Buying Paper - Risk And Reward

by Darrin DeRoches May 16 - 22, 2013

You hear people talking about “buying paper” and that is just what it is. The investor is looking to buy a property before construction “ on paper” with the intention of selling it when the project is complete. It can be a profitable endeavor but it is still risky. It’s happening in our market with condos but also townhouses and freeholds. People always wonder why homes go up for sale when a new sub division is built or when a condo development is completed. How can they make money?     An investor will purchase a property from the plans when they are first introduced. They are able to get the best deal on a unit. It may be discounted as high as 10 per cent less than the final sale price. They buy the unit and wait for the construction which usually takes at least a year but in most cases two years. The Hamilton market has gone up about 7 per cent each year so if you take the original discount and add the natural market increase the investor can be in for a 25 per cent return. So if they bought a $200,000 unit and paid only $180,000 then it increased by 14 per cent or $28,000 they stand to make $48,000 on a unit they only owned the “paper”.     So if it is so easy why wouldn’t everyone do it? There is a risk that the market will not increase and you will have a property you never wanted to live in. The smart investor will then rent out the property and wait until the market increases and then they will realize their return. Most investors also buy multiple properties at a time and will make $150,000 for three or $200,000 for four units. One hundred grand a year is not a bad return on “buying paper”. Of course you have to have money to buy the units and depending on your bank you can buy them for just 10 per cent down and sell them before the mortgage kicks in. It can be a risky time but if you know how to invest and have the wherewithal, you can do pretty well with very little effort.     A new client from out of town contacted me about doing this in our market and there are a few good opportunities out there. He is interested in buying at least three condos before construction begins but doesn’t know which ones. You have to really know which size, location and project to buy in. If you buy the wrong ones you will have a really hard time selling them before your mortgages kick in and it can be a tough time. Every market is different and just because it worked in Vancouver or Toronto does not mean it will work in Hamilton. Picking the right broker can make or break your investment. Risk and reward! V         Darrin DeRoches is a local real estate and mortgage broker. He can be reached to answer questions, comments or stories about real estate experiences through this weekly column at sold@uniquerealty.ca.