What to Consider When Buying Preconstruction?

It should be a property that a large portion of the general public wouldn’t mind owning or renting. You are buying the unit to eventually sell or rent to an end user, and you want to make sure the property will be attractive to that level of the market. The end user may be a long-term renter, a first-time homebuyer, a short-term vacationer, or even another investor. That will depend on where and what you are buying. Analyze who the end user will be before you put your money down, as you will want to make sure there will be a big enough market to sell your property into. Pay attention to how much similar supply is in the pipeline in the area. Leverage…preconstruction’s silver bullet. You get a discounted price to compensate you for taking on some of the early development risk, but the real incentive to buy preconstruction comes from leverage. While the terms of the payments vary from project to project, no matter what the terms are, you are leveraging your returns to some degree. A typical deal will start with a small down payment…say, 5%…and work through various staged (progress) payments during the construction period, until you have paid anywhere between 5% and 80%. The balance is due when the keys are turned over. Let’s walk through a sample deal to show how leverage works when buying preconstruction. You purchase (preconstruction) a $500,000 condo with a 10% down payment. The balance is due on completion in two years’ time. A 20% increase in price during the build period means a 200% return (net of fees) if you were to flip. Of course, leverage, like buying an option, can work in two ways; a 10% fall in price means that you are down your entire investment. Preconstruction as part of a wealth accumulation strategy Buying preconstruction can be a great way to accumulate a rental portfolio. Capital appreciation can mean that at closing, a bank will lend based on the new valuation, not the price you paid. This can mean that you can pull cash out of the property the day you pay for it. I’m using preconstruction as part of a medium term wealth accumulation strategy in Fortaleza. When in the market cycle does preconstruction make sense? Buying preconstruction is a strategy that will maximize the retail investor’s ROI in the early-to-mid stages of a market appreciation cycle. Buy preconstruction at the top of the market and you risk losing your entire investment…and maybe even more than you have invested, if you are contractually bound to complete and that clause is enforceable. All the benefits of buying preconstruction are tied to a rising and active market. Without a rising and liquid market preconstruction almost never makes sense. If there isn’t activity in the market you run the risk that the project you buy into won’t be completed or if it does get completed half the building will be empty. This can be a big problem when it comes to maintaining communal areas or amenities and security.