Investor's guide to Ontario pre-construction

The single most important thing for an investor to understand about Ontario pre-construction is that the rebate priced into your purchase is not yours, and discovering that at closing is the most common expensive surprise in the market.

The rebate problem

Both enhanced programs require the home to be the primary place of residence of the buyer or a relation, and the buyer to be the first occupant. A tenant is neither. Primary residence.

So as an investor you do not qualify for the rebates the builder assumed when they priced your home.

Here is what happens at closing:

1. Your price was quoted net of HST rebate.
2. You tell your lawyer it is a rental.
3. The assignment to the builder fails.
4. The builder bills you the rebate amount, up to $80,000, in certified funds, on closing day.
5. You then claim the NRRP rebate from CRA yourself, with a signed one-year lease, and wait months.

You generally do recover it. But the sequence is pay first, recover later, and the cash requirement at closing is far larger than an owner-occupier’s. NRRP mechanics.

Model it correctly

Two rules for your pro forma:

Cash-to-close uses the gross number. Deposit, land transfer tax, levies, adjustments, legal, plus the full HST amount. On a $1.1M townhome that is roughly $80,000 more than an owner-occupier brings.

The NRRP is a lagging inflow, not a price reduction. Put it several months after closing, and stress-test a scenario where it is reduced or denied.

Ontario has also introduced enhanced relief touching new residential rental units. Whether it reaches your purchase depends on timing and your agreement’s wording, and the interaction with the NRRP is genuinely technical. Get it from an accountant who does this regularly rather than from a search result, including this page.

What not to do

Do not tell the builder you will live there when you will not. The rebate forms are sworn. Misrepresenting occupancy to obtain a rebate is a CRA matter, your lawyer will not assist, and the amounts are large enough to attract attention.

If your intention genuinely changes, tell your lawyer and deal with the cash-flow consequence. That is survivable. The alternative is not.

Low-rise specifics for investors

Longer closings. Two to four years of capital committed before any rent arrives.

Higher closing costs than resale. Levies, connections, Tarion enrolment, $30,000 to $45,000 on top of everything.

More excluded from the base price. Appliances, window coverings, fencing, landscaping, all needed before a tenant moves in. What’s excluded.

Exterior maintenance is yours. No condominium corporation. Roof, windows, driveway, lawn, snow.

But: real rental demand for freehold low-rise, from families who want space and schools and cannot buy. Typically longer tenancies and lower turnover than a downtown condo.

And: no interim occupancy. Condo investors often pay many months of occupancy fees before they can place a tenant. Freehold closes once, and you can rent immediately. More.

Negotiate assignment rights at signing

Your exit options matter more than an owner-occupier’s, because your plans are financial and can change.

Most low-rise agreements restrict or prohibit assignment. Ask for the right when you sign, it costs the builder little then and is nearly impossible to obtain later, when you are asking from weakness. Note that an assignment can also affect the rebate position. Assignments.

The honest summary

Pre-construction low-rise can work as an investment. It works considerably less well than the spreadsheets handed out at sales centres, because those spreadsheets usually assume a rebate you will not receive at closing and ignore the exclusions.

Build the model on the gross HST, the real closing costs and the full fit-out. If it still works, it probably works.

Let’s run your numbers honestly.