Investing in a pre-construction condominium might be a viable strategy, but there could be potential downside risks, said an expert.
John Pasalis, president at Realosophy Realty, said there are three key things investors should consider when thinking of buying a pre-con condo: price, rents, and risks.
Pasalis said investing in pre-con condos only works in circumstances when the prices are rising.
"If you buy a pre-con condo and prices fall 20%, unless you have a lot of money saved up, you'll be unable to even take possession of that unit to live in it or rent it out because banks only finance what the property is worth, not what you paid for it," he said in a think piece in Move Smartly.
Pasalis cited what happened with the buyers of pre-con detached homes in Oakville in Halton Region and in Durham Region in the Greater Toronto Area. After paying the peak price in 2017, buyers eventually found that their homes were worth significantly less than what they paid for.
"Many lost their life savings because they did not manage that downside risk. Given the potential risks, it's critical to ask yourself tough questions before you are enticed by the 'sure-fire' promises of Toronto's condo marketers," he said.
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The average price per square foot for a pre-con condo was 30% higher than units for resale last year. Pasalis said buyers are often not worried about qualifying for a mortgage until the building is completed, making pre-con condos a popular choice.
"The idea is that you just put down a deposit on a condo and you'll double your money in the five years it normally takes for a building to be completed. But with the high prices investors are currently paying, there's no guarantee that market will even catch up to what they paid when it comes time to sell," he said.
Rents are also an important consideration. Pasalis said the rent forecasts for pre-con condos seem "unrealistic". He said investors would need to charge significantly high rents to tenants to justify the prices they are currently paying.
"That's very unlikely to happen. In some cases, when condo prices are so inflated, I've seen agents and builders craft lofty projections that guarantee investors will be able to rent out a 750 square-foot condo for over $5,000 a month as a furnished rental - but again, these are pretty lofty expectations," he said.
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