08 Nov Why to choose pre-construction condo as an investment vehicle in your portfolio.
Condos are a great vehicle for investment for small investors. We have seen the strong demand for pre-construction condos with buyers and investors last year. Though everyone buys or invest for their own reason, one must plan out a well thought out strategy before investing in a condominium.
Leverage is the single most factor for making condo investment very lucrative because your deposit is heavily leveraged. Leverage refers to the total amount of debt financing on a condo relative to its current market value. The loan-to-value ratio is another commonly used term when discussing leverage. However, Loan-to-value ratio refers to the amount of a single loan, such as a mortgage as a percentage of the value of a property. Leverage includes all of the different layers of debt in the capital stack, such as first or second mortgages and/or friends-family financing.
Condo Investors often rely on leverage as a means to increase the potential return on an investment. The reason that leverage increases returns on a property is because of the cost of debt financing, such as a bank loan, is usually cheaper than the unleveraged returns a property can generate. By inserting leverage, you can take the additional return from the leveraged portion of the project and apply it to the remaining equity to enhance leveraged returns. In simple terms, leverage allows investors to get substantially more bang for the buck.
For example, you’re putting down payment of 10-20%, yet your property is appreciating at the full 100%. Moreover, pre-construction condos sales start 3-5 years before unit complete. Suppose you purchase a condo unit for $200,000 with an annual appreciation of 10% with closing after 4 years. With 20% down you paid only $40,000 but in four year time period your unit appreciated almost $80,000. So you got your $40,000 back and a profit of $80,000.
There are not many such investments for small investors where you are able to purchase such a large asset with a small percentage of your money. The more the leveraged you are, greater the return on your downpayment. And on top of that if you rent it afterward with positive cash flow. you will make money both by appreciation as well as rental income.
But It’s equally very important you choose the right project for investment. Not all condo projects launching every week are the same, some condos are priced below market price, some are at the market price whereas others over market price. Don’t just buy on the builder’s hype, it’s very important to seek professional advice, there are chances of you getting burned. Always work with professional Realtor on your side as it doesn’t cost you a dime.
If you haven’t already looked at our post on how to profile the preconstruction condo project for investment, take a look now. We carefully analyze condominium projects before recommending any project to our clients. Feel free to contact us in case of any question about condo investment or for your real estate needs, for buying and selling. To learn more about real estate condo investing, get top condo projects advice and valued tips for real estate investment and to register for a free investing portfolio account, please JOIN NOW.