# Buying pre-construction condo as investment (Ottawa area)



## canabiz (Apr 4, 2009)

Folks, my brother just put a hold on a pre-construction condo as an investment with a closing date of late 2014. He has not signed the agreement yet so he still has time to back out if necessary.

I have experience with the house-building process but I don't know much when it comes to condo-building process. Is there any pitfall that he should be aware of? I know it's hard to visualize what the unit would look like based on the floorplan but that is all he has to go with for now. Is delay typical for condos in the Ottawa market? Tarion is there to protect the buyer, supposedly but are they? 

My brother won't live there when the unit is complete so it's not the end of the world if the unit does not turn out exactly like what is in the plan right now but it's certainly good to know what we can expect so that there is no surprise.

Anyone bought pre-construction condos before, esp. for investment and any tips on things to watch out for?

Tks.


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## Square Root (Jan 30, 2010)

I certainly would not be buying an investment condo now. Has he read the papers?


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## kcowan (Jul 1, 2010)

The main risks are that the developer fails to get financing, and that the property values decline. If the building is not sold out, he may be faced with the developer clearing out remaining units for less than he paid. He should wait for those clearout sales or buy a resale unit.


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## Cal (Jun 17, 2009)

Depending upon how he feels the RE market will go, assuming the condo does get completed by 2014, he may be able to pick up the same unit, from someone buying now, for a great price in 2 years.


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## iherald (Apr 18, 2009)

The theory is that you pay $0.90 for $1.00 in the future. So you buy at a pre-sale on the assumption that it's cheaper today than it will be when its done. Will that be the case, I'm not sure, anyone who says that they are sure is being silly. But, my experience with condos in Toronto are that they are often delayed, and in many cases up to a year. In general they have to sell at least 75% of units prior to breaking ground. So if they don't reach that amount, they aren't doing anything. Hence the delay.


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## sprocket1200 (Aug 21, 2009)

Have him contact me. I have a bunch of those too. We expect it to work out at 77% on the dollar. Lower if he is more eager to give us the money sooner..... Our expected completion is very soon and date of possession shortly thereafter!! Who is in!!


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## canabiz (Apr 4, 2009)

Folks, after doing further research and talking to realtors and friends who own investment properties, i have given my brother advice to look for a condo townhouse now, rather than waiting for 3 years for his condo to complete. Here are my arguments, please let me know if I am missing something or if I am way out in left field.

1. Eliminate the uncertainty in terms of interest rates. If he buys now, he can lock in at a very good rate for the next 3 years at least. It is only a matter of time before the rates rise and I don't know what will happens in 3 years.

2. Start building equity in the investment property right away, as opposed to waiting for 3 years before doing so. 

3. There are a lot of investors who bought condos in this and other condo projects currently or will be under way shortly. As a matter of fact, he told me he ran into a previous neighbour who bought 2 2-bedroom units, presumably 1 for themselves and 1 to rent out. What it means is when his condo is complete in 3 years, he may have to compete with other investors for tenants. Couple this with the interest rate uncertainty in #1 above, I don't think waiting for 3 years is the optimal choice for him.

4. I suggest condo townhouse as an investment property for 2 reasons: it's generally cheaper than a new condo and has a better chance of generating + cash flow and the exterior maintenance is taken care of by the condo board. There will be condo fees but that's par for the course.

His counter argument is his friends bought pre-construction condos a few years ago and saw the value jump 50% from the time they signed to the time they took possession. I told him you can't look at past performance to predict future. He also does not see a problem renting out the unit as it is right in downtown Ottawa with a nice view of the Parliament Hill and the river.


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## Four Pillars (Apr 5, 2009)

@canabiz - Is your bro even asking for your advice? 

Nothing wrong with trying to help him, but the problem with this sort of thing is that nobody knows what will happen over the next three years with respect to real estate values, interest rates, rental rates/vacancy rates etc.

Your plan is as good as his and vice versa. I would just let him proceed with what he thinks is best.


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## dvelecka (Oct 18, 2012)

I would suggest always doing your due diligence before signing the papers. Research the developer, their previous projects, financial statements... Also, weigh your options- calculate the numbers, financing etc., can you cover the mortgage and overhead costs by renting your property?
Here are some tips that may help you... the article talks about how you can pick a correction-proof property: http://bestofourmarket.com/2012/10/tips-to-picking-a-correction-proof-investment-property/



canabiz said:


> Folks, my brother just put a hold on a pre-construction condo as an investment with a closing date of late 2014. He has not signed the agreement yet so he still has time to back out if necessary.
> 
> I have experience with the house-building process but I don't know much when it comes to condo-building process. Is there any pitfall that he should be aware of? I know it's hard to visualize what the unit would look like based on the floorplan but that is all he has to go with for now. Is delay typical for condos in the Ottawa market? Tarion is there to protect the buyer, supposedly but are they?
> 
> ...


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## Cal (Jun 17, 2009)

Sales are down 30% here in Toronto recently. There is a distinct possibility that the condo doesn't even get completed. Which helps your arguement #2. If it doesn't get build his money will be returned, but the investment potential of those dollars over that timeline will be lost.

http://business.financialpost.com/2012/11/01/toronto-condo-projects-delayed-as-sales-plunge/


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## andrewf (Mar 1, 2010)

Also, if the unit falls in value before closing, you are on the hook for the originally agreed purchase price, which no bank would lend to you as a mortgage. Buying pre-construction is not low-risk. It can destroy your finances through leveraged exposure to undiversified risk (condo market in a single city).


