Thinking of buying a pre-construction condo? As we enter the 11th month of paying rent to the developer on two units we own in the Toy Factory Lofts in Toronto's trendy King West district, I want to tell you not to. We are paying rent, yet we own the two units. Or wait, maybe we don't!?
Five years ago I pooled some money together with a couple of partners to buy these units. Our research in the area led us to believe that it was just about to emerge as the next great place to live in Toronto. And, it did! The value of our units has increased a lot. Even with the market cooling. But, I can't help but feel frustrated that we aren't paying the mortgage down on these units yet! As each day passes the return on our investment is diminishing. We haven't even got our financing in place because officially we don't own those units yet!
Confused?We are paying what the Globe and Mail recently called phantom rent [theglobeandmail.com/servlet/story/RTGAM.20081120.reBelford1121/REStory/RealEstate/home].
Phantom rent is the period of time between getting occupancy of your unit and the condo being registered (at which time you then officially own the unit and will obtain a mortgage on it). While you live in the unit (or in our case, rent it out), you must pay the developer rent to cover their costs associated with the unit. In effect, you are just renting your own unit until the condo corporation is registered with the city and you then officially get title to your unit. Once you have title, you can obtain a mortgage (or pay cash) to finally close the deal.
In our case, we have been renting for 11 months now! According to the lawyer quoted in Globe article, she states the norm is about 2 - 4 months of rent! Well, this does not please me (nor my partners) on our deal because we have missed out on building equity through principal paydown from our tenants (yes, thankfully we have 2 great tenants in our 2 units paying us rent while we pay it right back to the developer) over those 11 months.
How much money have we lost with our two pre-construction units thanks to the phantom rent we have been paying since occupancy 11 months ago?
Unit 1 - $257,400 purchase price
20% Down payment
Mortgage will be: $205,920
Using 5.5% Interest Rate and starting payments in January, our Principal paid down after 11 payments would be $3,643, so we would now owe $202,276.
This is equity that would have been built up through the pay down of the mortgage using the rent from the tenants. So, in effect, we lost up to $3,643 in equity during this time.
Unit 2 - $276,400 purchase price
$55,280 down payment (20%)
$221,120 mortgage
$3,913 would have been paid down on the principal after 11 mortgage payments, so we would now owe $217,207
So, in effect, we lost up to $3,913 in equity during this time.
We have lost out on approximately $7,500 across the two units in what should have been paid down on the mortgage, AND with each month we still don't own our unit, we lose another $700.
There are many pro's and con's to buying a condo before it's built, and the newest con that I will add to my list is Phantom Rent. As you should with every investment, set your goals before you invest, and be aware of the facts before making the leap! And if you really want to avoid this situation - buy resale condos only!
Dave is a real estate investor in Vancouver, BC and publishes a newsletter to help people get started real estate investing. Sign up for his real estate investing newsletter and you'll receive a free bonus Starter Tips Guide on Real Estate Investing which includes articles on:
* Three easy ways to make money with real estate
* The right way to buy valuable property with limited cash
* The easiest way to get financing so that you don't miss a deal.
You can also visit his website for more articles: http://www.revnyou.com
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