New construction is a fantastic way to get started with real estate investing, especially for younger people who may have the option of living at home while the project is getting completed. It’s also a great option for people who are currently renting and are able to line up a delivery date with their lease’s expiration date.
One of the best things about a new build, of course, is that everything will be brand new.
The electrical is going to be new, versus something that was built in the 70s and may require maintenance much sooner down the road. You can typically also have some say on which finishings you would like to have.
All of those things seem amazing, but at the end of the day, there are also downsides to going with new construction. The most important one is delays. These delays can be quite substantial and a little unpredictable.
So, in that sense, it’s a strategy that we suggest more so for people who already have a place to live, so they can wait it out a little then move in when the property is ready.
If it’s a pure investment, as opposed to somewhere you’ll be an owner-occupant, you can be a lot more flexible because you’re not planning on moving in. But if you do intend on this being
your principal residence, you need to understand that delays are normal.
A lot of these properties have deposit schedules to respect, whether that’s a 5-5-5-5 or a different structure. That means you get to actually have some time to build up your cash reserves before you park them into this investment.
Additionally, you only have to get your final mortgage certification at the time of delivery. Many young investors say something like, “I’ll get the approval at the time of signing with my parents as co-signers. But I know that in two years’ time, when I’m actually taking delivery of the property, my salary is going to have increased enough for me to purchase it on my own.”
That opens up a few more avenues for ownership on your own, which is very difficult when you’re right out of university or just getting started in a new career.
Touching on that, delays can be a con in some cases, but they can also be an advantage. The play with new construction is to reap massive amounts of appreciation. Depending on how early you’re buying, you could be buying based on plans. You could be buying in phase 3 of a 5-phase project, so the community has not necessarily been established yet and people are still able to buy new properties when you are purchasing yours.
A year from now, there will be no new properties to buy, and people will already be starting to buy the resales of the previous phases. In those markups, you’re building your appreciation and you haven’t even started paying your mortgage yet.
One thing that cannot be understated is the need to evaluate the developer. If you’re going to wait two years for this project to be delivered, you’re expecting that things are going to be done properly and to code. We saw a lot of developers go belly-up during the pandemic, which left people in the dust. So it’s important to bet on someone reliable.
The next thing is understanding what the co-ownership fees are going to be like. So that’s the condo fees, contingency fund, the evaluation, snow removal, everything. You really want to make sure that your objective, when you run your numbers and build your proforma, comes out with a reasonable monthly cost.
Make sure you ask the right questions, especially compared to other buildings of a similar age, so that you’re actually prepared for the appropriate payments and don’t encounter any unpleasant surprises. It’s not uncommon for condo fees to nearly double in the first, two to three years.
It’s something that developers are using to their advantage: they’re going to pitch you really, really low condo fees, which sounds exciting at the beginning. But at the end of the day, the building isn’t going to function at those fees long-term.
Thinking of investing in a new development? Have more questions? We’re here to help. Give us a call or drop us a message anytime, and one of our experts will be happy to share their wisdom!