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## ddkay (Nov 20, 2010)

I would personally never buy preconstruction, even if its for rental purpose, I want to see the final product. These developers take you for a walk through the park, then all of a sudden floorplans change and you have a washer and dryer in your bedroom closet. Also preconstructoin is a bet on the market price in however long it takes to build, you can often find older inventory for less and better value. I don't know about Ottawa though. In the spring downtown Toronto condos were asking $700psf for buildings completing 4 or 5 years from now, have already adjusted down 10-15% to $600-630psf. They could get pushed back even longer, and if it takes too long I suspect many won't ever get built.

Where does your brother want to live? He should factor commute time to/from work and other daily conveniences in his decision as well. Townhouses aren't usually built in the core, pretty typical for mid-town, though you'd have to dish out extra for a monthly bus pass. I live downtown and with access to the pedestrian tunnels I can walk/bike everywhere I need to be year-round. Spend maybe $30 a year on public transportation.


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## My Own Advisor (Sep 24, 2012)

I'm with ddkay.

There's much less stress when you know what the final product is. 

I live in Ottawa, south of the city now, and we used to own a condo downtown for a few years. We enjoyed it but even then it was older condo; there were issues we weren't happy with. The Ottawa condo and real estate market has always been in a bit a bubble, but that is changing. There's lots of great properties on the market and with boomers retiring and downsizing in this city, more properties should be available in the years to come. 

If he really wants the condo, I would suggest doing some detailed research on the builder, looking at their previous work, talking to owners of other properties, financials, etc. 

Ottawa is a great city and there are so many resale places to live without all the uncertainty. Just my two cents.


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## canabiz (Apr 4, 2009)

All good points, folks

@Mike, he has asked me to give him some feedback and I certainly don't want my sibling to get into financial difficulty so I am simply trying to gather as much info as I can to help him make an informed decisions. We have talked to real estate agents, mortgage agents, friends/colleagues who own investment properties, doing research on the Web and various forums (including right here on CMF)

I have told my brother to walk away from this deal. For the record, the builder is Broccolini and the project is the Slater (corner of Bank and Slater). Broccolini is a big developer from Montreal who has built some commercial buildings in Ottawa but I believe this is their first venture in the residential condo market, at least in Ottawa. I have no reason to believe they will not deliver the project on time but that is not what we are mainly concerned about.

I think the location is fantastic as it is right downtown, close to all public transit (including OC Transpo and future LRT) and the unit he put a hold on is near the top level with a nice view of Parliament Hill and the River. I also agree with him that there should not be any problem finding tenants after all is said and done.

But that's neither here nor there as there are just too many unknowns with pre-construction. Anything can happen between now and 2015 (when the condo is slated to complete). The interest rates may rise and it will, there may be delays for the project, he may not even have his solid gig right now with all the government layoffs, the condo market in Ottawa may be over-saturated like it is in Toronto right now...I am a firm believer in you should do what you can within your control and he certainly does not have a lot of control, if any, over this.


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## joncnca (Jul 12, 2009)

do not forget that the purchase price probably doesn't include HST. since it's a rental property, he won't be eligible for the HST rebate. he can apply for the HST rebate for a rental property only after 1 year of renting, which locks him into the property for another year. you shouldn't necessarily try to sell so soon anyway, but just another one of those things to consider.


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## chloev (Nov 26, 2012)

there are always risks that come with investing in pre-constructed condos.


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## Jay (May 9, 2012)

Interesting thread - I realized it's a month old, but I thought I'd add a recent story about a friend of mine who bought pre-construction in Ottawa from one of the more reputable builders in a prime location. He bought about a year ago - with completion scheduled in 2014. Since he bought, the sales figures haven't changed for the building - still at 50%. The developer has changed the floor plans *significantly* 3 times... from a 1 bed 1 bath, large living/dining/kitchen... to a 1 bed 1.5 bath smaller living room... to finally a 1 bed+den, 1 bath, miniscule living room/dining/kitchen. He's planning to live there, though is also hopeful of making money on it for investment reasons. Currently, there are several units available for around the same price in recently completed buildings nearby... and condo prices appear to be at best static, if not beginning to trend downward a bit in Ottawa... we'll see what 2013 and 2014 bring, but in 2012, most condos sold went for well below their MLS asking price - sometimes significantly lower. I can't predict the future either, but I think he'll be lucky if it only costs him a comparable amount to what it would cost a renter. The days of buying a condo and having it be an easy investment appear to be well over in Ottawa.

For the record, I was looking at buying a condo in Ottawa earlier last year, but after some careful math, found out it was cheaper to rent an apartment downtown - or that you could buy a nice SFH in a not too distant part of the city for the same as a downtown condo.


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## marina628 (Dec 14, 2010)

My friend came to me in June 2011 with Idea to buy a condo in a pre construction at a subway station in Toronto area.I declined that but he went ahead and because he had entire $45,000 cash up front to put down he negotiated for free granite and a parking spot which today they sell for $28,000.The unit does not close until Jan 2015 and he has made $82,000 on paper so far.Who knows if there will be a pull back but when his unit is ready he will have a 25 year old daughter who will be moving into it.For myself it just didn't work with my other plans I have ,but I am kicking myself for not buying one lol


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## Just a Guy (Mar 27, 2012)

Don't forget, with real estate, you never know the true value until you have a cheque in your hands. Many real estate investors have a lot of net worth on paper, but there is a big difference between on paper and on hand.


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## mauricecowell (Oct 15, 2012)

I would not rather buy a condo for an investment instead I want to look for a lot that is commercial to all establishments and build an apartments for a good investment. Safety of the lessor is the priority of course. Pre-constructed condos basically has a lot of problems especially if they did not pay the full amount of it and you need to have a negotiation on this matter.


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