Is pre-construction still a good investment?

Once upon a time, buying pre-construction was a cheaper route to home ownership and profitability – buyers got a “discount” for waiting years for a place to be built. But those days are gone. Pre-construction condos are no longer the deal they once were. In fact, these days, they’re much pricier per square foot than resale.

So are pre-con properties still a good investment? The answer is yes: if you’re an investor who can wait 3-4 years to see a profit, and doesn’t need cash flow right away. It’s an excellent route to building that passive appreciation – without actually paying a mortgage.

The pros of pre-con investment

You don’t have to have the whole down payment up front. If you put 20% down on a $1M resale, that’s $200K you have to hand over in a lump sum as soon as you close. But with pre-con, that 20% is spaced out over time: usually four chunks of 5% before you take possession. You can use that money for other things in the meantime, or have more time to save it up.

No mortgage needed until the building is done. Unlike a resale, you don’t take out a mortgage until you close. Without a mortgage, you don’t have that debt on the books, so you can use that “borrowing room” to invest in something else.

You can make a big profit. The amount you make depends on how early you can get into a project. Most developments have multiple “allocations.” In other words, they launch blocks of units at different times. Each allocation costs more than the one before: in later releases, you’re looking at paying $25-35K more for the same floor plan. So the earlier you buy, the less you pay – and the higher your profit. But remember, making money on pre-con is a long-term play: it isn’t for investors looking to turn a quick profit.

You can sell before closing. This is how a lot of investors make money. They buy early, then sell the contract before occupancy. This move is called an assignment sale. Not every project allows these (and those that do generally put limitations on them), so it’s good to understand those terms before you buy. A huge upside of an assignment sale is this: you can take advantage of 3-4 years of appreciation, but avoid closing costs and land transfer taxes. Those end up getting paid by the person who owns the unit when the building has been completed. And you never have to take out a mortgage.

It WILL appreciate. Yes, paying $1,400 or more a square foot seems crazy right now. But it won’t seem so crazy in four years, when prices have gone even higher. Remember this: over the last 100 years, property values have basically doubled every decade, despite some shorter-term peaks and valleys. And once you close, you’ll already have additional equity to draw from for other investments.

No rent control. Anything built after November 2018 doesn’t have the same rules about rent increases as units built before that date. Which means you can keep your rents at market rate, and not be limited by government-mandated increases, which generally don’t keep pace with the market.

You can rent during occupancy. The occupancy period is the time between being able to live in a unit and actually owning it. You’ll end up paying occupancy fees equivalent to your monthly mortgage payment – without it actually going towards your mortgage. But if the builder allows rentals during occupancy (that’s something an agent can help you negotiate), a tenant can cover your costs so you’re not out of pocket.

The cons of pre-con investment

Buying pre-construction is expensive. That higher price per square foot is there for a reason. Developers are forecasting how much a unit will be worth once it’s completed, not what it would be worth right now. So if affordability is a factor for you, buying a resale unit is definitely cheaper.

No cashflow. If you need a renter to be covering your monthly costs from the outset, you’re better off investing in something else. Your 20% will be parked until the unit is ready to be lived in or rented out, so if you can’t afford that, pre-con is probably not for you.

Investing in pre-construction is a big topic: there’s a lot to know. I’ll be writing another blog soon. Stay tuned for 5 things to keep in mind when you’re investing in a pre-con property.

Looking to invest in a pre-construction project in the GTA? I have VIP access to a number of high-demand developments in the GTA, with pre-negotiated investor incentives and other perks. Get in touch to find out more!