Real Estate

Presale condo investment - Vancouver

  • Last Updated:
  • Nov 11th, 2017 6:52 pm
[OP]
Newbie
Oct 21, 2017
47 posts
4 upvotes

Presale condo investment - Vancouver

Does it make sense to invest in a presale condo that has a planned completion time of 4 years vs investing in the stock market? In 4yrs, I may or may not live there. It's getting scary out there that I'm getting closer to getting priced out.

Eg. Condo is $500k and need 25% deposit before completion, I'm leveraging $125k deposit over 4yrs on $500k property. If there is an annualized gain of 5% over 4 years, that 5% is compounded on $500k. If I have the same amount, $125k, invested in the stock market, that annualized gain is only on $125k.

Appreciate the input.

Thanks
20 replies
Deal Addict
Nov 2, 2013
4816 posts
915 upvotes
Edmonton, AB
You get paid more to take more risk. Who knows what exactly the appreciation rates will be. Historically around that region it has been 8.5%, but as you can see, some properties have jumped as much as 20-30% YoY recently. My mother's condo was around $450K in 2015; $540K+ in 2016; now market value is around mid $7xx,xxx, and selection is extremely narrow. This is in Port Coquitlam... not even Vancouver itself (hour out).

Though note that throughout those years the CAD plummeted, so it could be that other currency holders suddenly have more purchasing power in Canada... so in foreign currency terms (particularly USD), nothing much has changed, or we've actually depreciated. New immigrants from all over usually have other currency, and the locals enjoy the appreciation brought up by their demand, etc. Even today the CAD still sucks.

The problem with pre cons is the builder will promise the moon and sky but they often take even longer, don't even finish, and/or the actual unit turns out to be ugly, has a bad view/lighting feel, etc. It can either turn out really good or really bad.

Not sure what that builder's policies are but some don't allow you to sell your contract to someone else until completion... essentially in that case your cash is completely illiquid until then. Equities are much more liquid, though not the same leverage is available. Cash on cash return perspective, often after factoring in transaction costs and upkeep, they end up to be about the same, or even less for some properties. Like the recent rapid appreciation seen in BC Lower Mainland real estate, some select very undervalued companies also jump dramatically... some much more. These stocks just require a very unique kind of discipline and tolerance for extreme volatility, hence their high yields from low initial entry prices as resultant of low investor demand in the beginning. Real estate demand can vary dramatically day by day also, but this psychological shift is less visible compared to equities whose prices are updated by the minute during trading hours.

TL;DR stocks vs. real estate is kind of an apple and oranges comparison, as one allows a lot higher leverage in return for other drawbacks.
Deal Addict
Jun 20, 2011
1405 posts
402 upvotes
VANCOUVER
The amount of $ you can earn from pre-sale is not as great as it used to be. However, if the market even gains 5-8% yearly then you should have a nice tidy profit that investing in the stock market can not match.

I just bought a pre-sale last Saturday. It cost me $1066 per sq ft. If it goes up a modest 7% in 2018, 6% in 2019, 5% in 2020 (completion slated for 2020) then I would have made approx 110k (not factoring fees, taxes, etc) as simple math. Initial deposit of 59k, another 29k needed in approx 6-12 months.

To contrast that pre-sale purchase... I bought a unit in Yaletown May 2017 for 428k. A similar unit in the same building just sold for mid 500s. Mine is fully renovated so if I was to list today, I'd ask 599k and probably will get it. That would be a profit of 172k (as simple math). So you technically do not need to buy a pre-sale.

Gone are the days of 300k condo presales that you can flip for 600k+ these days. (I should have bought more ugh). For example, I grabbed a unit in the Metrotown area in Nov 2015 for 380k now similar units are 600k+.
Here's something I dug up from a VIP invitation back in Jan 2012 just for fun. A 2 bedroom at the Lido for 548k. Currently there are 2 active listings for 940k and 945k. 5 years for a almost 400k gain...

I do not believe this is sustainable and it can not surely gain 20% year over year for Burnaby as reported in a publication, I think it was the Vancouver Sun. However, as you can see I am still taking a risk.

I'm not a foreign buyer, just a local taking advantage of the situation.
Deal Addict
Dec 5, 2003
1269 posts
62 upvotes
curiousgeorge1000 wrote:
Oct 22nd, 2017 8:53 pm
Does it make sense to invest in a presale condo that has a planned completion time of 4 years vs investing in the stock market? In 4yrs, I may or may not live there. It's getting scary out there that I'm getting closer to getting priced out.

Eg. Condo is $500k and need 25% deposit before completion, I'm leveraging $125k deposit over 4yrs on $500k property. If there is an annualized gain of 5% over 4 years, that 5% is compounded on $500k. If I have the same amount, $125k, invested in the stock market, that annualized gain is only on $125k.

Appreciate the input.

