We all know what appreciation in Real Estate is, right? You buy a condo in Toronto today for $500,000, and magically, in five years that same property is worth $700,000. Assuming you didn’t make any major investments in improving that property, then yes, you have experienced some decent appreciation.
In today’s GTA condo market, investors usually like to put a minimum amount of money towards a down payment for a unit. The one downslide to this is that it can affect the cash flow. A small down payment strategy requires a larger mortgage, and thus one’s monthly mortgage payment is proportionately larger. As such, it is difficult to obtain positive cash flow early on in the condo investment.
Cash flow is what many investors look at to determine the validity or profitability of a property, but this is often a mistake, since cash flow only reflects the direct return. The other factor, which must be considered in a Real Estate investment, is indirect return – or appreciation.
The investors (and home owners!) who are as interested – or more interested – in appreciation as the key investment factor, often try to get ahead of the game by looking for the “next great neighbourhood”, so as to ride the wave of rapid property appreciation. While historically this was done only by savvy investors, today most people are well informed and have access to sufficient information to understand neighbourhood and market trends. Instead of looking for that hidden gem, which is becoming more and more difficult, a sound investing strategy can also be to simply buy into a quality condo project, by a good developer/builder team, in an area that is reputable and stable.
Here’s the shocker: Everything in this article so far refers to what happens once you actually own a property. Average appreciation of property in the GTA is around 7% per year (calculated over a 50-year period) But that doesn’t take into account the period of time between when you negotiate the purchase price of a property, and when you actually close on the purchase and own it. With most condo investments, that period of time only lasts for two, three, or four months.
Here is where the magic of investing in pre-construction condos comes into play. You put down a deposit of 5, 10, or 20 percent of the purchase price with the developer, and you sit back to start waiting the one, two, three or four years until your unit is ready.
As an investor, the longer the period of time from when you sign the purchase agreement, to when you own the unit, the better. The reason is that you are not covering any expenses for owning the unit (which eat into your returns), and you have not had to provide the full purchase price (either all in cash, or a combination of cash and mortgage). The appreciation is ticking up on the full purchase amount, not just on your deposit amount. As such, your ROE (Return on Equity) can be phenomenal, since you’ve only put out the deposit amount, but you are benefitting from appreciation on the full value of the condo unit.