Is There Still Money To Be Made With Pre-Construction Condos?

King Toronto RenderingIf you’ve taken a look at pricing on some of the recent pre-construction condo launches in Toronto, you are probably thinking that the builders are out of their minds. $1200/sqft+ is becoming the new norm for any condo launching in downtown Toronto. This means that a 400sqft studio is now going for over $500,000 when everything is said and done (adding levies, land transfer, legal fees and anything else required along the way). This may sound like a lot, and I agree in many cases projects are launching at very ambitious prices, but if you look at the resale side you see another story. It is becoming harder and harder to find a half decent condo for less than $1000/sqft anywhere downtown, and prime areas are selling for well over that amount. Heck, even my listing at 15 Grenville last year sold for over $1300/sqft!  So when you really start digging deeper, the numbers aren’t that crazy in some cases.

There is no denying the condo market has been on a crazy run the last few years, and I really don’t expect we will continue to see the same double-digit returns (we are currently up 11.7% YoY on average condo price in the 416 as of last month) over the next few years, but I don’t see it falling off a cliff either. Demand is still very strong in the market and just a few weeks ago I submitted an offer for a client where there were 17 other offers for an average condo on Wellesley St. We didn’t get that one, but every condo we did view was averaging more than 1 offer.

That being said, I do think there is still definitely money to be made in pre-construction, but you need to do your due diligence and make realistic predictions. Be ultra conservative with your numbers. Since 2013 the average condo price has gone from $395,000 to $615,000 in the 416, and that averages out to an average return of 11.14% per year, so maybe just assume that will drop down to an average of 2-3% annually and if it still makes sense an investment jump in. But also take the rents into consideration and do your own research. Builders often show nearby rents at buildings which aren’t always a great apples-to-apples comparison.

Leverage In Real Estate Investments
Leverage In Real Estate Investments vs. Market Investments

If you are new to investing in pre-construction, let me explain why a 2-3% investment is still a very attractive return. Unlike buying stocks or mutual funds where you have to put down 100% of the money, with pre-construction condos you are typically putting between 15-20% down prior to closing. But here’s the magic, instead of just earning gains on your initial investment, you realize the gain on the entire value of the item you are purchasing while

Real Estate Investment Math

King Toronto - Pre-Construction
Recently Launched King Toronto

To make this easy to understand, let’s do a little math. Imagine you bought a $1,000,000 condo, you would need between $150,000 to $200,000. The average condo takes roughly 5 years to complete so assume that the condo goes up by 2% compounded per year. At the end of the 5 years, the condo has increased by $104,000. If your initial investment was $150,000 then your investment has grown by nearly 70%, or 14%/year. If your initial investment was $200,000 (20% down), your investment has grown by 52.5% or 10.5% per year. Sure, there are some costs in here that I am overlooking such as legal fees, land transfer tax, builder levies, etc., but then you have an asset which you can rent out and hold for a longer period once the building completes. Of course this sounds too good to be true, but it is possible the market could go down which is where the risk comes into play, but if you are in it for the long haul, and the predicted rents can cover the property you can potentially ride out any bad markets.

Real Estate Investment Risks

Without risk there is no reward and real estate is no exception. The biggest potential threats to the market are as follows:

  1. Migration/Immigration – without people the demand will slow down
  2. Government – policy changes, new laws, lack of investment, land use changes etc.
  3. Borrowing/Mortgage Issues – interest rates, further stress tests, new rules, etc.
  4. Speculation – I believe there is still a fair amount of speculative investment in the market and should those people get spooked it could cause panic to drive pricing down. 44% of investors who took possession of their units in 2017 were in negative cash flow. (Side note: I HIGHLY recommend reading that entire report in the previous link)
  5. Cost of Living – As cost of living becomes more and more unbearable people could decide to leave the city for cheaper options in the short-term. The city needs to continue attracting big companies which pay decent wages.

A big change in any of these areas could have drastic impacts on the market.

Why I Still Believe In Toronto As An Investment

It’s not all bad though, Toronto definitely has a lot of good going for it. Here are the main factors which I think will keep people investing in Toronto.

  1. We Have SANE Mayoral Candidates With Great Visions For The City – No matter if you plan to vote for Tory, Keesmaat or anyone else this election, I think the city will be in good hands. All the major candidates have a great vision for the city and want Toronto to continue to be the best place to live in the world.
  2. We don’t have Trump – A lot of international money that used to go into investments south of the border has made its way up here. There is no shortage of people wanting to buy any condo project that launches and our government has great policies when it comes to immigration. When people look at safe/non-volatile places in the world to park their money Canada is a top choice for many would be investors.
  3. We can’t build fast enough to keep up with the demand – The biggest issue has and continues to be supply in Toronto real estate, and there is nothing in the pipeline over the next 5 years at this point which is going to swing this all that much. I think next year we could see more condos nearing completion but skip ahead to 2020 and 2021 and I think the supply issues will be very real yet again.
  4. Our Dollar Is Still Cheap – When you look at our dollar vs. the US dollar (which most of the world operates on), Canada is still cheap. Maybe not for Canadians but in a global economy it’s still quite attractive to people overseas looking to call Canada home.
  5. Diversity – I still believe Toronto is the most diverse cities in the world where everyone is welcome. People want to make it their home and are willing to pay the premium to do so. When people consider moving to Canada there are really only a few cities most people will consider where they will fit in and adapt quickly, and Toronto leads that list.

How To Spot A Good Condo Investment

  1. Location – Always the most important thing. Needs to be close to transit and easy to get around in the city.
  2. Price – How do the prices compare on the resale side. Is there a huge discrepancy? Has it been priced in for the future?
  3. Nearby Competition – Are there a lot of similar buildings nearby?
  4. Rents – What are the current market rents for the property today? If you need help analyzing this just send me a message. How much do you expect they will grow between now and completion? BE CONSERVATIVE IN ESTIMATES!!!
  5. Quality / Builder Reputation – With several projects cancelling before they even take off recently, names and reputation mean something more than ever. Don’t be lured in by a developer selling cheap who likely will never get the project off the ground.

Best Condo Projects For The Remainder of 2018

Line 5 Condos Pool Rendering
Line 5 Condos Pool Rendering

This is the time of year when many projects are launching. Just this week at least 4 condos launched and more are expected in the coming weeks. From the projects that launched this week, I really like the potential of YSL Condos, the design vision for KING Condos & the pricing at Line 5 up at Yonge and Eglinton. Line 5 is the only one which has many units under $1000/sqft, even a couple in the high $800s/ft, and considering the location if I had more money to invest I would do so without hesitation when you look at resale activity and the transit improvements coming to the area. If you would like to view floorplans and pricing for any of these projects send me an email or I can also come up with a personalized plan to work in any budget. Just be sure whoever is advising you follows the condo market specifically and has experience with pre-construction. The last thing you want to do is make uneducated investments in this current market.

Disclaimer: The views contained herein are my views only and do not reflect those of my brokerage.  Such opinions are subject to change without notice.  This publication has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular strategy or investment product. Real estate, like any investment comes with risk and it is important to understand the risks prior to making any investment.