Thanks
As others have said, there is a big risk but also potentially big gains. It is tough in such a high market, however, if you are willing to take those risks and live in the condo or have other assets to help if it turns out to be a bad investment, then find something you like and enter into a contract. I've read it is pretty competitive for pre-sales still. I would also only deal with a very reputable developer.
Deal Addict
Dec 27, 2006
1110 posts
277 upvotes
CRA probes presale condo flips in Toronto as part of real estate crackdown

Federal government auditors are scrutinizing 2,800 preconstruction condo flips in the Toronto area as part of a crackdown on tax evasion in the real estate industry.

The Canada Revenue Agency obtained court orders last year compelling 44 condominium developers to hand over information about people who sold their units before projects were completed, a practice known as paper flipping or selling on assignment. The agency is still analyzing the data it received.

"In the Toronto area in particular, audit work has increased substantially on what are called 'assignment sales,'" Paul Murphy, a CRA spokesman, said in an e-mail. "The profits from flipping real estate are generally considered to be fully taxable as business income."

In addition to its Toronto blitz, the CRA has obtained judicial orders requiring Vancouver condo developers to provide information about buyers who flipped units. Speculation in the presale condo market has been blamed for helping to drive up housing prices to record heights in both cities in recent years.

Presale condo units can be bought with deposits of only about 20 per cent over time with the balance not required until a building is completed. However, selling units on assignment allows for speculation on price growth for the unit's entire value between the initial purchase date and the flip.

In Ontario and British Columbia, there are no public registries that track assignment sales, meaning there is no way to know how widespread – and lucrative – the practice is. However, the CRA's crackdown is an indication that it has identified paper flipping as a significant source of potential tax cheating.

As GTA real estate prices soared earlier this year, Ontario Finance Minister Charles Sousa blamed real estate speculators for adding uncertainty and risk to the market, going so far as to call them "property scalpers."

While the region's real estate market has since slumped, the condo sector remains on course to be at or near a record sales year. The provincial government's 16-point package of policy changes designed to cool the market, unveiled in April, included a vow to "understand and tackle practices that may be contributing to tax avoidance and excessive speculation in the housing market such as 'paper flipping.'"

Contracts for preconstruction condo purchases and assignment sales are held by developers rather than being filed with land registries, meaning there is no publicly accessible way to review such records before a building is completed. Developers typically charge an administration fee for assignment sales and some limit the practice. Unit ownership information is registered once projects are closed.

The CRA obtains records about assignment sales through court orders, known as "unnamed persons requirements," that compel condo developers to provide information and documents about their customers. The agency filed 44 such applications between July and September of 2016 and all the companies complied, Mr. Murphy said, adding there is no assumption that developers have engaged in any wrongdoing.

As a result of these efforts, which are part of the CRA's attempts to combat the underground economy, the agency identified 2,810 preconstruction condo flips in 69 projects in the Toronto region and is combing through the data to determine tax compliance.

"The CRA has started and continues to analyze this information to determine whether audits need to be carried out," Mr. Murphy said. He did not respond to questions about the dollar value of taxes that were not paid and how much money has been recovered.

Asked whether the CRA would like the Ontario government to require public documentation of presales, Mr. Murphy said: "The Agency is working with the provinces to determine availability or improve access to real estate data that will help to identify potential non-compliance."

The real estate development industry generally supports the CRA's practice of obtaining assignment sales information as long as such efforts are backed by court orders, according to the Canadian Home Builders' Association.

"We really don't have a problem with that. Obviously, someone who's evading taxes should be held to account," said David Foster, director of communications at the CHBA.

Condo owners who sell preconstruction units on assignment must report the gains on their tax returns and generally must pay taxes on 100 per cent of the extra income. Those who run afoul of the rules by failing to declare such transactions or who pay taxes on only part of the proceeds can expect to be audited and to be forced to pay taxes owing plus a penalty of at least 50 per cent as well as interest and may face criminal charges, said William Howse, a Toronto tax lawyer.

"They're making a gain on selling a piece of paper and the CRA position, and I agree with it fully, is you're going to pay tax on every penny," he said.

Mr. Howse said CRA auditors compare condo developers' lists of people who sign sales contracts against land-registry data once buildings are finished. In doing so, they can identify and target previous owners of units that have been flipped, combing through past tax returns to determine compliance.

