Elevated home sale activity continues to outstrip the supply of homes for sale in…
One of the many stories driving the chatter of Vancouver real estate over the past number of years is the presale market. It is worth noting that clients of the Vancouver Real Estate Podcast get VIP Access to Projects around the Lower Mainland and our team has helped hundreds of buyers find the right presale property.
We have also discussed this area of the real estate market from multiple angles, like the role of the realtor in a presale purchase, strategies for leveraging a presale development in a certain area, as well as detailing whether or not a presale is the right fit for you.
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But many people still don’t understand why presale construction is so compelling for investors.
Below we outline the top reasons investors are so excited about presales but first we should start with the distinction between “built” properties and “presale” properties.
A built property refers to exactly what you think: a property that exists, that you can walk in and view, and that is most often marketed on MLS and accessible through our fantastic research tools.
A presale or a pre-construction property has not yet been built, so you are buying the rights to a future home – a timeline that is usually anywhere from one to four years in the future.
It may seem counterintuitive to be more interested in something that does not exist as opposed to an existing condo in which you can immediately get a tenant and start cashing rental cheques.
But for many it is not.
Here are the top seven reasons investors love presales:
1)The Advantage of Leverage
A presale property can be purchased with as little as 5% to 10% deposit (and usually at the most 25%). This allows you to potentially benefit from a large asset without having paid anywhere near the entire amount ultimately due yet.
Let’s take an example with easy numbers: Say you bought a downtown condo in 2015 with a completion of 2018. You pay $500,000 for the condo with 10% down or $50,000 up front.
We are now in 2018 and the property is just completing and will be ready for possession next month. Looking at last month’s REBGV stats, prices have appreciated downtown 63.3% in the last 3 years. Your condo would now be worth $816,500, according to the stats.
Without having paid any more than your initial 50k deposit, then, you have made $316,500 or put another way a 633% return on investment if you sold the contract of purchase and sale as an assignment.
Let’s say, however, that you decide to keep your property and you need to get a mortgage.
You have put 10% down, so you either must come up with another 50k to avoid expensive high ratio mortgage insurance at completion, right?
The property is no longer worth 500k but $816,500, so, using a great mortgage broker and getting an appraisal, you now have over 80% as a down payment ($316,500 in appreciation + $50,000 deposit = $366,500 on a mortgage of $450,000) with only putting 10% down in the first place.
2)Developers Transform Neighborhoods and Increase Value
We have talked a lot on the podcast about how to benefit from large developers rebranding existing neighborhoods through massive capital investments. There is more than one way to do this but the absolute easiest way is to buy in as early as possible to a presale project (or a larger master planned community) and let big money and big money interests take care of the rest.
There is no denying that effective real estate investing is energy intensive and that applies to purchasing a presale.
With that said, a presale is much easier and much less stressful in that you can immediately start benefitting from market trends (presales rise and fall with the regular real estate market), while kicking financing, tenants, property taxes, or maintenance fees down the road.
Tenants – like buyers – like brand new. And why not? The homes have new appliances, modern layouts, and often home features not available in older condos.
The buildings, moreover, will likely have attractive amenities, such as a gym, a meeting room, a lounge, rooftop patios and potentially a pool/hot tub/sauna.
Tenants will pay a premium for newer homes for the same reasons newer homes are easier to rent.
One way to think of an investment property is like a car.
One of the benefits of a new car is that you know that all the potentially expensive components of a brand-new car should not require repair or replacement for some time. Your brake pads are at a 100%, for instance, as opposed to say 35% on a car that is 10 years old.
Similarly, the major systems in a building – the pipes, the roof, the elevator – have an economic life span that is predictable. The elevator may have an estimated service life of 27 years, for instance. You can expect to own a brand-new condo for many years before you are hit with high repair or expensive replacement costs.
7)2-5-10 Home Warranty Insurance
All new construction in British Columbia comes with a 2-5-10 Warranty.
You can expect the coverage to include:
- 2 years on labour and materials
- 5 years on the building exterior (or envelope)
- 10 years on the structure of the home
This warranty goes along way to limiting potential costs in the first 10 years after completion.
These are the reasons so many investors find presale construction compelling here in Metro Vancouver.