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Why Investors Prefer New Residential Projects

When you are shopping for a condo, you’ll hit a fork in the road: preconstruction or resale?

For existing condos, the seller usually hires a real estate broker to manage the listing and visits and pays the broker a fixed commission after the sale. Potential buyers can visit it in person or take a virtual tour. Once the sale is finalized, they can move in immediately.

When a new project is announced, it is launched by the developer with attractive prices in order to finance the project. Although you cannot visit a home like you do in resale, you’re able to look at the brochure, plan, square footage, price per square foot, finishes, location, views, common areas, construction specifications, and usually visit a model unit.

Another major difference between new homes and resale homes is that sales tax (GST and QST) is added to the purchase of a preconstruction condo.

This said, why is it that investors still prefer to buy new condos over existing ones?

Freezing the Market Price

If you buy a unit today with delivery planned in three years, you are essentially freezing the market price. Your home will (almost) inevitably be worth more by the time you can occupy, rent or sell it. Your mortgage payments only begin when the home is delivered, so you won’t have to pay any interest until then. You have the option to sell it before delivery, in which case, you would pay no interest at all.

Better Construction Quality

Renters will pay more for a newer unit and you can expect construction quality to be superior to older homes. A modern construction gives future buyers more confidence that the unit will not require much maintenance for the next 5 years.

Every new home in Québec is covered by Garantie Construction Résidentielle (GCR – Residential Construction Warranty) for 5 years after delivery. This independent, nonprofit organization also inspects projects to make sure they adhere to the Regulation respecting the guarantee plan for new residential buildings. If or when an issue arises, GCR has a simplified claim system so that the builder covers any renovation costs, if an agreement has not been met between both parties. In most cases, homeowners can find a solution directly with the builder without having to process a GCR claim.

Québec’s Construction Code regulates the standards for new construction across its territory. It is frequently amended to adapt to the best practices in the field, and to enhance the health and safety of residents. Recent amendments to the Construction Code include the Building Act (2015), the Plumbing Code (2021), Energy Efficiency (2020), Elevators and Elevating Devices (2004), Electricity (2018) and Bathing Places (2014), among others.

Higher Return on Initial Investment

Let’s compare two hypothetical homes to determine which one has more potential as an investment over 3 years. Both homes are appraised at $500,000, but one is a preconstruction home and the other one was built ten years ago. The preconstruction home’s delivery is planned for 3 years later. In this example, we are using a 25-year mortgage loan with a 25% down payment and 3% interest rate.

Purchase Details

 

NewResale
Price$500,000$500,000
Down Payment (25%)$125,000$125,000
Mortgage Amount$375,000$375,000
Date of purchaseJanuary 2022January 2022
First Mortgage PaymentJanuary 2025January 2022

 

Return on Investment Calculation

 

Return on Investment CalculationNewResale
Mortgage principal After 3 years $                   – $    31,494
Mortgage interest after 3 $                   – $    32,393
Total Mortgage Payment $                   – $    63,888
Total Capital Investment $  125,000 $  156,494
Total Expenditure $  125,000 $  188,888
Annual Appreciation10%7%
Value at Resale (3 years) $  665,500 $  612,521
Revenue at resale $  290,500 $  269,016
Return on Initial Investment132%42%

Bear in mind that in this simple calculation, we did not take into account any rent income, condo fees, power, taxes and renovation expenses. These numbers can fluctuate, and will inevitably skew the return on investment in favor of the new home, where there are no such expenses, and where rent may be higher.

Another key component we we did not factor in is the interest the owner of the preconstruction home would have gained (or lost) by investing some of the down payment and mortgage payments in their investment accounts.

Who Wouldn’t Want a New Construction Home?

Now that we can see that a new home may make more sense from an investment point of view, it’s not always the obvious choice. Our homes reflect our current life situation, and things can change very quickly. Let’s suppose you live in your condo and need to move out because of lack of space or the location is no longer suitable. You can only afford a single mortgage so you need to sell your current home to free up the funds needed to buy a two-bedroom unit.

If your goal is to move in immediately after completing your purchase, new constructions will probably not be the right fit for you. In this case, because you are looking for a principal residence to move into as soon as possible, it makes more sense to buy an existing home. The alternative would be to rent a house or apartment for 2-3 years, while you are waiting for your new home to be delivered.

 

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