What is Preconstruction Real Estate?
Preconstruction real estate is any real estate purchased directly from the builder. A majority of the time purchasers buy before the property is built based off of floor plans, and renderings. This applies to all types of residential real estate: high rise condos, townhomes, and detached homes.
Benefits of Preconstruction
There are an abundance of benefits to buying preconstruction. The returns and opportunities are fruitful when investments are done thoughtfully. Our brokerage has the experience and knowledge to maximize these benefits for our clients.
1. Extended Deposit Structures
Resale transactions typically require a 20% down payment within 60 to 90 days depending on the closing date. Preconstruction deposits are unique to each project. Typically speaking, deposits are stretched over 2-3 years. This gives our clients time to save towards the down payment in stages.
The following is an example from a project on the West side of the GTA with an expected occupancy of 2030.
Deposit Schedule:
Upon Signing $10,000
Upon Occupancy (~2030) 10% of purchase price
Upon Final Closing (~2031) 10% of purchase price
See more about deposits here.
2. Time Value of Money
Preconstruction projects typically take 3-5 years to complete. During this time, your property is appreciating.
Other than the deposits there are no other financial commitments. Your investment will appreciate just like resale properties during this time except there are no operating expenses.Simply let your investment grow as the property is built.
Example: Let's say your purchased a property for $600,000 and in the first year you put 10% in deposits. In the second year you put down another 10% in deposits. The property takes 5 years to complete from when you first invested. During the 5 years of construction the housing market appreciated at a conservative average of 2% per year annually.
From the time your purchased to the end of construction, your investment is growing in value even when your deposits aren't increasing.
Year | Deposits Made | Property Value |
|---|---|---|
1 | $60,000 | $600,000 |
2 | $60,000 | $612,000 |
3 | $0 | $624,240 |
4 | $0 | $636,725 |
5 | $0 | $649,459 |
3. Leveraged Returns
The Canadian housing market appreciated an average of 4.6% annually between 2010 and 2020.
Remember, most investors have a maximum of 20% of their own money invested. Preconstruction real estate allows investors to make returns on the entire property value - even the portion that is leveraged. Meaning between 2010 and 2020 investors were making 4.6% annually on their entire property value while only investing 20% of original purchase price.
Example: Let's say your purchased a property for $600,000 and in the first year you put 10% in deposits. In the second year you put down another 10% in deposits. The property takes 5 years to complete from when you first invested. During the 5 years of construction the housing market appreciated at a conservative average of 2% per year annually.
From the time your purchased to the end of construction, your ROI on deposits is 41%. Your annual ROI on deposits during the construction phase is as follows:
Year | Deposits Made | Property Value | Annual ROI |
|---|---|---|---|
1 | $60,000 | $600,000 | N/A |
2 | $60,000 | $612,000 | 10% |
3 | $0 | $624,240 | 10.2% |
4 | $0 | $636,725 | 10.4% |
5 | $0 | $649,459 | 10.6% |
4. Tarion Warranties / Builder Warranties
When buying resale, more times than not the property is sold without warranty. Though buyers typically conduct thorough property inspections, anything that is pre-owned is at risk to be faulty.
All new homes built in Ontario are required to be under builder warranty. Tarion is a not-for-profit organization established by the Ontario government to ensure homeowners are receiving the warranties they are entitled to.
Preconstruction properties also come with new appliances which are under their own warranties with the manufacturers - another perk forgone with most resale purchases.
Tarion has divided their coverage into 3 categories: 1 year, 2 year, and 7 year coverages. More details on their coverages can be found here on their website.
5. Customization & The New Home Feel
Purchasers through the builder are able to customize their property with finishes of their choosing. The ensures you're getting exactly what you want inside your property. Builders also have an abundance of upgrades you can choose from.
Whether it be somewhere for you to live or potentially your children - it's always nice to move into a place thats fresh from the developer. Similar to a new car smell, a brand new home is a benefit especially for first time home owners.
All content on this site is provided for educational purposes only and does not constitute legal, financial, or real estate advice.