August 1st, 2023 | Landlords

The Preconstruction Trap: Why So Many LANDLORDS Are Losing Money

For as long as I’ve been a licensed Realtor (15 years!), the mantra that’s been propagated around pre-construction investments is that pre-construction is an opportunity and will make you money – period, end of story!

And while that may be true, the flip side of the coin is that it could also cost you and not be as fruitful of a venture as you once thought.  

Today, for example, the average investor who purchased a 2 bed 2 bath condo between $700K-1M in the last 0-3 years with 20% down is likely running a deficit of no less than 1-1.5K per month (when you include all costs versus today’s market rents).  

This is particularly disturbing considering rents have rebounded significantly since COVID and are back and beyond their peak prices already (i.e. you can’t just up rents by 1-1.5K overnight and are also bound by the Landlord and Tenant Boards Rules and Regulations around rent control + Tenant rights).

But, let’s not despair … like with anything, it starts with developing an understanding of what it is you’re considering and weighing the advantages versus disadvantages as they pertain to your personal circumstances … so let’s dive in!

Advantages of Considering Pre-Construction:

1. Customization: Pre-construction properties often allow buyers to choose finishes, layouts, and some design elements, providing a personalized touch.
2. Modern Features: New developments typically include the latest technologies and amenities, offering a more contemporary living experience.
3. Warranty Protection: New constructions typically come with builder warranties, providing peace of mind for repairs and defects during the initial years.
4. Lower Maintenance: Since everything is new, maintenance costs are generally lower in the early years of ownership.
5. Potential Appreciation & Spread Out Payments: If the real estate market is growing, pre-construction properties may appreciate in value before completion, leading to potential financial gains & you don’t need a mortgage immediately as you’re spreading payments out over a longer period of time (allowing you to save the required 20-25% down versus coming up with the cash up-front).

Disadvantages of Considering Pre-Construction:

1. Delayed Possession: Construction delays are not uncommon, leading to a longer wait time before you can move in.
2. Uncertain Outcome: It can be challenging to envision the final product and accurately assess the quality until it’s completed.
3. Financial Risks & Associated Costs: Changes in the market or developer issues could lead to the property’s value being less than expected at completion & associated costs like interim occupancy fees, levies and taxes can drastically impact your expected returns.
4. Limited Negotiation: Developers often have fixed pricing, leaving little room for negotiation on the purchase price.
5. Potential Disruptions: Nearby construction during the development phase can create noise and inconvenience for future residents.