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Why Investing in Pre-Construction is a Good Idea

By All Access Homes

February 19, 2024

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4 Reasons to Invest in Pre-construction

In Toronto's thriving real estate market, pre-construction condo investing remains a lucrative long-term investment opportunity. Beyond the allure of quick property flips, holding onto a property for an extended period, with tenants covering your mortgage, can generate passive income well into your retirement.

Here are four reasons we believe in investing in pre-construction condos:

Less Cash Needed Upfront

Most pre-construction condos typically require a 20% deposit of the total purchase price. This deposit is often divided into multiple 5% installments to be paid over the project's construction phase, which typically spans 3 to 5 years, depending on the project.

For a $500,000 investment, a 20% down payment would amount to $100,000. Not everyone has that much cash readily available. This is one reason buyers and investors favor pre-construction condos for their flexible deposit plans.

Maximize Your Investment

When you invest in pre-construction condos, you're leveraging the developer's money against the property's full value. Your investment appreciates based on the property's total value, not just the amount you've invested. This is significant because, with a 20% down payment, the bank finances the remaining 80%, but your investment appreciates at 100% of the total property value. The bank finances the increase in equity.

Let's illustrate this with numbers: A $600,000 condo investment with a 20% down payment. Assuming a 5% annual real estate appreciation rate, after four years of construction, the condo's value would be approximately $729,304. That's a $129,304 gain in equity, resulting in a remarkable 108% return on investment. This growth happens while you're waiting for the condo to complete, and it occurs before you even move in. With the right property, rental income can cover your mortgage, allowing your tenant to pay down your mortgage.

Growing Rental Income and Long-Term Gains

As time goes by, rental rates tend to increase, and over the course of 3 to 5 years, as the condo project is completed, you can expect rents to have gone up. This allows you to benefit as your tenant covers your mortgage.

Rental income not only takes care of your mortgage expenses but also helps you build equity in your investment. Real estate investments are geared for the long haul, not quick gains. With rents continuing to rise, you'll enjoy consistent monthly rental income. In the long run, your tenant's payments will eventually pay off your entire mortgage on the rental property, leaving you with passive income for as long as you choose to hold onto the condo investment.

Building Equity

Significant equity will have built up in your property over the 3 to 5 years it takes to complete your condo. This increase in value, occurring even through the construction phase, means that by the time you receive your keys, your investment will have a substantial amount of equity. This built-up equity, based on the TOTAL value of the property and not just the down payment, can be leveraged upon closing. Refinancing to use this equity as a down payment for additional investment properties is a key strategy for maximizing your returns.

Create Generational Wealth

We have all experienced shifts in interest rates. Savvy investors take advantage of these market changes to build and optimize their real estate portfolios. What’s amazing about real estate and leverage is that tenants pay off your mortgage, and over the years, you will eventually own a mortgage-free property that generates cash flow.

Imagine owning multiple properties, for instance, five condos, each with its mortgage paid off, and you are collecting $2,000 per condo in rent. That adds up to $10,000 per month in passive income, providing a continuous cash flow.

Real estate is a long-term strategy, unlike the often short and quick wins of the stock market. It's a pathway to creating generational wealth over time. Smart investors make smart real estate investments because they understand the power of leverage.

Are All Pre-Construction Condos Created Equal?

Not all pre-construction condos are great investments. My team and I work closely with the city’s top builders to bring you carefully selected pre-construction opportunities that we believe are great investments. Give me a call; I would love to chat with you to understand your investment goals and present opportunities that closely match them.

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