Pre-Construction Vs. Resale Investing
The barrier to entry for a pre-construction is lower than buying a resale property. In pre-construction you own 100% of an asset without having to pay the deposit all at once. Whereas in resale, you’re paying the down payment all upfront.
Pre-construction also has the advantage of submitting the down payment in increments, meaning there are set dates where you hand in the deposits. A typical down payment for a pre-construction is still 20%. However, the bulk of the payments are usually 15% down within a span of 2 years then the final 5% on closing. Which is easier on your wallet than submitting it all upfront. Also, investors avoid paying the final 5% deposit if they sold on assignment and would only be paying 15% in total.
If you were to pay 15% down for a resale property, you’d have to default on mortgage insurance which could prove to be very costly. That’s why the minimum down payment for a resale is usually 20% because anything below that requires insurance.
The other thing is, you’d have to lock in a rate right away for a resale and even if the market is down there’s no way avoiding it, unless you wait and invest in the future. But, in pre-construction, you only need a mortgage approval then you lock in a rate closer to closing, which could even be 5 years down the road.
So you can relax and own an asset without having to lock in an unattractive rate and wait for the market to settle down. Also you may never even have to get a mortgage if you were able to sell on assignment before closing.
Below you can find a typical deposit structure for a pre-construction property.
Conversation With An Investor
Investor: So if I invest in pre-construction, I get to own an asset for cheaper because I’m not locking in a mortgage rate til later and I’m not paying utilities, taxes and maintenance every month? On top of that, I get to pay the deposit in increments instead of all at once!?
007Realty: Yes.
Investor: Ok, that’s great, but how do I make money from it?
007Realty: Well the secret all your friends are using to build wealth from pre-construction and in my opinion the easiest and most hands-off strategy for first time investors, is selling on assignment. Which is basically options trading for real estate.
In pre-construction you don’t actually own the condo it’s not even built yet, but you own the rights to buy the property and that in of itself is an asset in which, people want to buy and for a lot of money.
So, right after you complete the offer to purchase a pre-construction you already own the asset and you can sell it anytime before occupancy. The way people make money from this is simple.
Let’s say you bought a property for 500k in 2023. But 2 years later, demand increased and your property value is now 700k. You have the option to sell this property before closing and profit on the difference.
Investor: But what about the deposits? Let’s say I already contributed 15% of the deposit, which is $75,000 then what happens to that and what about the remaining 5% on closing.
007Realty: After the switchover date, (builder agrees on assignee) all of the assignor’s responsibilities are transferred to the assignee. So, they would actually mirror what you already contributed and it becomes their responsibility to pay the remaining 5%.
Therefore, you bought the property at 500k and you sold it at 700k two years later you would make 275k from the assignment because the assignee will pay you the 15% ($75,000) deposit you gave the builder, plus the appreciation of the property ($200,000).
Also, if the demand for the pre-construction is high and not a lot of people are selling, you could potentially increase your asking price and sell it for more.
Conclusion
Overall, pre-construction is a great strategy to build capital especially in a down market where the rates are too high to afford. Many first time investors use pre-construction as a gateway into real estate investing because the barrier to entry is so low and you can make a lot in a short amount time.
Which they can use to reinvest into more assets and grow their wealth. If this is something you want to get into, feel free to book a 1:1 with me to discuss the newest pre-construction projects and I’ll also give you a free price breakdown for the deposit structure so you know exactly when and how much you’d be paying.