Tuesday, April 25, 2023 / by Evelyn Lopes- Klarine
Are you considering investing in builder pre-construction units but not sure where to start? Look no further! In this blog, we'll be sharing valuable insights and tips from a mortgage specialist and discussing important considerations you need to know about investing in pre-construction units. We'll cover the potential benefits, the risks involved, and how to mitigate them. Plus, we'll dive into the financing options available so you can make an informed and strategic decision.
Investing in pre-construction units can be a great way to grow your investment portfolio and build long-term wealth. As we've discussed in this blog post, there are potential benefits and risks involved in this investment strategy, and it's crucial to have the right guidance and information to make informed decisions.
One of the primary benefits of investing in pre-construction units is the flexibility of deposit structures, allowing investors to make payments in installments over time. Additionally, leveraging the increased value of the property over time can allow investors to potentially build multiple properties and increase their long-term wealth.
However, it's essential to note that investing in pre-construction units can also come with some caveats, especially when it comes to financing and pre-approvals. It's important to work with a trusted mortgage specialist and do thorough research to avoid potential challenges down the road.
One of the significant benefits of investing in pre-construction units is the flexibility of deposit structures. Unlike purchasing a home where you need to have all the down payment upfront, you can speak with the builder about their deposit structure and make payments over a period of time. This allows you to save up and make payments in installments, making it easier for those who may not have all the funds upfront.
Another significant benefit of investing in pre-construction units is the potential for investors to leverage their investment through financing options. For example, BMO offers financing based on the appraised value of the unit at the time of closing versus the purchase price. This means that investors can potentially take out additional equity based on the increased value of the property over time.
Let's say you purchased a pre-construction unit for $500,000 and put a 20% down payment of $100,000. Over the course of the next few years, delays in construction may occur and it may take up to 5-6 years for the property to be fully built and ready to move in. In this time, the value of the property may appreciate significantly, potentially up to $700,000. When it comes time to close on the property, the bank will appraise the property at its current value and investors can potentially take out additional equity based on the increased value.
For example, if the property is appraised at $700,000, an investor could potentially take out a mortgage of 80% of the appraised value, which would be $560,000. After paying the builder the original agreed-upon price of $400,000, the investor would have $160,000 left over to use towards their next potential investment property. This leveraging of the initial purchase price allows investors to potentially build multiple properties over time, increasing their long-term wealth and financial freedom.
However, it's essential to note that investing in pre-construction units can be a complex process. That's why having the right guidance and information is crucial. It's also important to consider the appraisal process and financing options available. BMO orders an appraisal once the property is about 97% complete, which is typically two to three weeks before closing. This allows for financing to be provided based on the appraisal report specifically.
For those buying their first investment property, BMO recommends having the appraisal done at the time of submitting the firm offer on the property or after removing conditions. However, this ultimately depends on the investor's goals and preferences.
When it comes to deposit structures, pre-approvals can provide flexibility in terms of making payments in installments. However, if a purchaser does not have the full down payment at the time of purchase, it can be challenging to obtain a pre-approval letter. In such cases, BMO may consider the individual's income, credit, and potential for borrowing or receiving a gift from someone else.
It's important to note that investing in pre-construction units can also come with some caveats, especially when it comes to financing and pre-approvals. As Kyle Cole mentioned, the pre-approval letter is generally needed in order to commit to the contract, and most builders request it to avoid deals falling through.
Purchasing a new build can be a rewarding experience, but it's crucial to be aware of the potential risks and uncertainties. Some may be tempted to purchase a new build without having the full down payment or a solid plan for financing in the future. However, this approach can lead to challenges down the road, including difficulty obtaining a pre-approval letter or being unable to secure financing.
Investing in builder pre-construction units can be a fantastic opportunity to grow your investment portfolio and build long-term wealth. With the right guidance and information, investors can make informed and strategic decisions to achieve their financial goals. So, if you're considering investing in pre-construction units, be sure to do your research, consult with professionals, and make informed decisions to maximize your investment potential.
In conclusion, investing in builder pre-construction units can be a smart and lucrative investment strategy, but it's important to understand the potential benefits, risks, and financing options available. As we have discussed, flexible deposit structures and leveraging the increased value of the property over time can help investors build long-term wealth. However, the appraisal process and financing options require careful consideration to make informed decisions.
So, if you're considering investing in builder pre-construction units, be sure to do your research, consult with professionals, and make informed decisions that align with your investment goals and risk tolerance. Consult with your realtor in regards to market trends and future growth potential. Consult with your mortgage professional to ensure that you are financially sound in the investment. And, remember to have your legal team review your documents so that you fully understand the agreement, it’s limitations and risks. With the right guidance and knowledge, investing in pre-construction units can be a strategic and rewarding investment opportunity.
Mortgage Specialist with BMO- Bank of Montreal
Realtor | The Evelyn Lopes Realty Team
iPro Realty Ltd., Brokerage