes of $120,000 or less.
Can I use my RRSP to buy pre-construction?
The Home Buyer’s Plan offered by the Government of Canada allows first-time home buyers to withdraw up to $35,000 from their RRSP toward a down payment for buying or building a qualifying home. The buyer must be a resident of Canada and must occupy the home as their primary residence within one year of the purchase date. The program allows buyers 15 years to pay back the withdrawn funds.
