4 Commandments of Pre-Construction Condos
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
Tax Implications: For investors, HST is payable at closing and up to $24,000 is rebated if certain conditions are met. Consulting with an accountant and/or lawyer upfront is important in understanding the total closing costs required
2. Deposit Structure
Typically for pre-construction condos, the deposit structure is the following:
Initial deposit of $5,000 – $10,000 at signing to be deposited after the 10 day cool off period when the purchase contract is firm
30 days: 5% less initial deposit provided at signing
90-120 days: 5% of purchase price
180-270 days: 5% of purchase price
365 days or closing: 5% of purchase price
There is a variance in the time frame builders require the down payment but typically 20% is required at closing. For non-resident foreign buyers investing in pre-construction condos, 35% down payment is required and the 15% non-resident speculation tax (NRST) is payable at closing. NRST is rebated if the non-resident becomes a resident within 4 years of closing on the property or if they have a child attending a local school for at least 2 years. Consulting a lawyer and accountant upfront during the 10 day cool off period is imperative in understanding the total cost of investing in pre-construction condos.
Finishes selection takes place approximately 8-10 months prior to interim occupancy. Upgrades are paid for then, they can not be included in the mortgage.
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:
Interest portion of the condo 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. Having a clause in the purchase agreement to allow renting pre-construction condos during the interim occupancy period is important.
4. Closing Costs
For pre-construction condos investors, there are 4 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.
4. Non-Resident Speculation Tax (NRST)
Applicable to non-residents only. 15% is added to the purchase price. Eg. For a $500k pre-construction condo, $75k is required at closing
It is important to account for all closing costs when purchasing an investment condo to ensure adequate capital is available and avoid delays closing.
There are two methods of investing in condos: pre-construction condos or resale investment condos.
Looking to invest in pre-construction condos? We put together a timeline explaining the process. Contact us for our detailed analysis on neighborhoods to invest in.