Pre-Construction vs Resale Condos

13 May 2015

Both condo investors and agents always ask me whether they should buy pre-construction or a resale condo and the answer is always, "it depends".

When I look at the pre-construction market, I ask myself first ,  what is the difference in price between pre-construction condos and the current resale price of condos on a per square foot basis. Investors are prepared to pay a premium for new condos, but how much? My response is no more than 25 dollars per square foot as a premium. Ideally you want to buy at  today’s market price.

So where do Investors get into trouble? They buy units with 100 dollar per square foot premium over today's current resale market for condos. When you do this you are betting on how much you think condos will increase in price over a period of time, which is never a good bet. When you buy at today’s price you are protected. 

“How much money do I have to put down to generate a positive cash flow?”

How much down payment you need? Our belief is to calculate a 20% down payment with today’s rents to create a break even cash flow position.

Why break even?

As an investor, you never want to feed the fire every month. If you do, the result is you’ll end up having to sell the property at the wrong time.

Some might question why you should break even. Remember, with today’s low mortgage rates, more than half the mortgage payment is going to reduce the principal of the mortgage. If you also assume a 2% price appreciation on your property then you’re total returns on your equity will be over 20% per year Now you know why patient investors choose real estate.