There are four reasons why I like resale investment condos over pre-construction condos.
First reason is it exists. It's right there. When you walk into the condo, you can see it, feel it. You get a sense of the neighbourhood, the location, the views, everything's right there in front of you.
With pre-construction condos, you're buying off plans. You're looking at a two dimensional drawing that could possibly change and you don't get a full sense of the building, the amenities, the height, the views, and what's happening around you.
2. Money Starts Working From Day 1
The second reason is your money starts working for you right away, on day one. Here's what I mean: You put your downpayment, you pay your land transfer taxes and legal fees and on the first day of possession once you get the keys and you put a tenant in, right away you are getting four things working for you: cashflow, mortgage pay down, appreciation and tax benefits.
With pre-construction condos you're putting the down payment and then you have to wait until the project is complete until you get those four factors working for you. The only factor that works with pre-construction condos would be appreciation. There is no cash flow, there is no tax benefits, there is no mortgage pay down until the condo is complete, registered and you have a tenant put into the investment condo.
3. Closing Costs
Third reason is closing costs. With resale investment condos, you are going to pay your land transfer taxes. If you are buying in Toronto, you'll pay the city of Toronto land transfer tax, you're going to pay the province of Ontario land transfer tax, you'll pay a lawyer their legal fees and you're done. That's all you have to pay.
With pre-construction condos, there's a whole bunch of other stuff that you have to budget for closing above and beyond your two land transfer taxes and legal fees. You have section 37, you have development charges, you have HST for real estate investors, Tarion registration and other fees that you have to account for at closing. Now keep in mind your closing costs cannot be capitalized into the mortgage, which means you have to cut a cheque. It has to be cash. You cannot add it to the mortgage.
Fourth reason is timing. The typical timeframe for a pre-construction condo is four to five years from the day you buy it to the day it registers and you put a tenant in. Now over five years time frame, a lot of things can change with your life and circumstances, you might need that capital, you might need to sell. A lot of things can happen that could change your position or your needs with respect to that investment property.
With resale investment condo, the beauty of it is you have multiple options. Obviously you can sell it, which is not the best option because you want to invest over a long period of time. You can refinance the mortgage and tap into equity if necessary. You have options when it comes to the resale investment condo.
With a pre-construction condo, your pretty much only exit strategy is assignment, which is restricted by developers. They don't want to compete against private investors or owners who are trying to sell their condos before completion or registration when developers are still trying to sell the remaining units, if there is any left on the market.
With respect to pre-construction condos, you're pretty much locked in until registration. That's when you can sell, refinance or do what you need to do at that timeframe. But again, you have to hold onto that investment for possibly four to five years until it's complete.
Some developers will allow assignment prior to project completion/registration. Keep in mind if you assign your condo, ie. sell the right of ownership, there are significant tax implications. Canada Revenue Agency, CRA, would look at the sale as active business income. This means ALL of your profit will be added to your taxable income as opposed to capital gains where only 50% of the profits are added to your taxable income. There is also the risk of HST, as CRA might ask you to pay them 13% of the sale price if they deem the transaction as active business income. It’s important to consult with a tax professional on your exit strategy options and the impact on your tax situation.
With resale investment condos, you can tap into the equity through multiple options prior to the five year mortgage is up for renewal.
Let me know down in the comment section, what your thoughts about investing in resale condos versus pre-construction condos?
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