Build and Sell New Homes
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Investors can profit of $400 000 before tax on building and selling new homes in Ontario developing cities. Invested amount requirement and profit changes with ability to use personal money or chose an option to finance both property purchase and construction.
Let’s assume that property purchased for construction costs $1 000 000/$1 150 000/$1 300 000 for and investor puts 20% for mortgage. Our target is mainly areas of Toronto and developing nearby cities like Oakville, Markham, Richmond Hill or similar growing areas in GTA.
Breakdown of Expenses and Profit
Every land/property purchased will be completely different and our idea is to give an understanding of approximate costs for building and flipping homes. Our examples contain current prices in GTA with annual adjustments to market.
| 2500 sq ft | 3000 sq ft | 4000 sq ft | |
|---|---|---|---|
| Drawings & City Fees | $30 000 | $36 000 | $50 000 |
| Construction Costs | $875 000 | $1 050 000 | $1 400 000 |
| Financing 80% of Construction | $70 000 | $84 000 | $112 000 |
| Mortgage Financing | $30 000 | $30 000 | $30 000 |
| Realtor & Transfer Fees | $130 000 | $140 000 | $150 000 |
| Breakeven – to Sell for | $2 135 000 | $2 390 000 | $3 042 000 |
| Potential – to Sell for | $2 500 000 | $2 900 000 | $3 700 000 |
| Total Investments | $504 000 | $612 000 | $825 000 |
| Potential Profit Before Tax | $365 000 | $510 000 | $658 000 |
The devil is in the details
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Cost Difference in Flip Homes
There is a difference in our price model for flipping homes and possibility to save money. Construction costs of homes to flip are less than new custom homes for personal use not because of lower quality of work, but because materials selected are more affordable and less complicated to work with.
Of course every deal is individual and it makes big difference if investors are able to secure property for construction for less and sell in that area new home for more than projected. Investment costs are less and potential profit increases if you already have land to build on and don’t require financial assistance.
Are taxes on flip profits the same as other business?
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Selling Custom Homes As Business
Real estate market has always been hot in Toronto. Ideas to make money on building and selling custom homes attracted local and foreign investors. This strategy can definitely be profitable business if all rules are followed. We will try to explain in this post details you will have to consider as well as things to avoid while investing in new homes as business.
Builders have to provide transferable warranty
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Legal Obligations And Warranty
For building and selling new custom homes in Ontario you or your builder must have license from Tarion. This agency tests knowledge, checks all accreditation, company documents, criminal status and financial position of builder to allow process of building new homes in Ontario. Without Tarion, your project will be stopped and you may be penalized by officials. Each property build must have appropriate building permits from municipality with multiple inspections on progress of entire process. The act requires plumbers, electricians and HVAC specialists to have trades specific licenses for work they perform.
Hire only professional and licensed companies
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Problems You May Encounter
All profitable businesses or investments come with problems that you may face on the way. The biggest and most common issue is selecting builder that is not right for your project. Inexperienced builders will not be able to complete your project within allocated time and budget for the job. Crucial mistakes will lead to losses and potentially redoing steps in process of building custom home. Specific work done not up to code will trigger stop work or mandatory corrections from city inspector.
Do You Need To Pay Taxes?
Ontario you will be required to pay taxes and custom homes building is not an exception. There are few different ways on how you will be filing profits from selling custom home.
Higher investments bring more return
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Build New Home Instead Of Selling Old Real Estate
If it is your primary residence and you are thinking of selling it, we recommend exploring the opportunity to build new custom home first. Yes it will be longer and more complicated, but way more profitable than just selling old house. Ask ALBO Homes representative about all details and possibilities to build up your new home before selling.
Financing options for construction in Toronto
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HOW TO GET MONEY FOR NEW BUILD
One of the most popular ways to get money for construction project is use home equity from the bank. It will have the lowest interest rate and easy way to improve your property for making more profit. There are private investors that can land you money with high rate. The benefit of private mortgages is that they do not require most of documentation that banks do. The least explored way to raise money is to ask builder. ALBO Homes is open to conversation on working together and possibly raising money to build your new custom home before sale.
