RESALE VS PRE-CONSTRUCTION - 3 FACTORS YOU MUST KNOWBy CondoWong Friday August 16, 2019
You have decided to invest in Toronto condo.
Should you buy an existing condo from the resale market or should you buy a pre-construction unit to be completed in a few years?
Resale or Pre-construction?
This is one of the most popular questions I answered on a daily basis.
I am going to share with you, 3 factors you must know before you make your decision.
The main difference between a resale unit and a pre-construction unit is the closing date.
For a resale unit, usually the closing happens 60 days after the purchase.
For pre-construction unit, the closing won’t happen until a few years after.
Here comes the Factor #1 - Money
Upon closing, you need to come up with 100% of the purchase price.
The money can either come from your own savings or from a mortgage.
To buy a resale unit, you need to come up with this 100% purchase price within 60 days.
If you have 30% in cash, make sure you can get the remaining 70% mortgage from the bank.
To buy a pre-construction unit, 20% cash is needed.
The remaining 80% is due upon closing in a few years.
Pre-construction sounds like the way to go if you want to delay dealing with mortgage applications.
However, if you are planning to retire in the next 2 years or if you are anticipating a significant income drop, you better get your mortgage commitment sooner rather than later.
In this case, resale unit is a better choice for you.
Factor #2 Sense of Touch
Buying a resale unit is like shopping in a physical store, where you can feel and touch the product.
Buying a pre-construction unit is like shopping online, where you buy from photos and specifications.
If you are the kind of people who must feel and touch before you buy, then you can only consider resale; otherwise, you can open up your selections in both worlds.
Factor #3 Rental income
The time you start collecting rent and how much rent you can collect are both important elements in your investment equation.
With a resale unit, you can start collecting rent right away.
With a pre-construction unit, you would have to wait 4 years before you can start collecting rent.
How much rent you can collect is directly affected by the rent control policy.
This policy has 2 parts. The 1st part applies to units that were completed before November 15, 2018, let’s just call these OLD units.
The 2nd part applies to units that were completed after November 15, 2018, let’s just call these NEW units.
For the OLD units, you can only increase the rent once a year according to the rent increase guideline set by the government.
The increase in 2019 is 1.9%.
And the increase in 2020 will be 2.2%.
You may not like this, but if you purchase a resale unit that’s in this OLD unit category, then you have no choice but to obey this guideline.
For the NEW units, you are still limited to increasing the rent once a year, but there is no limit to how much you can increase.
This means you can legitimately increase the rent from $2,000 to $10,000. If your tenant does not agree to the increase, he or she may choose to leave.
In an OLD unit, you would only be able to increase the rent to a maximum $2,038.
Some investors are trading OLD units for NEW ones so that they can enjoy the benefits of the new rent control policy.
Can you find NEW resale units in the market?
It’s tough because only 1% of the condo units in Toronto right now are completed after November 15, 2018.
So if the new rent control policy is very important to you, then pre-construction unit may be a better choice for you.
Let’s recap on the 3 factors you must know before you make your decision on resale or pre-construction.
If you need advice on where and what type of unit you should invest in, you can schedule a call with me.
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