To start – the first question you should ask yourself is WHY AM I BUYING THIS CONDO?:
Buyers of pre-construction condos typically have 3 reasons for purchasing:
1 – To live in it, and make it their home, or for a family member, such as a child or parent to live-in.
2 – Buy the condo as a rental investment
3 – Buy a condo pre-construction in hopes of re-selling it upon completion of the new project.
In the event of option number 1, a pre-construction condo can still be a great investment – as you are buying a “roof over your head”, not only are you investing in a home, but you are also investing in a lifestyle!
In the event of option number 2, I personally would be very cautious. Perhaps I am not as good at math as some of my university colleagues, as I just made it through linear algebra, but, I cannot seem to make the cash flow work on many new construction condos without a significant downpayment, often times more than six figures. So in this case, I challenge someone to find me some condo apartment rental investment numbers that work, and I’ll bring some investing buyers to it!!! My number one recommendation: if someone selling a condo is talking numbers (i.e. this unit could rent at xxx per month), I would suggest you do your own research and get some proof in comparable units, and if the numbers work, it can be a good realtively hassle free, tangible investment.
Option 3 – pre-construction purchase with intent to flip or resell upon completion: The appeal of this type of investment is that you put a minimum deposit until closing, so example – one puts 40,000 down on a 300,000 condo, and the condo is worth 325,000 upon completion 2 years later, lets also assume that they could resell it to someone they know with no additional costs, and pay minimal land transfer taxes etc. of 5000. So net, they make a 20,000 return on their initial 40,000 investment. This looks great, as they’ve made a 50% return on their investment over 2 years – 25% per year. This example is an “if the stars aligned” scenario, similar odds of winning 5 bucks on a scratch ticket at the local corner store. I think the cat is out of the bag on this one, and I do not believe we will see some of the returns we have seen on pre-construction condos in Ottawa, in the past 3-5 years. Over the past decade in Ottawa, our market has been a strong, and an overall increasing market, however markets are cyclical, and at some points it will go up, and at some points it will go down. In order for a model like this to work, the market as a whole usually must also have significant increases, which is not what industry experts are predicting.
I don’t buy lottery tickets!!! Nor do I like the idea of committing to something a few years ahead of time when we have no idea what the world will be like. That being said, I am a relatively cautious investor.
The caution I would pose here is: do your homework: Items to research: How many more buildings are being constructed in the area, how many units are similar to my unit, and are many of them being purchased by investors. What is the residential real estate market around the development like – how much does a similar amount of space in a freehold property cost? Depending on the answers to questions like these, it should impact whether or not buying a condo pre-construction in Ottawa with the intent of re-selling it, or flipping is a good idea.
In summary, all three options could possibly be good investments, but remember the definition of investing: “the act of investing; laying out money or capital in an enterprise with the expectation of profit”, make sure that you do your research as the goal of an investment is to expect a profit, and if it doesn’t do so, it is likely not a good investment.
Travis Gordon is a sales representative with Remax Metro-City Realty Ltd., Brokerage, an experienced Ottawa real estate agent, and co-founder of the Ottawa Condo Guide, a resource for buyers and sellers of condominium properties in Ottawa. Our goal is to help educate buyers and sellers in the Ottawa real estate market, and provide professional advice when helping them buy and sell properties, including Ottawa Condos and Homes.