Invest in a Stable Real Estate Market
Investors can profit of $400 000 before tax by building and selling new homes in Ontario’s developing cities. The required investment amount and profit change with the ability to use personal money or choose 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 an investor puts 20% down for the mortgage. Our target is mainly areas of Toronto and developing nearby cities like Oakville, Markham, Richmond Hill or similar growing areas in the 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 the GTA with annual adjustments to the market.
|
2250 sq ft |
2750 sq ft |
3700 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 |
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At ALBO Homes, we can take care of all construction management and documents for obtaining permits and finally moving in. No reason to deal with multiple companies.
Cost Difference in Flip Homes
There is a difference in our price model for flipping homes and the 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 a big difference if investors are able to secure property for construction for less and sell a new home in that area for more than projected. Investment costs are lower and potential profit increases if you already have land to build on and don’t require financial assistance.
Selling Custom Homes As Business
The real estate market has always been hot in Toronto. Ideas to make money on building and selling custom homes have attracted local and foreign investors. This strategy can definitely be a profitable business if all rules are followed. We will try to explain in this post the details you will have to consider, as well as things to avoid, while investing in new homes as a business.
Legal Obligations And Warranty
For building and selling new custom homes in Ontario, you or your builder must have a license from Tarion. This agency tests knowledge, checks all accreditation, company documents, criminal status and the financial position of the builder to allow the 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 the municipality, with multiple inspections on the progress of the entire process. The act requires plumbers, electricians and HVAC specialists to have trade-specific licenses for the work they perform.
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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 a builder that is not right for your project. Inexperienced builders will not be able to complete your project within the allocated time and budget for the job.
Crucial mistakes will lead to losses and potentially redoing steps in the process of building a custom home. Specific work done not up to code will trigger stop work or mandatory corrections from the city inspector.
Do You Need To Pay Taxes?
Ontario, you will be required to pay taxes, and custom home building is not an exception. There are a few different ways you will be filing profits from selling a custom home.
In situations where the property was not your primary residence, and you have built a new custom home with the intention to sell, but are not in business for flipping or building homes, you will pay taxes on 50% of the capital gain. For example, if your property value was $500,000 at the time of purchase, in a few years you spent another $600,000 to build a new house and eventually sold it for $2,000,000. Your gain in this situation is $900,000; therefore, you will pay taxes on $450,000 as income.
To all others who are planning to make this a business model, you would have to pay regular taxes on profit after selling the home. You will be calculating all investments and expenses to subtract from the final amount that you receive after the sale. Ask your accountant for more details.
If a new custom home was considered a primary residence and there were no intentions to gain profits as a business model, homeowners are not obligated to pay taxes. A good example of this situation is when homeowners have lived at this property and built a new custom home before selling it.
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 a new custom home first. Yes, it will be longer and more complicated, but way more profitable than just selling an old house.
Ask ALBO Homes representative about all details and possibilities to build your new home before selling.
How To Get Money For New Build
One of the most popular ways to get money for a construction project is to use home equity from the bank. It will have the lowest interest rate and an easy way to improve your property for making more profit. There are private investors who can lend you money at a high rate. The benefit of private mortgages is that they do not require most of the documentation that banks do. The least explored way to raise money is to ask a 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 |
$1 130,000 |
$1 385,000 |
|
Total Investment |
$2 325,000 |
$2 847,000 |
|
New Market Value |
$2 850,000 |
$3 450,000 |
|
ROI |
22.40% |
23.59% |
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
The biggest issue with building a house instead of selling it right away is time. Yes, it may take up to 9 months in some cases, and homeowners who want to earn money have to be patient. Your builder must be available and agree 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 a problem they are not willing to face. If this property is your primary residence, then you will need to move for at least 6 months for the duration of the construction project. Some homeowners 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 a low supply of new custom homes. By building a new house on the street, you are investing borrowed money to gain from the sale. On average, homeowners would make (after calculating all expenses) $170 000 more after building a 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 a very developed neighbourhood.
Our Work From Client’s View
