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Over the past few years, Toronto is being recognized as one of the leading world metropolises.
The city boasts of high international attractiveness, proximity to a large international market, well-functioning institutions, high technology, research movement, creativity, and innovations. Its location by the water, cultural diversity, good quality of life, good food, scenic environment, and trendy neighborhoods make the place even better.
All of this combined has made it one of the most expensive cities in the world, with a booming real estate market, particularly with the sale of pre-construction Toronto condos. However, even though more and more people find the task of finding their ideal home daunting and difficult, the city has noticed that a trend of flipping pre-construction condos is on the rise.
In the article below, we try to help you learn the basics of flipping pre-construction condos in Toronto.
Understanding Pre-Construction Condo Flipping
Before you start looking into the prospect of flipping pre-construction condos, you must first understand what it means.
It is an act of purchasing a pre-construction condo and after a short time deciding to sell it, which has been proven to be a very lucrative form of investment.
Usually, pre-construction condo flipping is also referred to as an assignment sale, which means selling purchase contracts for units that haven't been developed yet. This is considered somewhat of a passive but excellent investment strategy as it may provide greater returns on investment.
What makes flipping unique is that you are buying the pre-construction unit with the purpose of selling and as the demand for condos on Toronto’s market is at an all-time high, this form of investment can generate considerable profit.
Look for a Reputable Builder
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Since putting money in something that is still not built yet can be a very risky business, what you need to do is to find a construction company that has a solid background.
Ensure that the builder has a good track record of completing projects on time, without exaggerated delays. In case there were delays in the past, it would be wise to check if they were handled properly.
You surely do not want to find yourself buying pre-construction units and then be in a situation where the developer has canceled the entire project. Do a background check of their reputation and post-closing history as it is a crucial point before making a real estate investment.
Think About Location and Your Business Model
A particularly essential next step in flipping is finding the right location. When choosing the best location, you should think of a place that has the potential of flourishing, with room for plenty of development, and a growing job market.
It’s wise to consider a location that is up and coming, which can increase the value rapidly.
Before investing, make sure to create a business model as the ultimate plan for making your profit. The plan should include the pre-construction condo as the product, the target buyers, and the vision of how the investor will go about selling the product.
Once you find a property that meets all requirements of your business model, such as location, price, and the builder’s reputable background, you can go ahead and purchase the condo in question.
Be Wary of the Perils of Flipping
Although flipping condos gives people the opportunity to earn fast money, speculators are still exposed to certain risks. The Canada Revenue Agency (CRA) monitors the activities of this industry because as far as taxes are considered, such short-term investments are much more prone to inspection and risk.
In case a person claims the sale of their condo as an investment to avoid being taxed on 100% of their profits, they should know that the CRA might flag the real estate transaction. This can occur if the ownership of the pre-construction condo is less than one year, if the expertise and professional background of the person and the associates are relevant to real estate, taxation, and similar activities, and if the person has performed similar transactions.
If the CRA flags the transactions due to any of the reasons mentioned, they will look closely at the person’s financing at the time when the purchase was made. During the process of buying a pre-construction condo, the buyer declares whether the reason for the purchase to the builder was an investment or bought as a primary residence.
Exceptions Do Apply
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Every rule has an exception and even the Canadian government shows deeper understanding and knows that every person’s life circumstances can change. This also applies to the purchase of pre-construction condos.
Even though some people truly had the intention of living or renting them, but were forced to sell, the government will show leniency if you prove that you have come across financial difficulties, found a new job that requires you to move, or that your relationship came to an end which forces sale.
Be On the Safe Side and Invest Long Term
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A general rule of thumb is that when investing in a pre-construction condo while having the intention to keep it long-term, it will bring in great returns for you and manage to get rid of any suspicion on the CRA’s part.
To do this successfully, you should purchase a pre-construction unit and keep it for at least one to two years after becoming its official owner. A smart next step is to take advantage of the high rental prices in the city and lease out the condo. Investors who are exploring the idea of having a one-year lease in place are eligible for an HST rebate in the amount of up to $24,000.
These general guidelines will make you be seen as an investor when investing in pre-construction units. As the right time comes for you to sell, you’ll be able to deduct operating expenses from the total profit and also be taxed only 50 percent of the capital gains.
With its red-hot real estate market, Toronto has made its residents and potential homebuyers recognize the act of flipping pre-construction condos as a great future investment and a way of earning some extra money.
If you want to avoid getting certain unpleasant calls from the tax authorities, be sure to follow this guide, do your research, and prepare yourself by looking for the right builder, location and get informed about the risks that flipping pre-construction condos involve.
This will give you the extra boost of confidence you need when embarking on this adventure and hopefully bring you some positive financial gains.