PRE-CONSTRUCTION & NEW BUILD INVESTING - WHAT YOU NEED TO KNOW & DO

Ah, the new build and pre-construction investment market! Alternatively known as the “shiny new toy” in your investment property portfolio. Brand new, never lived in before, fresh amenities, why doesn’t everyone just buy these versus something for sale in the resale market? Well, this type of investment may seem like the most appealing option to the masses, but they are arguably one of the most complicated transactions in residential real estate. The Westside Partners of TrilliumWest are going to give you the rundown on what you need to know, and need to do, when considering a new build or pre-construction investment property.

ASK YOURSELF THESE QUESTIONS

Technically you should be asking yourself a lot of questions with any investment purchase, but we believe that these questions are extremely important, especially with new build investing.

• Why am I attracted to this project?

• Am I getting sucked in with the beautiful marketing package?

• Have I ever purchased a new build before? If not, do I have a solid team around me that can help?

• Do I fully understand the risks of buying a new build or pre-construction property?

• What is the current new build market like right now?

• Who is an expert I can work with?

BUILD YOUR TEAM WITH EXPERIENCED PROFESSIONALS

Here are the folks who you absolutely must have beside you during the start to finish phase of buying new:

REALTOR: One with ample knowledge, experience, and who will bring you an unfiltered + unbiased perspective at all times.

REAL ESTATE LAWYER: Your safeguard to ensure the deal you’re getting into, legally makes sense.

MORTGAGE PROFESSIONAL: Funding new build deals can be challenging, but not to someone with experience helping buyers finance their new build deals

TAXATION PROFESSIONAL: We’ll get into this later and talk about that scary “HST” word!

HOW TO “RUN THE NUMBERS” ON NEW BUILD DEALS

We aren’t just talking about potential rental rates, mortgage costs, and property taxes here folks! Time to tweak up that investment proforma and include some very critical factors and calculations in your analysis.

Let us elaborate further:

• Land Transfer Tax, Lawyer fee, and some adjustments for property taxes on closing are the usual, but are you incorporating occupancy fees, developer closing adjustments, and Tarion Warranty fees?

• What rental rates are you using to calculate cash flow? Current market rates, or “future rents”? How did you calculate those “future rents”? Are they realistic?

• Did you factor in holding a vacant property for 3-6 months? You’re not going to be the only one trying to rent out your property, especially in a condo building with 200 new units.

• Are there any extra buffers in your proforma in case the legal fees are higher, you arrange non-conventional financing (lender fee(s)), or you need to buy window coverings, appliances that were not needed until occupancy?

DO YOUR BUILDER & DEVELOPER DUE DILIGENCE

This one is EXTREMELY important! Do you have any idea who you are buying from? We have seen countless instances where the “deal” on paper looks fantastic, but the property ends up becoming a complete bust due to either the lack of experience, priority of customer service, or messy management with a builder. You NEED to find the answers to all of these questions:

• How many projects has the builder/developer completed, not completed, currently have in motion?

• What is their track record? Lets look at Tarion Warranty Registration website, Google Reviews, resales in those developments (hard to resell?). Any reported cancellations, negative news articles, etc?

• Is the builder/developer local, or out-of-town? If out of town, do they have a local team assisting them that knows the drill in the area with new developments?

• What do their marketing packages look like? Does it look like they have an attention to detail?

• How fast or slow have their other projects taken to sell and why?

HAVE A REAL ESTATE LAWYER REVIEW YOUR DEAL

Before you firm up or waive any conditions on that purchase agreement, get that paperwork into your lawyers hands, and let them dive into the details. Not having a lawyer review could cost you an unnecessary extra four, five or even six figures! We’ve seen it all! These are the critical points you should be hearing from your lawyer during the review process:

• What are the anticipated developer closing adjustments? Can I have them capped?

• Is the project site plan approved? What stage of development is this project currently in?

• What are my rights if the project is delayed, cancelled, or if other issues arise?

• Am I allowed to rent the unit before closing and during occupancy?

• What happens if I experience a significant life event and need to sell? Can I assign the deal?

TAXES & REBATES & UPGRADES OH MY!

Arguably the most misunderstood, confusing, and number one reason in our experience as to why buyers walk away from new build/preconstruction deals. The scariest word of them all: HST!!! Although, with the right team in your corner, the logistics and explanations of HST, HST rebates, and upgrades can be made quite easily. You need to rely on your team to answer the following questions for you:

• Do I have to pay HST on this deal? Is it included within the price? Is it payable on closing?

• Do I qualify for one of the “New Home GST/HST Rebates” from the government?

• What would make me not qualify for these rebates?

• Am I subject to any additional taxes, such as the “Foreign Buyers Tax”?

• What finishes & features are included in my purchase price? Appliances, Mechanical Equipment?

LOCATION, LOCATION, LOCATION & TENANT DEMOGRAPHICS

Alright! We’ve almost finished our due diligence on this new build/ pre-construction deal. But, shouldn’t we double check if this project is actually in an area that makes sense not only short term, but also long term to maximize potential investment growth? Very underrated fact. Check logistics, that we see masked by those pesky “best deal in the area!” banners. These are your baseline questions to consider to finish evaluating your new pre-construction deal:

• Is the project in an area that is seeing other new developments in the immediate vicinity?

• What does the population growth outlook look like for this area? (Growth = Increased Demand)

• When renting your property out to tenants, what does your tenant demographic look like? Families, young professionals, singles, downsizers, subsidized tenants, etc?

• What does the resale market look like in this area? Are properties hard or easy to resell and also rent out?