New Condos Can Make You A Non-Profit Investor

August 9, 2012 | Real Estate |

Veterinarian investors considering purchasing in the condo market as part of their portfolio should consider the following.  After one of our recent monthly seminars, it was obvious that there is a huge misconception among investors with regard to the brand new condominiums being built, specifically in Toronto.

My advice is DO NOT buy these 5 star luxury properties as an investment.

But if you decide to purchase one here are some tips on what you should do.

The most important thing to consider is this: Be sure that you have an assignment clause in your offer.

An assignment clause allows you to sell the property prior to closing or registration of the condominium.

Remember, the closing of your purchase and the registration of the condominium are two entirely separate events.  The closing date is the date the builder tells you that you may now occupy the unit you have purchased.this is the date that you will begin to
pay the costs of ownership.  However, just because you have closed on your specific unit, does not mean that the condominium has been registered.  When the unit is occupied, but the condominium is not registered, what you have in fact is called ‘interim occupancy’.

Condominiums must be 90% occupied before they can be registered, and until they are registered, you cannot place a mortgage on the property.  During the period of interim
occupancy, you will be paying the builder rent instead of paying your mortgage.  When the condominium finally registers, only then can you register your mortgage and begin paying it off.this period of interim occupancy can last anywhere from 6 months up to 2 years!

Now back to the assignment clause.  If you have speculated well enough and the property has gone up in value significantly, under an assignment clause you can sell it prior to closing or registration to a willing buyer.  Technically, they are buying your paper or your contract.  Keep in mind that you must still hire a lawyer for closing to ensure you receive your profit and deposit.  Without this clause, you will be forced to wait out the interim occupancy until the condominium registers before you will be allowed to sell it.

So, why not buy a new condominium as an investment?  If you are thinking ‘cash flow’, think again.  You will be a non-profit organization.  “Non-Profit!” you must be wondering – can’t be so. do the math.  Let’s use an example of a typical condo at 650 square feet.

 

Toronto/SQ.Ft. PRICE = $500.00/SQ.FT.

UNIT PRICE (650 SQ.Ft.) = $325,000

CLOSING COSTS = $10,000
(Includes all registration fees and land transfer taxes)

20% DOWN PAYMENT = $65,000

TOTAL DUE ON CLOSING = $75,000

 

So what does this all add up to? you have just spent $325,000 for a ‘palatial’ condo of 650 sq. ft. and because you must put down a minimum of 20% for an investment property, your pocket is lighter by $75,000.  But we are not done yet.  If you are going to rent this property out, let’s figure out your carrying costs.

 

BASIC CONDO FEE: $350.00/MONTHH
(Which by the way will be going up!)

PROPERTY TAXES: $350.00/MONTH

MORTGAGE PAYMENT: $1300/MONTH
(on $260,000)

TOTAL MONTHLY COSTS: $2000.00

AVERAGE RENT: $1500.00

CASH FLOW: -$500/MONTH
(-$6000.00 per Year)

 

You are now in the red by $500.00 each month and providing your tenant with a fabulous lifestyle!  Remember also, this total negative cash flow does not include any vacancies or
non-payment of rent.  So i have to ask the ultimate question: if there are 42,000 new units closing in the next 2 years, why would someone rent yours?  The common answer is price.  You’ll have to reduce the rent you charge to compete.  Oh, and one last thing.  Of those 42,000 units, 65% have been purchased by investors.  Congratulations.you are now a “not
for profit” investor.

So I would like to give you some valuable advice.  Buying new condos today is not advisable if you are looking to do a quick flip.  Buying them for cash flow definitely won’t work.  So why buy them?  If you yourself want to live in a great building with fabulous amenities, then by all means go ahead.  But be prepared for those condo fees to balloon after the
second year, and be aware that your building may lose value because more than 65% is tenant/renter occupied.

Investment real estate does work, and people have made millions with it.  Make sure you do the math, read the fine print and keep it SIMPLE.  That way, you can look forward
to passive income in your future and generational wealth for your family.

Bottom Line: A simple math primer on a condo investment that leads to the investor status of ‘Non-Profit’.