Have you thought about investing in pre-construction condos? Here are 4 things you need to know before taking the plunge into this type of real estate investing.
1. Cool Off Period
By law, a buyer has 10 calendar days where they can cancel the purchase contract without penalties. This cool off period is critical in completing due diligence:
- Lawyer Review: We highly recommend to have the builder's purchase agreement reviewed by a lawyer specializing in pre-construction condos to ensure there aren't hidden costs or surprises at closing. Some investors choose not to have a lawyer review the documents, however it is an important due diligence step that we highly recommend.
- Mortgage Financing: Builders want a qualification letter provided by the bank stating the buyer can qualify for a mortgage on the property. Mortgage terms and rates will be different at closing, however builders want to ensure buyers qualify and they use the letters to get their construction financing in place.
2. Deposit Structure
Typically, the following is the deposit structure:
- $5,000 at signing to be deposited after the 10 day cool off period when the purchase contract is firm
- 30 days: 5% less $5,000 provided at signing
- 90-120 days: 5% of purchase price
- 180 days: 5% of purchase price
- 365 days or closing: 5% of purchase price
There is variance in the timeframe builders require the downpayment but it is typically 15%-20% up to closing date.
3. Interim Occupancy
Interim occupancy period begins when the owners of the suites are allowed to move in but the title of the unit / building is in the builder's name. This period can last from 3 months and up to 12 months in worst case scenario.
During this period the buyer pays for the following costs corresponding to their unit:
- Property tax
- Maintenance fees
- Interest portion of the condo unit mortgage
The buyer pays for the cost of living in the condo however they are not the legal owner. This period of time can be tricky since condo investors want to rent their condo to generate cash flow, however they are not the owners. It is imperative to have a clause in the purchase agreement allowing the buyer to rent the unit during interim occupancy period.
4. Closing Costs
As condo investors, there are 3 closing costs to be aware of:
1. Land Transfer Taxes
In the city of Toronto, buyers pay for provincial and municipal land transfer taxes. Land Transfer Calculator
2. Development Charges
A lawyer reviewing the builder's agreement upfront during the cool off period would let the buyer know whether development charges are capped or not. Capping the development charges is a must. These are charges levied by the city of Toronto.
Investors pay HST on the purchase price of the condo, however a rebate is available via CRA pending certain conditions are met. Up to $24,000 of HST can be rebated to the buyer. At closing HST is payable.
It is important to account for all closing costs when purchasing an investment condo to ensure the right amount of capital is available and avoid delays closing.
Looking to invest in pre-construction condos? We put together a timeline explaining the process.