Preconstruction vs. Assignment

With the market ripe with many investment opportunities, we would like to share with you some food for thought for real estate investments especially in the pre-construction and assignment space. 

We put below a quick analysis for Pre-construction vs. Assignment investment so you can better understand the returns you can make from investing in a pre-construction or an assignment property.

PRE-CON RETURN CALCULATION - LATEST PRE-CONSTRUCTION CONDO IN MARKHAM EXAMPLE:

Assuming you buy the 2 bedroom, 2 bathroom and 1 parking of this latest pre-construction project for $845,000 ($775,000 + $70,000 for parking). The nice thing about this project is there is a lot of time ahead for you to generate your return. The expected occupancy date is 2027.

This project requires the following deposits:

  -  5% deposit ($42,000) 

 -  7.5% deposit ($63,000) in 2024

  - 2.5% deposit ($21,000) in 2025 

  - 5% ($42,000) in 2027

Current market data and future assumptions:

• A 2 bedroom, 2 bath with parking and locker and 853 square feet resale condo just sold for $828,000 or $970/sf. in the area.

• We expect condo prices will appreciate at least 10% - 15% each year once interest rates stabilize. 

• Let's assume 10% appreciation each year. This means the condo may appreciate from the current $828,000 to $1,002,000 by the end of 2025. 

• Your gain will be $1,002,000 - $845,000 = $157,000. After selling costs*, your gain will be ~ $90,000.

(Note, this example assumes you sell the condo on assignment and not closing it so you avoid builder’s closing costs.)

• selling cost includes 4.5% commission + HST ($51k) and HST on deposits ($16K) paid up to 2025

Estimated return before tax: $90,000 / $126,000 (deposits made by end of 2025) = 71%

After tax return: $45,000 or $67,500 (assuming the highest tax bracket of 50%)

One thing to note is that the government may consider your assignment gain as regular income and not a capital gain. So you may not get the capital gain tax advantage. That means the $105,000 gain may be taxed at the max 50% personal tax, leaving you a net return of $50,000. If taxed as a capital gain, you are looking at a $75,000 net return.

ASSIGNMENT RETURN CALCULATION - A SOUTH RIVERDALE ASSIGNMENT CONDO EXAMPLE:

Assuming you buy a currently available 2 bedroom, 2 bath, and 675sf condo with 1 parking and 1 locker in the South Riverdale area for $675,000.

The assignment requires the following:

• Deposit to assignor: $100,000 total by occupancy date (June 14)

• Required profit to assignor: $160,000 (this cash upfront may be refinanced in full via a mortgage at closing depending on your downpayment requirement)

Current market data and future assumptions:

• A recent larger 2 bedroom resale condo with 1 parking and 1 locker just sold for $1,150,000 and close to $1,000/sf. So approximate price is $1,150/sf currently in the pocket.

• Our current South Riverdale assignment opportunity is asking $675,000 (or $1,000/sf). The current market value for this assignment should be closer to $776,000 based on the current price per square feet in the area. We will assume $710,000 (or $1,050/sf) is the current market price for this assignment to be conservative.

• We expect prices will appreciate at least 10% - 15% each year once interest rates stabilize. 

• Let's assume 10% appreciation each year. This means the condo may appreciate from $710,000 to $859,000 by the end of 2025. 

• Your gain will be $859,000 - $710,000 (includes closing costs**) = $149,000. After commissions ***, your gain will be ~ $105,000. 

** closing costs include ~$20k land transfer tax and ~$15k builder closing costs

***4.5% commission + HST ($44k) assumed

Estimated return before tax: $105,000 / $135,000 (deposit + land transfer tax and builder closing costs) = 78% 

After tax return: $52,500 (assuming the highest tax bracket of 50%)

(if the assignment is held for more than 12 months after closing, it is considered a capital gain and not regular business income so it benefits from the tax advantage of a capital gain)

Conclusion: We believe there is merit in investing in both types of investments. Pre-construction investment is a simpler choice as all you have to do is to put in the deposits over time and require much less upfront capital. Assignments require you to provide more deposit upfront and close the condo, which require more closing costs. However, you maybe be purchasing an assignment at great discount to current market value so your gain is more assured than the pre-construction gain.

With either choice you choose, our team can offer one stop services from helping you purchase the unit, to providing property management, to managing your sale and generating a profit for you seamlessly.

Final Point: The reason why real estate investments are so great is because of the power of leverage. 

If you have $500,000 to invest and are able to generate a return of 70% every two years, your $500,000 will turn into $7,000,000 in 10 years. That is not a typo, it is $7 million portfolio value on a compounded basis after 10 years time. 

Data are based on certain tax assumptions and current pre-construction and assignment opportunities as at March 31, 2023.