As you know, the world of real estate is constantly changing, but oftentimes people do not catch up fast enough and continue to execute investment strategies that are out of date and no longer work in the current market. Approximately 3-6 years ago, buying condos to flip was all the rage. People talked about putting down 5% deposit to buy a condo and then selling it for $60K profit in a few years. Back in the day, 5% down payment was only around $20K, so that translated to a wicked 300% return on investment (ROI) in a few years.
Reality Check – Well it’s Spring 2019 now and things have certainly changed since those 300% return days. So many things are now getting in the way and eating up your potential $60K profit. So the question now becomes: “Is flipping pre-construction assignments still a viable strategy?”
In my opinion, the simple answer is….. No.
The Little Green House – If you’re a client of mine or have been following my content for a while, you’ll understand that I invest for the long haul. It’s about creating generational wealth by holding onto real estate. Real estate investing is very similar to the game of Monopoly; if you don’t absolutely need to sell a little green house, then don’t. The only time I look forward to selling a little green house is when I can upgrade to a big red hotel.
Numbers Game – If you are a numbers person, then let me point out a few things that have changed which has also caused this strategy to not be as lucrative as before.
- The deposit structures are usually 20% at launch now. Gone are the days where you can put $15K down (5% deposit) to buy a condo.
- Prices have gone up, meaning your 20% deposit is significantly higher. If 5% of a $300K condo was $15K back in the days, then 20% of a $400K condo in today’s market is $80K. Your entry point for pre-construction condo flipping just increased over 5 times!
- Capital gains tax – The CRA is really serious about catching people who do not report their profits on a condo assignment now. There’s a very simple and easy way for them to track this. They ask the builders for a list of original purchasers and the list of owners when the building registers (i.e., when everybody closes on their units) and if the names from the those 2 lists don’t match, guess who they’ll be calling for tax revenue?
- Fees, fees, fees! There will be fees for assignments unless you have negotiated a “free assignment”. Also, just because it says free assignment on the marketing materials, it doesn’t mean it’s actually free; you should always read the fine print because you could be paying upwards of 1% on the new purchase price in assignment fees. Don’t forget commissions and legal fees!
The Lo-Down Breakdown – Here is a quick breakdown of an example. Let’s assume your pre-construction condo appreciates $100K over 3 years, or approximately 8% (this is the average, but I usually use a conservative 4%). This means that over 3 years for investing $80K, you are netting $52,500 or ~66% Return on Investment (approx. 22% per year). That may sound great but that is all based on hypothetical appreciation. So the resulting ROI is not 300% anymore, but rather it’s 66%. That’s 5 times less money in return for 5 times more capital up front! Life is not fair sometimes, eh?
The Wrap – For the reasons above, I would never recommend my clients to buy pre-construction condos for the sake of flipping them during the assignment period. I’ve talked clients out of this strategy many, many times before. If you want to learn how to build generational wealth with real estate, reach out to us here at PPTO and we can certainly explain much more lucrative investment strategies for you to deploy than the dated pre-construction condo assignment strategy.
Until next time, Happy Real Estate-ing,
Zhen
(416) 436 9436
