I went back in time and compared investment outcomes of buying pre-con vs resale condo in Toronto. This is what I discovered.

In 2008 investors Jim and Kate decided to put their savings into real estate.


Jim chose to invest in pre-construction condo in the heart of trending South Core financial district next to everything a city has to offer right across from about to be renovated Queen Quay.

He set his mind on 700 sqft 2 bedroom unit ($406,000) with one parking space ($37,000) and storage locker ($5,000) on a higher floor with great city views. This combination came to a grand total of $448,000 before of course all the applicable closing costs and legal fees.

Developer promised that the building will be completed and ready for occupancy in early 2013.

According to the contract Jim paid a total deposit of $89,000 or 25% of the cost (average for the industry) divided into 5 payments.

  • 20% or $89,000 is due and payable in fist 18 months after signing (made in 4 payments of 5%).
  • 5% or $22,400 is due on occupancy (expected in early 2013).

In 2013 Jim gets a note from the developer that the construction is delayed for 1 year and occupancy will commence in early 2014.

In early 2014 the construction finally came to an end and the last instalment of $22,400 becomes due. Jim gets the keys to his brand new unit but common areas of the building and some unfinished units will take another 12 months to be completed.

Condo corporation is expected to register in early 2015. Therefore Jim has to pay $1,800/month occupancy fees to the developer until registration.

Jim hires a real estate agent who rents out his unit to a tenant for a period of 12 months at $2200/month + utilities.

In early 2015 building is finally finished and ready for registration.

Development and closing fees become due. They usually vary in 2–3% range of the sale price and typically include city development charges, utility connection fees, HST on appliances and applicable legal fees. Let’s assume that Jim paid $13,500.

After 7 years of holding his investment Jim is ready to cash out. He searches a local real estate portal dweller.ca to find out that similar units in his building are currently selling at around $500,000 or approximately $715 per sqft.

In order not to complicate this calculation let’s leave out costs of obtaining, carrying and breaking the mortgage and pretend that CRA will not hit Jim with income tax for early disposal of his “primary” residence.

Initial investment:

  • $89,000 first 20% of deposits made within 2008
  • $22,000 final 5% deposit made on closing made in 2014

Additional ongoing expenses:

  • $2,486 real estate fees for finding a tenant
  • $21,600 occupancy fees paid for 12 months
  • $13,500 closing costs including all additional charges paid in 2015
  • $28,250 real estate fees for selling

Money collected:

  • $26,400 rent collected for 12 months
  • $52,000 profit from the sale

Profit:

$78,000 (total collected)

– $65,836 (total expenses)

= $12,164 (profit) earned over 7 years on $112,000 investment.

*Approximate monthly cost carrying this investment is $1,802.


Kate chose to invest in existing condominium next door to the construction site of Jim’s condo in the sweet spot near the lake. Building was built in 2004 and had plenty of units for sale.

With the help of real estate agent Kate picked up a perfect investment property for $326,000. Located on the higher floor a 700 sqft condo has 1 bedroom, 1 den and 2 bathrooms. Unit came with parking space and storage locker included.

Kate is a first time home buyer with excellent credit score which qualified her for a 5% downpayment and land transfer tax rebate. Upfront payments included:

  • $16,300 downpayment of 5%
  • $1,365 land transfer tax after rebates
  • $1,500 legal fees

Kate arranges a mortgage and without waiting any longer asks a real estate agent to rent out her new investment property until 2015. We’ll assume that during 7 year term tenants change 3 times and she’ll have to pay commission to real estate agent every time this happens. Total commissions for 3 years will be $5,706.

Now to the mortgage. Payments at 3.10% interest rate are only $1,484/month and during the period from 2008 to 2015 they added up to a total of $124,656 which would leave Kate with the mortgage balance of $245,500.

In 2008 Kate was collecting $1600/month in rent which increased to $1700/month in 2010 and $1750/month in 2013. During the period from 2008 to 2015 Kate collected $143,000 in rent payments.

During the same time period Kate had to pay monthly condo fees and property taxes which were increasing every year. Total payments added up to $49,149 for the same period of ownership.

Kate’s additional expenses included:

  • $3,500 for minor renovations and repainting
  • $1,200 for home insurance

After 7 years of home ownership Kate decided to sell her investment. Dweller.ca indicated that similar condos in her building are currently selling for $414,000 or $591 per sqft.

In order not to complicate this calculation let’s leave out costs of obtaining, carrying and breaking the mortgage and pretend that CRA will not hit Kate with income tax for early disposal of his “primary” residence.

Initial investment:

  • $16,300 downpayment of 5%
  • $1,365 land transfer tax after rebates
  • $1,500 legal fees

Additional ongoing expenses:

  • $60,456 of mortgage interest paid
  • $49,149 in condo fees and property taxes
  • $3,500 for minor renovations and repainting
  • $1,200 for home insurance
  • $5,706 real estate fees for finding tenants (3 times)
  • $23,391 real estate fees for selling an investment

Money collected:

  • $143,000 rent collected for 7 years
  • $88,000 profit from the sale

Profit:

$231,000 (total collected)

– $146,267 (total expenses)

= $84,733 (profit) earned over 7 years on $16,300 investment.

*Approximate monthly cost carrying this investment is $235.


*Article is based on real numbers and averages pulled from Toronto MLS and other sources.

**Investors Jim and Kate are imaginary. Real Jim and Kate are currently struggling to save for the downpayment:-)

 

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