If you have been buying pre-construction condos or simply just looking around, then you might recall seeing incentives like “$0 assignment fee” or a “reduced assignment fee”. You might be wondering why that is important and if you should be looking for that in your next purchase. Recently, I’ve been asked a few times about selling a pre-construction condo via assignment. As a fellow investor, I wanted to share my thoughts and strategy so that you are able to maximize your real estate investing efforts instead of making make a costly mistake.
What is an Assignment and its Purpose? An assignment is essentially the process in which one person sells the rights and obligations of a contract to someone else.
In the case of a pre-construction condo, when you assign a contract to someone else, they will get the benefit of closing the specific unit stated in the contract upon its completion, in addition to fulfilling the other contract obligations. A similar process takes places when you are transferring a leased car to someone else.
So then the question becomes: why do some people always look for an assignment clause on pre-construction purchases?
The Assignment Flipper – If you are a pre-construction assignment flipper, then yes, you could potentially make money on the assignment sale. The downside though is that you are essentially throwing away the long-term benefits of owning real estate. Allow me to explain why I don’t always recommend assignment flipping.
Finder’s Keepers – In my honest opinion, you will make the most money when you buy and hold a property, especially the way that the Toronto and Golden Horseshoe markets are shaping out. The longer you hold onto a property, the better off you will be for many reasons other than just appreciation. You also get the benefits of:
1) Cash Flow
2) Mortgage Pay Down
3) An Income Producing Asset
Many of my clients ask me to sell their properties, but as much as that will benefit my own business, I often talk them out of it because of the above benefits that you get with owning and holding onto real estate.
An Example – Let me give you an example (approximate numbers based on one of my clients). Let’s say that you purchased a pre-construction condo a few years ago for $400,000. It’s now worth $500,000 and you plan to assign the deal. From your perspective, you may think “Awesome! If I sell this property, I can make a quick $100,000 on my deposit from a few years ago!” That sounds like some wickedly good return on investment, right!?!
While that is correct, let me break down the numbers some more for you.
Your 100,000 profit would be eaten up by the 5% realtor fee, which is $25,000 + HST. Then, your profits will also be taxed at 50% for capital gains at your marginal tax rate. For a person who has an annual income of $100,000, that’s 21.75% or in other words, another $10,875 gone from your profits from the assignment deal. You will also need to pay the builder assignment and legal fee of approximately $6,000.
On the other hand, if you don’t do the assignment and just close on the property, you can rent it out and make a healthy cash flow each month. Subsequently, you could also choose to refinance your property immediately after closing (since there would already be some appreciation in the unit). This means that you could be possibly pulling out about $80,000 tax-free (from the refinance) to pick up another property.
What’s the Catch? The refinance would add another $350 per month to your monthly mortgage payments. However, as long as your monthly rental income on the additional property supports the added $350 per month mortgage payment, then you’re golden!
Here’s the kicker though – YOU STILL OWN THAT PROPERTY!
It is for the above reason why I will always try to talk you out of doing an assignment, unless you absolutely have to as a result of personal circumstances.
The longer you hold onto real estate, the more benefits you will have. So why not leverage the appreciation that you gain during the construction phase of a pre-construction unit in order to buy more properties? It’s a very simple formula.
Generational Wealth = Buy + Hold + Re-finance + Repeat
The Wrap – I hope this helps you understand why I’ll always push for you to not flip your pre-construction properties. You have the opportunity to close on an amazing asset in Toronto, why give it up that easily. It’ll only get more and more difficult to own real estate in Toronto in the years to come, so hold onto those hard assets! Here at PPTO, we can help you acquire even MORE properties so that your portfolio just keeps growing and outpacing the market instead of the other way around!