"It's low-hanging fruit to be caught by the CRA," he said. "Anybody who assigns an offer, sells an offer for a profit will be caught by the CRA. One hundred per cent guaranteed that the CRA will be able to identify these sales and the amount of the gain. … For auditors, can you imagine how easy it is?"
[OP]
Newbie
Oct 21, 2017
47 posts
4 upvotes
DDHLeigh wrote:
Oct 22nd, 2017 11:26 pm
I just bought a pre-sale last Saturday. It cost me $1066 per sq ft. If it goes up a modest 7% in 2018, 6% in 2019, 5% in 2020 (completion slated for 2020) then I would have made approx 110k (not factoring fees, taxes, etc) as simple math. Initial deposit of 59k, another 29k needed in approx 6-12 months.
That's 88k deposit total before completion. How much was the unit? Places like Etoile in brentwood has 1bdr going for $600k and requires 25% within 1st year. How did you manage to put down such a small deposit?
To contrast that pre-sale purchase... I bought a unit in Yaletown May 2017 for 428k. A similar unit in the same building just sold for mid 500s. Mine is fully renovated so if I was to list today, I'd ask 599k and probably will get it. That would be a profit of 172k (as simple math). So you technically do not need to buy a pre-sale.
How many sqft and age for the 428k unit?
I do not believe this is sustainable and it can not surely gain 20% year over year for Burnaby as reported in a publication, I think it was the Vancouver Sun. However, as you can see I am still taking a risk.
If a unit is $500k, 1bdr, 4yr completion, and requires 25% deposit within 1st yr, how do you risk doing an assignment or selling upon completion when you might not quality for a mortgage due to the high interest rate?
Deal Addict
Feb 9, 2009
4488 posts
2225 upvotes
Motoss wrote:
Oct 24th, 2017 9:49 am
CRA probes presale condo flips in Toronto as part of real estate crackdown

Federal government auditors are scrutinizing 2,800 preconstruction condo flips in the Toronto area as part of a crackdown on tax evasion in the real estate industry.

The Canada Revenue Agency obtained court orders last year compelling 44 condominium developers to hand over information about people who sold their units before projects were completed, a practice known as paper flipping or selling on assignment. The agency is still analyzing the data it received.

"In the Toronto area in particular, audit work has increased substantially on what are called 'assignment sales,'" Paul Murphy, a CRA spokesman, said in an e-mail. "The profits from flipping real estate are generally considered to be fully taxable as business income."

In addition to its Toronto blitz, the CRA has obtained judicial orders requiring Vancouver condo developers to provide information about buyers who flipped units. Speculation in the presale condo market has been blamed for helping to drive up housing prices to record heights in both cities in recent years.

Presale condo units can be bought with deposits of only about 20 per cent over time with the balance not required until a building is completed. However, selling units on assignment allows for speculation on price growth for the unit's entire value between the initial purchase date and the flip.

In Ontario and British Columbia, there are no public registries that track assignment sales, meaning there is no way to know how widespread – and lucrative – the practice is. However, the CRA's crackdown is an indication that it has identified paper flipping as a significant source of potential tax cheating.

As GTA real estate prices soared earlier this year, Ontario Finance Minister Charles Sousa blamed real estate speculators for adding uncertainty and risk to the market, going so far as to call them "property scalpers."

While the region's real estate market has since slumped, the condo sector remains on course to be at or near a record sales year. The provincial government's 16-point package of policy changes designed to cool the market, unveiled in April, included a vow to "understand and tackle practices that may be contributing to tax avoidance and excessive speculation in the housing market such as 'paper flipping.'"

Contracts for preconstruction condo purchases and assignment sales are held by developers rather than being filed with land registries, meaning there is no publicly accessible way to review such records before a building is completed. Developers typically charge an administration fee for assignment sales and some limit the practice. Unit ownership information is registered once projects are closed.

The CRA obtains records about assignment sales through court orders, known as "unnamed persons requirements," that compel condo developers to provide information and documents about their customers. The agency filed 44 such applications between July and September of 2016 and all the companies complied, Mr. Murphy said, adding there is no assumption that developers have engaged in any wrongdoing.

As a result of these efforts, which are part of the CRA's attempts to combat the underground economy, the agency identified 2,810 preconstruction condo flips in 69 projects in the Toronto region and is combing through the data to determine tax compliance.

"The CRA has started and continues to analyze this information to determine whether audits need to be carried out," Mr. Murphy said. He did not respond to questions about the dollar value of taxes that were not paid and how much money has been recovered.

Asked whether the CRA would like the Ontario government to require public documentation of presales, Mr. Murphy said: "The Agency is working with the provinces to determine availability or improve access to real estate data that will help to identify potential non-compliance."

The real estate development industry generally supports the CRA's practice of obtaining assignment sales information as long as such efforts are backed by court orders, according to the Canadian Home Builders' Association.

"We really don't have a problem with that. Obviously, someone who's evading taxes should be held to account," said David Foster, director of communications at the CHBA.

Condo owners who sell preconstruction units on assignment must report the gains on their tax returns and generally must pay taxes on 100 per cent of the extra income. Those who run afoul of the rules by failing to declare such transactions or who pay taxes on only part of the proceeds can expect to be audited and to be forced to pay taxes owing plus a penalty of at least 50 per cent as well as interest and may face criminal charges, said William Howse, a Toronto tax lawyer.

