Several of my investor clients have recently asked me: “Should buy a pre-construction condo?” I wanted to talk about this considering a recent study conducted by Urbanation and CIBC, because I have some interesting numbers to talk about!
I just want to note a couple of things:
- This discussion is more for investors and crunching the numbers. If you are buying a condo for personal use there are other factors to consider.
- My philosophy is that there is no right and wrong in real estate investing. There are lots of ways to make money in real estate. (And I will be talking about some of those in upcoming posts) Real estate investing is about maximizing returns for the capital you have for investment, your access to leverage, your risk tolerance and your real estate investment knowledge.
Okay so let’s talk about the numbers. On condos that closed in 2017, the average from pre-sale to construction was 60 months:
- The average down payment was approximately $75,000 and the return on investment was $155%. Not bad!
- 20% of new condo owners register with no mortgage
- 48% of new condo owners were investors
- 30% of investors & home owners are paying between 6-9% interest rates
- 44% of investors have negative cash flows (rent minus mortgage payments and condo fees)
- 15% of investors have a negative cash flow great than $1000/month
Okay so back to the question: “As an investor should I buy a pre-construction condo?”
Here is what you need to know:
- According to the study, rents will need to increase by almost 30% for you to be cash flow neutral when the condo closes in 5 years. Yes, there will continue to be upward pressure on rents, but will they go that high?
- Condos prices have gone up 42% in the last two years, how much higher will they be able to go? (It was 51% appreciation for the condos that closed in 2017)
- 93% of all units currently under development have been pre-sold. If you have tried to buy a pre-construction condo recently you know if can be tough to get one and get a decent layout.
I hope that helps! If you have any questions or want to talk real estate or real estate investment, please drop me a line!