Should I be the First in Line for New Developments?

Should I be the First in Line for New Developments?

 

Real estate has the oft-used phrase, “everything is negotiable.” That’s not entirely true. During the pre-completion sale phase of new developments, the buyer pays the price the developer is asking. As the project nears completion, there are fewer units available and prices have generally increases.

 

Example: the July 10, 2004 price sheet for the Elizabeth Lofts lists unit 1001 for $321,265. Today, that same unit is listed the Multiple Listing Service for $359,000. That’s more than a 10% increase in six months. “So what you’re telling me is that this is a no brainer good investment?” No, I am not.

 

First, we must remember that there is a lot of faith on the buyer’s behalf at the beginning of a project; there might be little, if any, sign of construction at the time. There is nothing tangible to look at and deciding how that unique sofa that has been in your family for years will fit in the living room isn’t easy from a letter-sized floor plan. The buyer puts between 2.5%-5% down when the contract is signed as earnest money. If the sofa doesn’t fit when you actually get to walk into the unit eighteen months later, it’s the sofa or your earnest money. Higher risk, higher reward. Just like an IPO.

 

Next important point is finding out if the developer will sell to investors. Many projects are sold as owner-occupied. What you do with the unit after you take possession is up to you (subject to the building’s by-laws) but up front, you may be asked to sign that you are going to live in the unit. The thought process is that owner-occupied spaces are better cared for than rentals (also evidenced by higher interest rates for investment property).

 

Now look at the math for the space as a rental. Odds are, your brand spanking condo is not going to cash flow positive, even with 25% down. Just because something doesn’t cash flow, doesn’t make it a bad investment. If the appreciation benefit will cover the cash out of pocket and you can stomach and afford writing a monthly check, it may still be a good investment. The smaller units seem to have better cash flow potential, which makes sense. If a renter can afford to rent a larger, more expensive unit, they can probably afford to buy one too. We see the same thing in single-family residences.

 

Buildings in the Pearl typically have less than 10% rentals. People buy there to live there. Rental potential is valid consideration in the purchase decision but probably won’t make sense if that is the driving factor. If you are looking as an investor, looking at smaller units, single-family or multi-family housing may be a better bet.

 

 

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