PRE-CONSTRUCTION INVESTMENT MATH:
Compound interest and leverage are important factors that make investing in pre construction condos an effective investment strategy. The ability to mortgage and borrow approximately 5 times the amount of money you have available allows you to maximize your investment.
Most people have financial goals they are trying to achieve. Retirement, children's eduction, or a second home are just a few. The majority of these goals require a significant sum of money that can take years to save. Having your money work for you is a valuable lesson that many need to learn. Investing your money correctly can allow you to meet your goals much sooner.
What Should I Invest In?
If you have $120,000 and put it into a savings account or GIC, you can expect to make a 2 or 3% return. Alternatively, you can invest it in the stock market which is riskier. Large Banks often advocate investing in the stock market as a way to save for your future. However, they will not lend you money to do so. However, they will lend you money to invest in real estate.
If you have $120,000 you can often leverage it and buy $600,000 or more worth of pre-construction real estate. This can generate some lucrative returns. Many might think this is a great idea but, do not have $120,000. However, many do own homes with equity that can be invested. The average home that was purchased in The GTA in the past 10 years has risen in value significantly. A home purchased for $400,000 ten years ago is likely worth over $1,000,000 today. At the same time, a substantial portion of the original mortgage will have been paid off leaving a large amount equity.
Why should this equity be invested in pre construction?
Leverage is the most important consideration, and compound interest is the second.
Leverage is the ability to purchase a $600,000 home with a $120,000 downpayment. If the condo value increases by 5% the first year, it’s the whole $600,000 increasing by 5%, so a $30,000 increase, or a 25% return on investment, keeping in mind that the investment is just $120,000. If we project a 5% increase in value the second year, now it’s the value of $630,000 increasing by 5% an increase of $31,500, that’s compound interest, which leads to a $26.25% return in the second year. Based on the same parameters, the increase in the third year would be $33,075 or a 27.56% return. If we project out 5 years, which is often the amount of time between buying a pre-construction condo and completion, based on a 5% annual increase, the $600,000 condo has increased by $165,768.94 to $765,768.94 or a 138% return on your $120,000 investment. We are using 5% appreciation, which is conservative. In recent history, some projects in the GTA have appreciated by over 10% annually. So it is quite possible that you will see higher returns.