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The Pros and Cons of Buying PreConstruction

Buying pre-construction means that the buyer invests in a unit before the project is actually built. This requires a certain amount of foresight, research, and thinking like an investor rather than a live-in purchaser. You need to know exactly where that neighborhood is heading in the coming years, the potential future returns on your investment, and the comparisons between different project options within your budget constraints.

While looking into new development options, here are some factors you should be considering:

  1. Surrounding Amenities
  2. City plans for the next 10 years
  3. Transit friendliness
  4. Parking/Garage options
  5. Price per square foot
  6. Market value
  7. Comparables in the same building
  8. Comparables on the same street
  9. Growth/appreciation
  10. Floor plans
  11. Condo amenities
  12. Features and finishes
  13. The developer’s reputation

Remember that real estate investments are only likely to bring positive returns if you hold onto them for 5-10 years. This goes for both pre-construction and resale units. You need to seriously consider both your own financial plans within that timeline, as well as the needs of any prospective tenants that you might rent the unit out to.

Pros of buying a pre-construction unit:

  • You get a say in the design plans and can customize certain elements (such as appliances, finishing, paint, and flooring). If you understand design trends and mass-market needs, you’ll be able to ensure your condo’s desirability to potential tenants.
  • Value per square footage is always better. Pre-construction condos offer incredible value when compared to other investment options.
  • You’ll have more time to save up for your condo, by paying the builder a series of smaller payments as deposits. The deposit usually adds up to 20 to 25% of the purchase price by the time of occupancy, depending on the builder’s deposit structure.
  • You get a brand new project. New condos tend to be trendier, more upgraded and offer better amenities than their resale counterparts.
  • Low maintenance fees. New buildings require less maintenance, which means less long term budgeting. And no renovations for at least a decade!

Cons of buying pre-construction:

  • Even though you will have access to virtual representations and models, you are buying before seeing the finishes, the details or the outside view of the building.
  • Unlike a resale, a pre-construction sale is subject to HST. But if you’re planning to live in the new condo (rather than renting it out), you might be eligible for an HST rebate.
  • Nothing is guaranteed. A condo building usually takes several years to complete. There is always a chance that the builder won’t sell enough units to proceed with construction, or that they won’t finish construction on time (or at all!). Also, it sometimes happens that the condo looks a bit different when it’s finished than it did in the plans proposed by the builders.
  • The biggest con of a pre-construction unit is that it’s a non-liquid investment- you freeze up a large chunk your capital for 2-4 years (the time it takes to sell and build the units). Pre-construction units usually have larger down-payments than resale counterparts, and you can’t touch your cash or pull out should you need it.
  • It’s a bit trickier to calculate market value for a a pre-construction condo, since you can’t base value previous sales in the same building.  It’s also hard to tell what your rental income will be, which makes it harder to calculate your cash flow based on the investment..

All in all, both both pre-construction and resale have their pros and cons, depending on your preference, your budget and the amount of risk you’re comfortable with. Before you make a decision, it’s a good idea to consult a real estate agent and/or a financial planner to find out your options.

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