Pre-Construction vs Re-Sale
Which way is the best route to go when buying an investment property? Will one option give me a higher return than the other? Why what history has told us might not be what the future says.
I have always liked the idea of investing in pre-construction property for a few reasons. It, not only, gives you something to look forward to but it also allows (usually) for less upfront capital (money!) Here are some pros of pre-construction investments:
High Return on Cash
Pay deposits over the course of a term and then leave your investment to grow untouched
Less stress upfront
Forced savings account
Pre-construction is a great tool for savings and not having up-front stress or worry. Once you pay your deposits over the course of the term, you just wait, as it takes a year or two or three to build. Most housing projects increase in price once they are built so you can have confidence that your money is increasing without any interference on your part. Initially, it is a very hands-off approach to investing. Once the building is nearing completion, you have some options.
Put it up as an assignment
Rent it out to tenants
Move into it yourself
Some downsides of pre-construction include:
Increasing development charges
Uncertainty of completion dates
Holdover between paying your deposits and getting the keys
Ties up your money
Pre-construction used to be the avenue to go to purchase a more affordable home. Re-sale was always more expensive. However, with the increasing costs to developers (city development charges, building code upgrades, land costs) the prices of pre-construction homes are increasing to a point that they are almost on par with re-sale. Another downside is that if you are moving into the new home, the timing can be very difficult as delays and unexpected push-backs are very common. And for some, the largest downside is that it ties up your money and it is not easily liquidated. It can take quite some time before you are able to get your money back out of the investment.
As an avenue that I am just starting to venture into myself, I have found that there are also some pros and cons to purchasing a resale property.
Return on Investment
With purchasing a re-sale property as an investment the positive is that you get possession immediately. Once having possession, you have the ability to start paying off the mortgage right away. There is no delay time and during the same length of time for a new property to be built, you have already been able to pay off a few years of your mortgage.
Higher capital needed upfront
Difficult to liquidate
If you purchase a fixer-upper or get renters into the investment property, both are a very hands on approach. It will take time, energy and/or money on your part to keep your investment. Another downside is the difficulty to liquidate if you were in need of your money. The time it takes to sell and close a house deal can be anywhere from a month to half a year or longer.
Usually re-sale homes will require more money upfront than a pre-construction home. This means that pre-construction will have a better chance at a higher return on cash invested than a re-sale would. This does not mean, however, that you would make less on a resale. Your overall return could be the same for both investment avenues.
It is important to understand that there is a difference between:
Return on Cash - your return on how much money you actually put into the investment (usually your down payment or deposits) over how much you make from your investment (usually when you sell) and it is a percentage.
Return on Investment - your return on how much your purchase cost (usually purchase price) over how much you make from your investment (usually when you sell) and it is a percentage.
It is good to remember that when investing in either pre-construction or re-sale, you should view it as a long term savings account. You will see greater results if you do not need the money back quickly. It is a super super savings where you will not touch the money for 5-10 years.
The decision on which avenue to take is dependant your current situation, financial ability, and comfortability or risk level. I believe that investing in real estate is one of the safest avenues and can net you a high return if done correctly.
If you have any questions regarding what you just read or would like to know more about investing and purchasing real estate, I'd love to chat! Email me at firstname.lastname@example.org
~ Cassidy Davis~