New Build
| Size | 2500 sq ft | 3300 sq ft |
|---|---|---|
| Average Land Cost | $1 145,000 | $1 412,000 |
| Carrying Costs | $50,000 | $50,000 |
| Construction Costs | $970,000 | $1 285,000 |
| Total Investment | $2 165,000 | $2 747,000 |
| New Market Value | $2 650,000 | $3 450,000 |
| ROI | 22.40% | 25.59% |
Addition & Renovation
| Size | 2500 sq ft | 3300 sq ft |
|---|---|---|
| Average Land Cost | $1 145,000 | $1 412,000 |
| Carrying Costs | $50,000 | $50,000 |
| Construction Costs | $863,300 | $1 087,600 |
| Total Investment | $2 058,300 | $2 549,600 |
| New Market Value | $2 410,300 | $3 050,000 |
| ROI | 17.09% | 19.63% |
Issues With This Strategy
Biggest issue with building house instead of selling it right away is time. Yes it may take up to 9 month in some cases and homeowners that want to earn money have to be patient. Your builder must be available and agreeing on the budget you have for this project. We have talked in this post about ways to fund this project, but for some people it is a difficulty and problems they are not willing to face. If this property in your primary residence, than you will need to move for at least 6 month for the duration of construction project. Some home owners may argue that it costs a lot to move and living expenses have to be calculated, but yes we always include that in expenses and your lender will be able to provide that money as well for you.
What Do You Gain By Building Custom Homes?
There are many developing areas in Toronto and low supply of new custom homes. By building new house on the street you are investing borrowed money to gain from the sale. On average home owners would make (with calculating all expenses) $170 000 more after building new home and selling it. There are more profitable deals in Toronto, but they are rare and your house has to be the worst in very developed neighbourhood.
OUR WORK FROM CLIENTS’ VIEW
FAQs
Yes, per square foot estimates tend to be very misleading to home owners who are not aware of all details in new home construction.
It gives you a basic perspective, but does not explain details of what is included and type of materials used for all finishes. Client’s should not compare Custom Home Builders based on their preliminary estimates for construction per square foot. It goes way further into selections, quality of work and control of process.
There are 3 ways to reduce cost per square foot when building a new home.
1) Build faster and pre-order materials. Everything goes up in price and if you are able to lock it, it can reduce overall costs.
2) Larger homes cost less per square foot. Smaller homes with exactly the same quality materials will typically be more expensive per square foot.
3) Select less expensive materials, although this is the least preferred method to lower the cost of construction per square foot.
Typically garage and exterior space is excluded from calculation when pricing new home construction. Does that mean extra 500 sq ft of garage space will cost the same amount as everything else inside the house? No.
For example: 3800 sq ft modern home with triple garage and exterior covered deck can be calculated as 3800 x average $380. Large garage and exterior space such as covered decks is calculated separately and should not be more than $150-$200 per square foot.
During cost calculation for new home construction in Toronto we can assume basement staying unfinished or basic type of finishes. With more detailed plan our team can give exact cost, but at start it makes sense to stay at basic. When clients ask us if per square footage cost includes finishing basement, the answer is always “no, but basement doesn’t cost as much as main floor”. The house is already construction around basement with exterior walls, slab, ceiling and required insulation. The rest is to finish it and it is fair to assume basic finishes to be within $100 per square foot of basement space.
Before permit drawings and exact details are specified for finishes, it is simply impossible to get exact cost for home construction. Even with all details provided we are able to only estimate the cost from contractors. Remember that most of the detailed work is going to be near end of home construction, which can be a year from time of estimation and no one would guarantee prices for that long.
ALBO Homes breaks down all stages of construction for clients to understand cost of separate work and materials involved in each project.
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