A recent study by CIBC Capital Markets Deputy Chief Economist Benjamin Tal and Urbanation Senior VP Shaun Hildebrand found that half of the condo buyers are investors—many purchasing real estate as a way to save for retirement or for their children to get into the property market. It’s likely that many other Canadians have had their eye on the condo market, hoping to make a purchase for a similar reason. However, there are a few things you should know to avoid costly mistakes before jumping into the market.
Beware of A Bad Developer
Not all condos are developed equally—some developers are better than others. While you may not need the best of the best, it’s necessary to make sure that the developer doesn’t deliver an end product that lacks quality and design. Remember, these companies spend millions on marketing and sales. You can walk out of that showroom feeling like you made a great purchase, due to the abundance of reassurance provided by the salesperson, then end up with thin walls, leaky pipes, and poor ventilation. This can ultimately hurt your life as a resident in the property as well as hurt the property’s resale price.
Tip: Find a developer who has a strong track record in the area. Don’t get caught up in all of the company’s marketing glamour—the quality of their prior developments say more than the fancy brochures and miniature models.
If you’ve purchased from a bad developer, Toronto Real Estate Agent Jamie Sarner advises:
You can hope that the area picks up, or try to stage the condo nicely, and then sell it. There’s not much you can do once you decide to purchase. This is why it’s extremely important to research the developer and the area.
Research Your Neighbourhood
Quite obviously, a neighbourhood is critical to a property’s value. But it goes beyond how central your location is or how beautiful your view is. Sarner warns:
New homeless shelters or community housings can really affect the value of a property in their area. Really, any new construction can affect the value of its surrounding properties.
Tip: Do a thorough research of the areas you’re shopping in and keep an eye out for any permit or proposals for new construction or zoning changes. Having a real estate agent who knows the neighbourhood is extremely beneficial, as well.
Check How You Will be Taxed
If you aren’t eligible for principal residence tax exemption—i.e., the property that you’re selling isn’t your main living quarters—the profit you earn from appreciation can be completely taxed. Usually, a seller under principal residence exemption treats their profit as capital gains tax (half of the profit is taxed), whereas others are treated as income tax (100% of profit is taxed).
Tip: A number of variables affect how you’re taxed when selling a property. This can include the nature of the property sold, the length of property ownership if you sold any other properties in past year, any work that was done to the property to attract more buyers (such as marketing), and your motive when buying the property. Double check to see whether the CRA will tax you as income or as capital gains so no surprises come your way when filing your taxes in April.
It's Easy to Overpay
In a heated real estate market where condos are sold for significantly more than the asking price, it’s easy to overpay. In the spur of the moment, hoping to outbid other buyers, you may end up offering a number that isn’t worth the square footage and neighbourhood that you’re paying for. Single homes are more limited, resulting in a more consistent appreciation; however, the constant supply of new condo developments have moderated its market’s prices. Often, condo prices are inflated by flippers who buy during the pre-construction phase. And if a flipper realizes that they overpaid, they’ll try to pass that cost onto the next buyer.
Tip: Unique condo properties, such as ones with multi-bedrooms, in high-demand areas, or which are part of a boutique complex, may appreciate relatively more in the market.
The Wrong Relator
Choosing a good relator is critical when buying or selling any property, whether it’s a condo, a townhouse, or a detached home. Inexperienced and experienced realtors tend to charge an identical or a similar commission price. Therefore, there’s a lot of benefit without additional costs to hiring someone with more experience. Experienced realtors better understand the selling and buying process, have more experience with certain areas, and know the track records of different condo developers better.
Tip: Choose someone with plenty of experience selling houses in the area that you’re looking in. Part-time realtors and inexperienced family friends may not be the best option.
If you’ve realized that the agent you’re with isn’t working out, Sarner advises:
You can always adjust who you’re working with, suggesting that any commitments signed are with the brokerage and not the salesperson. You can check with the manager of the brokerage to see if there’s someone within the office that is better suited to your needs.
Investment Property Mistakes
The Tal-Hildebrand study also found that condo prices are rising faster than rent prices and that many condo investors who rent out their unit to pay down the principal are experiencing an overall negative cash flow. The study further predicts that by 2021, the increase in the supply of condo units and the economic environment will make it tough for investors to keep up with the investment’s expenses by renting it out. With expanded rent control and rising interest rates, condo investments will continue to be tougher to manage.
Tip: When purchasing an investment condo property to rent out, a larger down payment can help you achieve a neutral or even positive cash flow. If you are at a loss, however, you can use this opportunity to limit tax burdens.