"They're making a gain on selling a piece of paper and the CRA position, and I agree with it fully, is you're going to pay tax on every penny," he said.

Mr. Howse said CRA auditors compare condo developers' lists of people who sign sales contracts against land-registry data once buildings are finished. In doing so, they can identify and target previous owners of units that have been flipped, combing through past tax returns to determine compliance.

"It's low-hanging fruit to be caught by the CRA," he said. "Anybody who assigns an offer, sells an offer for a profit will be caught by the CRA. One hundred per cent guaranteed that the CRA will be able to identify these sales and the amount of the gain. … For auditors, can you imagine how easy it is?"
William Howse looking for that business...
Deal Addict
Jun 20, 2011
1405 posts
402 upvotes
VANCOUVER
curiousgeorge1000 wrote:
Oct 26th, 2017 3:55 am
That's 88k deposit total before completion. How much was the unit? Places like Etoile in brentwood has 1bdr going for $600k and requires 25% within 1st year. How did you manage to put down such a small deposit?

Purchase price was 590k. It's 10% on signing, 5% after 6 months (generally they are never on time), and another 5% 6-12 months later (same thing, generally not on time). I plan to sell it as an assignment prior to the 3rd deposit so I did not factor in another 29k (yes, I could pay it if needed). Who knows what will happen though, I could end up completing the deal.

How many sqft and age for the 428k unit?

It's a 30+ year old building in Yaletown. It's approx. 600 sq ft. I was originally supposed to buy it for less (around 415k), but the selling agent kept nickel and diming me even as we were signing the contract. I figured the market was still hot so I paid what they asked.

If a unit is $500k, 1bdr, 4yr completion, and requires 25% deposit within 1st yr, how do you risk doing an assignment or selling upon completion when you might not quality for a mortgage due to the high interest rate?

For this question I'm not really worried about not qualifying. 25% down on 500k is 125k so I'd need to qualify for 375k. Secondary scenario would be the lender needing 35% down for a 325k mortgage. Worst case scenario, if I can't get any lending I'd just pay cash for the unit no mortgage.
Answers to your questions above in bold.

It's anybody's guess what the market will be like in 1, 2, 5 etc years. Surround yourself with knowledgeable people in the industry. When reading advice and stories from bulls and bears alike take each with a grain of salt. I bought my first investment condo in 2012 not caring what happens because it would be given to my daughter. After this latest deal, I plan on actively working on my DRIP since I'm really too heavily balanced to real estate.
Sr. Member
Feb 1, 2010
771 posts
102 upvotes
It's a 30+ year old building in Yaletown. It's approx. 600 sq ft. I was originally supposed to buy it for less (around 415k), but the selling agent kept nickel and diming me even as we were signing the contract. I figured the market was still hot so I paid what they asked.
Are you worried about special assessments on buildings of this age?
Deal Addict
Jun 20, 2011
1405 posts
402 upvotes
VANCOUVER
quatchi wrote:
Oct 28th, 2017 9:20 pm
Are you worried about special assessments on buildings of this age?
No, did my due diligence. Thing is, nothing is guaranteed so you make your best judgement.
Newbie
User avatar
Jul 1, 2015
46 posts
7 upvotes
Vancouver, BC
All of a sudden so many pre-sale condo advertisements in newspaper... I wonder why...no one is buying them now $1300/sq ft
Deal Addict
Jun 20, 2011
1405 posts
402 upvotes
VANCOUVER
Clutch77 wrote:
Nov 10th, 2017 8:45 pm
All of a sudden so many pre-sale condo advertisements in newspaper... I wonder why...no one is buying them now $1300/sq ft
Still selling like hotcakes.... $1300 is closer to false creek. After the unit I grabbed above in post#3, I actually grabbed another 2 weeks later in Vancouver. The Vancouver one cost me $1265 per sq ft.
Newbie
User avatar
Jul 1, 2015
46 posts
7 upvotes
Vancouver, BC
Don't tell me it's Second & Main...I still think buying Yaletown 10yo-ish condo is better investment than presale.. or False creek 5 yo units for under $1100/sq ft. At least it's tangible and you can see the quality.
Deal Addict
Jun 20, 2011
1405 posts
402 upvotes
VANCOUVER
Clutch77 wrote:
Nov 10th, 2017 9:25 pm
Don't tell me it's Second & Main...I still think buying Yaletown 10yo-ish condo is better investment than presale.. or False creek 5 yo units for under $1100/sq ft. At least it's tangible and you can see the quality.
Yes it's Main and Second. I had a chance to jump on a good unit and took it. I was not looking at getting one here initially.

It's about finances, If I was to buy a completed one I'd need to shell out more money. I'm already holding several with conventional mortgages and I need to complete on another in downtown as a cash deal in 2 weeks...

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