Have you ever wondered why so many investors love investing in pre-construction condos? In 2017, the demand was so high that pre-construction condos sales broke ALL records despite the government implementing the foreign buyer’s tax and rent control rules. Perhaps this insight article will shed some light on the perspective of a savvy and seasoned investor.
Let’s be completely transparent and upfront about this one first. As investors, we are not, and I repeat, are not putting our money into pre-construction condos for charity. We’re in it to make profits and secure our financial future. Everyone wants to be able to provide for their family, have a plan B, retire earlier, and being financially secure. Those are the primary reasons of why we invest in pre-construction.
For starters, we have to know how the pre-construction game works for builders. If you want a more in-depth analysis, do click on this link to learn more from a previous insight article: Behind the Curtains: How Developers Control Price.
Remember, most builders will need to sell 70% of the units in their project to secure construction financing from the banks. There are a lot of costs that builders are juggling with such as land acquisition cost, gross build-able floor area, development cost, material and construction costs, and a whole slew of things I can bore you with but will choose not to.
So then why do investors love investing in pre-construction units?
1) We can invest in the “need-to-be-sold-to-finance-the-project” units
Builders don’t actually get paid until the building is completed despite what you may think with the deposit money that they collect from buyers. Profits and securing financing are two of the biggest hurdles for builders.
The price must be enticing enough for the builder to sell 70% of the units so that they can get financing and as investors, we are able to determine whether that price is enticing enough for us to invest in their project. If it isn’t, then the builder will have difficulties getting the proper financing for their project.
So that is why you often see prices increasing later on in the sales process as the builder gets closer and closer to selling 70% of the units in the project. Once the financing is secured, there is less risk for builders in terms of increasing their price (they already qualified for financing, so they do not have as much pressure to sell units at lower price points). Hence, builders will likely increase prices later on in the project in order to create a healthier profit margin for themselves in this competitive market.
That is why having FIRST access to projects by working with PPTO during the initial release will, more often than not, yield you MORE profits. You will be able to invest at the lowest price with the best incentives.
2) Low Up-front Cost
Buying a pre-construction unit allows you to break up your deposit into easier bite-sized 5% payments instead of the right-off-the-bat 20% down payments. This allows investors to invest in the market much faster, rather than watch the prices appreciate and miss out on the profits.
This low up-front cost also means that you don’t have to get a mortgage on your property for the first 3-5 years until your unit closes (i.e., is built and completed, ready for move in). It’s a great opportunity for first-time investors to get into the market first and then have time to work on building up their finances and credit to get a mortgage.
Those are the two main reasons why investors love pre-construction investing. Obviously, there are more reasons, but oftentimes these reasons are also tailored to everyone’s unique situation. If you’re interested in learning the other benefits of pre-construction investing that may relate to you, schedule a Discovery Call with Zhen today by clicking on the link .
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Until Next time,
Zhen
